Penny Plan
Research for Online Investors

by John Dalt

7/27/11

The drama in Washington has taken some twists and turns in the last 24 hours, and not in the conservative’s favor.  The progressive members of congress have a natural ally in most of the mainstream media that are adept at placing all the blame on the House conservatives, or specifically the “Tea Party.”

John Boehner’s new plan to cut $1.2 trillion over ten-years was scored by the Congressional Budget Office, and found to only cut $850 billion.  Harry Reid’s plan came up short also.  Democrats claimed it would cut $2.7 trillion over ten-years.  The CBO scored savings at only $2.2 trillion. Make no mistake, both plans are silliness.  If your family was spending more than you made, would the bank loan you money on a ten-year plan to reduce spending?  Mine would ask me how we were going to cut our spending TODAY.

Both proposals came up short because they were built off the January CBO “baseline” budget numbers. The CBO adjusted these numbers in May after the Continuing Resolution (CR) showdown between Boehner and Obama that lowered future spending.  This lowered the amount of money they could claim as savings in the new proposals.

An interesting twist on the story has emerged in a bill that is sitting in the House Budget Committee.  The bill is titled the “One Percent Spending Reduction Act of 2011” but is commonly known as the Penny Plan.  The bill offers a very simple solution and roadmap that will balance the budget in six years.  Reduce spending 1% each year from the year before.

It would take affect beginning in the 2012 budget year.  The 2011 budget is $3,382,000,000,000 (trillion).  2012’s budget would have to be 1% less (3,348,180,000,000), a real $33,820,000,000 billion cut in spending.  The congress could adjust the budgets internally, adding to one budget and taking away from another, but if they didn’t hit the 1% target the cuts would become automatic.

Every Federal Government budget would be cut 1% from the EPA to Defense, including Social Security and Medicare. But, remember, the congress could change the total for each budget line, so some budgets could get cut more to make room for increases in other budgets.  In 2013, they would have to do the same!

What family hasn’t had to cut their budget more than one-percent, when something unexpected happened?  States are cutting budgets, why can’t the federal government?  It is just one-percent.

After five years of holding the budget to a strict global amount, the budget would be limited to 18% of gross domestic product (GDP) starting in 2018 and beyond.  We would have a balanced budget and start paying down the debt we have borrowed.  The Federal Budget presently exceeds 24% of the nation’s GDP, an all time high.  This is why conservatives are so adamant the government doesn’t need more money, the government needs to cut spending.  In this case only one-percent!

The exciting thing is once the government slows down its growth and intrusiveness into the private economy, the GDP will rise with increased economic activity.  This will increase tax collections, and you don’t have to raise tax rates…just get out of the way.

Here is why the progressives don’t like this plan, even though we can all understand it.  Current baseline budgeting projects a seven-percent INCREASE in spending by the government for next year.  While Americans are struggling to make house payments, the government grows at seven-percent and acts like that is no growth at all.

While they claim inflation is only one or two percent for COLA’s, they expect a seven percent increase IN EVERY BUDGET.  Only in Washington could this be considered sane and points out the duplicitous nature of many politicians.  What is good for the great unwashed is not good for the government.

The progressives are winning the public relations war at the present time.  Even though the house has passed two bills, Paul Ryan’s Budget Plan and the Cut, Cap and Balance, the Senate has not taken a vote.  Harry Reid’s plan has not been reduced to writing and introduced in the Senate.  President Obama has never presented a plan to either legislative body, except his budget that failed 0 to 97 in the Senate early last spring.

The House is being drawn into a game of negotiating with themselves.  Reid and Obama proclaim their efforts are not good enough and won’t even allow a vote in the Senate.  Boehner should send the Penny Plan to the Senate, and tell them they are sitting on two bills that deserve a vote.  Then, get on TV and start winning the public relations war.  If the debt ceiling is not raised, it is the Senate that has not taken action and the president that has threatened a veto on bills approved in the House.

To learn more about the Penny Plan, just go to YouTube.  The bill was introduced by Connie Mack (R-FL).  He has appeared on most networks to discuss the plan.

Quote:
The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is asign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. Increasing America's debt weakens us domestically and internationally. Leadership means that, "the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.--Senator Barack H. Obama, March 2006

Editor’s note: Thanks to C.W. for sending this quote.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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