Second Law of Budgets

After attempting to digest the First Law of Budgets, I suspect not many politicians or members of the public would have much stomach for the second course. How annoying it must be to be told that you have to pay for everything. But for those of you who do, the Second Law is more esoteric and insidious. The Second Law of Budgets deals with the principle that in managing money the system is imperfect, you cannot attain a perfect conversion of a quantity of money into an exact equal value of whatever you equate it to. In other words, with every financial transaction there is an inequality of the exchange. Now the bookkeepers will contend that they can and do balance the books; that every penny, rupee, yuan, or pound is accounted for and that the ledger balances. But that is accounting, not money or value. The natural law that we are dealing with here, with regard to budgets, is that as money (value) flows from one region to another, or within the total system itself, that every movement includes a small (or not so small) loss to the parties engaged in the transaction. This loss can come from many factors and there can be more than one of these incremental losses nibbling away at the value of the exchange.

An example would probably be helpful. If you spend a $1,000 to buy a flat-panel TV and the value of the TV was agreed by all to be $1,000 then the exchange seems equal, balanced and exact. Except that there are additional costs that the buyer has to account for. There is typically going to be a sale-tax (both local and state), there is a cost to have it delivered or to transport it back to you abode, there may be an installation/set-up fee, and there is an immediate loss of market-value once you take it out of the box. You might even want to account for other value factors. If you gave the delivery person(s) a tip for their service then that was an additional value for the TV that is neither in its inherent value nor recoverable.

This gradual but continuing erosion of value within the exchange process is simply the operation of the Second Law of Budgets. Whatever you establish as your acquisition target there will be more and more cost bites added on to the value of what you desire or need with every person, action, and stage that the transaction encounters as you move closer to completing the purchase. In the end, you will possess the goal object but you will have spent more money for it than it will be worth at the moment of ownership/possession. As C. P. Snow would say about the Second Law: “You can’t break even.”

Now this should provide our budgetary heralds with some intriguing insights into the difficulties that Congress has to include in their reasoned and unbiased deliberations on what needs to be done by the government and what will be cared for by the private sector. I am sure that they will appreciate that every calculation of value that they think they are making will be reduced more and more by the little but persistent nibbles. The nibbles will come via the Second Law through each individual exchange along the chain of purchases, acquisitions, and trades that are the magic of the economy. Congress will learn that the best and most efficient exchange process is not in fact determined by simple and ideological approaches. The free market nor the government program set in any fixed relation to one another, and neither will ever perform as expected by the masters of the budget.

Let’s turn Medicare into a voucher/premium-supplement supported market-based insurance program. Nibble, nibble. Let’s raise the age or retirement. Nibble, nibble. Let’s reduce taxes on the wealthy to create jobs. Nibble, nibble. Let’s stimulate the economy with tax-credits and bailouts. Nibble, nibble.

What Congress doesn’t comprehend is that they are mostly a nibble, just another aspect of the Second Law of Budgets. Not only can you not get as much out of what you’re taxed as you pay in, but Congress insures that you get less. And they do so in the most inefficient manner. Democrat or Republican, they just keep nibbling and nibbling. Even when they tell you that they want to do less and tax you less, they haven’t figured in the non-government nibbles. Maybe you’re taxed too much, maybe you are not. That’s the wrong issue, it always has been. It’s just another one of their nibbles, it’s not like they have figured out that there are other nibbles out there that if not understood are worse than the one’s they want to try and change.

The national debt is in part a Congressional nibble. The deficit is a Congressional nibble. The declining entitlement programs funding is a Congressional nibble. Defense spending adds its own nibbles. Nibble by nibble the nation’s problems grow because Congress doesn’t understand the Second Law which leaves them vulnerable to it. It’s not that they make mistakes; they don’t even know the rules. They don’t make mistakes, they make actual bad decisions.