SENATOR RAND PAUL'S PLATFORM TO REVITALIZE AMERICA

FY2013

Senator Rand Paul

United States Senate
FY2013

A Platform to Revitalize America

Budget of the
U.S. Government

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Senator Paul FY 2013 Budget

February 25, 2012

Office of Senator Rand Paul (R-KY)

Staff:

John Gray

With contributions from:

Rachel Bovard – Regulatory Reform

Peter Fotos – Medicare Reform

Brett King - Research

Blake Deeley – Research

Paige Agostin – Research

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Table of Contents

Preface ......................................................................................................................................................... 5
Analysis ........................................................................................................................................................ 6
Major Budget Policy Options ..................................................................................................................... 21
Legislative Branch .................................................................................................................................. 22
Department of Agriculture .................................................................................................................... 24
Department of Commerce ..................................................................................................................... 26
Department of Defense ......................................................................................................................... 28
Department of Education ...................................................................................................................... 31
Department of Energy ........................................................................................................................... 35
Department of Health and Human Services .......................................................................................... 37
Department of Housing and Urban Development ................................................................................. 40
Department of Homeland Security ........................................................................................................ 44
Department of the Interior .................................................................................................................... 46
Department of Transportation .............................................................................................................. 48
National Aeronautics and Space Administration ................................................................................... 50
International Assistance Programs ........................................................................................................ 52
Miscellaneous Policy Changes ............................................................................................................... 55
Tax Reform – Flat Tax ................................................................................................................................ 58
Budget Process Reform ............................................................................................................................. 67
Social Security Reform ............................................................................................................................... 69
Medicare Reform ....................................................................................................................................... 71
Regulatory Reform ..................................................................................................................................... 72
Summary Tables ........................................................................................................................................ 81
Discretionary Function Totals ................................................................................................................ 83
Mandatory Function Totals ................................................................................................................... 84
Function Totals ...................................................................................................................................... 85
Budget Totals ......................................................................................................................................... 86
Budget Comparisons .............................................................................................................................. 87
Major Categories ................................................................................................................................... 88
Brief Policy Explanation ............................................................................................................................. 89

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Appendix .................................................................................................................................................... 92
Endnotes .................................................................................................................................................... 94

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Preface

In 2010, Carmen Reinhart and Kenneth Rogoff, authors of This Time Is Different, and researchers on financial crises
and debt, officially proclaimed the United States in a “decade of debt.”1

The economy is stagnant because the crisis has been misdiagnosed. In almost every instance, attempts by
Washington policy makers to solve this persistent nightmare have only made things worse. The catastrophe of 2007
was built upon massive leverage both in the private and public sectors. A loose monetary policy allowed asset prices
to skyrocket, and the regulatory system was too convoluted to understand and even more complicated to enforce.

Since then, the prescription of even greater leverage, looser monetary policy, and more regulation has resulted in a
more fragile country. If we tip back into recession, the consequences will be significantly worse than what was
recently experienced in 2008. Even if we stay the course without further contraction, the projections are dire. We are
on a path of slow economic growth, mountains of debt, permanently high unemployment, and a deteriorating
standard of living.

The time for experimentation has concluded. The Keynesian economic proposals, increased regulation, special
interest endorsed tax code, and monetary policy gamble have failed.

Although we are in the midst of the decade of debt, this budget seeks to reverse the trend by reducing debt and
spending, eliminating unnecessary regulations, replacing the tax code with a fair and viable flat tax, and halting the
growth of America’s massive unfunded liabilities.

This plan accomplishes a number of important achievements while still balancing the budget in five years:

Cuts and reduces the overall size of government;
Not only stops the growth of debt in nominal terms, but begins to reduce it;
Projects net interest costs at more realistic levels, above those provided in the Congressional Budget Office
(CBO) baseline;
Reduces trillions of dollars in unfunded liabilities by reforming Social Security and Medicare;
Addresses and budgets for the cost of the federal regulatory burden;
Repeals Obamacare and defunds Dodd-Frank; and
Reforms the current tax code in favor of an efficient and competitive low-rate flat tax.

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Analysis

The world economy remains in a volatile state. Fragility, low confidence, and the risks of overleveraged societies
continue to threaten further economic decline. The United States continues to sink deeper into debt; Europe, forced
into austerity, is facing major financial turbulence. Japan is recovering from a natural disaster that has left it nearly
paralyzed; the Middle East is in chaos, and the structural system of Asia is of concern. According to the Bank of
International Settlements, total industrialized country public sector debt is now expected to exceed 100 percent of
gross domestic product (GDP), something that has never happened during a time of peace.2

The globalization of world economies means that the U.S. remains intertwined with the affairs of others. Should
economies remain fragile, the failure of one country could lead to a depressive shock to the others, leading to
economic contractions potentially worse than 2008. It is necessary for countries, especially the United States, to
structurally strengthen their economies, achieving a resilience that will be able to withstand significant volatility and
challenges in the future.

The United States

The last decade in the United States left its mark with mountains of debt. By way of sophisticated financial
engineering, we allowed banks to issue unprecedented levels of debt without assuming the risk. During this same
period, the Federal Reserve was also maintaining artificially low interest rates, which contributed to housing prices
increasing three times as rapidly as general prices. This sharp increase induced a construction boom, and housing
starts reached two million units per year – about 500,000 more units than the number required to satisfy the growth in
population, the losses to fires, storms, and similar
factors.3

The result was significant increases to
home prices, enabling Americans to further
leverage themselves. In 2009, homeowners
extracted $719 billion dollars from their homes –
nearly as much as President Obama’s deficit-
financed economic stimulus plan.

The U.S. economy was running on debt, and that
debt accumulation was not binary. Nearly every
segment of the economy became massively
overleveraged; between government, Fannie Mae
and Freddie Mac, bank debt, asset-backed

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securities, household debt, and corporate debt, total debt reached historically high levels.

In some respects, we should have been cognizant of the situation. After all, the United States, more than most other
countries, incentivizes debt accumulation. The tax code promotes home buying, rather than renting, through the
mortgage deduction. Businesses and corporations can write off borrowing costs, promoting debt over equity.
Politicians borrow to avoid raising taxes or cutting spending. And we’ve become a society that provides few
consequences for indebtedness: Large and highly leveraged corporations are bailed out, and individuals can claim
Chapter VII or XIII bankruptcy and be given second and third chances to become leveraged again with limited
personal sacrifice or economic consequence.

Unfortunately, the belief that our nation could prosper with so much debt overshadowed the fact that at some point,
the game must end – it always does. Since 1800, the world has experienced financial crises nearly 270 times, often
as the result of housing.4

Failed Policy Response

The first and most notable problem was Washington’s failed attempt at curing the crisis. Much like the past, policy
makers and economists insisted on Keynesian economics, promoting large government spending programs to spur
growth, coupled with an incredibly loose monetary policy to provide for extra liquidity. While it might be fair to say
that both of these policy initiatives artificially dampen the overall effects of the recession, the treatment was benign,
ultimately creating a much more fragile system, promoting moral hazards, and hurting long-term growth potential.

The fundamental difference between a typical recession and financial crisis is the difference between a liquidity crisis
and a solvency crisis. During a normal cyclical recession, liquidity crises are the result of a need for additional
capital in the system and short-term bridge loans. In other words, assets may be greater than liabilities, but for many
reasons those assets are illiquid or short-term capital is difficult to obtain. However, in a solvency crisis, asset prices
decline, resulting in greater liabilities than assets. Even with the ability to liquidate those assets, individuals and
entities are still left with negative equity. The differences between the two are important. During a liquidity crisis,
access to capital may often result in continued consumption and investment (although lessened) – whereas during a
solvency crisis, entities are far less inclined to partake in those activities and are much more inclined to pay down
debt and fix their balance sheets.

John Mauldin and Jonathan Tepper provide their own analysis of the debt phenomenon, in their book, Endgame:

All the assets that had been securitized and sat on the balance sheets of money market
funds would eventually make their way back onto the balance sheets of banks. The run
wasn’t only restricted to the commercial paper market. Foreign central banks started
dumping Fannie Mae and Freddie Mac mortgage bonds, forcing the Fed to start buying
them back…

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…Governments tried to stop the effects of the private sector paying back its debt and
unleashing a major debt deleveraging by running large fiscal deficits and printing massive
amounts of money, causing the balance sheets of central banks and governments to
explode…

…While households and corporations started paying back their debts, governments
massively ramped up their borrowing.5

It is important to note that the 2008 financial crisis was the result of a massively overleveraged society – both in the
private and public sectors. Unfortunately, the tribulation caused by this debt has not been treated, but merely
transferred from the private sector to the balance sheets of the federal government and our central bank.

When the economy is going through a period of deleveraging, cleaning up balance sheets and eliminating bad debt
and toxic assets, there are only a few policy provisions, many of which aren’t being applied today, that will allow the
system to recover without increasing risks and hurting future prosperity. Periods of deleveraging typically last six to
seven years, and are accompanied by slower growth. Businesses and individuals are less likely to consume and
invest, consumption growth is much slower than pre-crisis levels, and spending patterns shift.6

But these symptoms

are characteristics of the past; proper handling and the right policies can shorten the duration of downturns and
increase growth and employment more quickly.

A solvency crisis necessitates correcting upside-down balance sheets, a result of asset and security prices declining
(deflation). There are two kinds of deflation: good deflation, which is the result of prices dropping by way of
technology, efficiencies and increased productivity, and bad deflation, which happens when prices plummet as a
result of distorted price inflation. Bad deflation has negative consequences such as high unemployment, excess
capacity leading to slack in the economy, and wealth destruction. But most of these problems can be corrected with
capitalism in a free market. For example, by allowing distressed assets to be purchased by the healthiest firms, the
economy soon stabilizes and puts wealth creation and employment back on track. As is later shown in this analysis,
the Federal Reserve’s attempts to inflate prices and promote consumption only create greater fragility in the system
as well as the risk of high inflation.

Washington Responds: Private to Public Debt Transfer Leads to Out of Control Spending and Lack of
Reform

In 2011, federal spending rose by 4 percent or nearly $142 billion over 2010, to a total of $3.6 trillion. As a total of
the economy (GDP), the government spent nearly 24.1 cents of every dollar produced in the economy in 2011. While
spending is estimated to fall, the Congressional Budget Office (CBO) projects the federal government will continue to
spend 23.2 cents of every dollar produced – a level higher than any year between 1984 and 2008.

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CBO estimates that under current law, spending
will decrease from an average of 24.1 percent of
GDP the past two years to an average of 22
percent over the next decade – still a much higher
average than the 20.1 percent of GDP spent during
the 1990s.

To some, this small decrease in spending relative
to the past few years might provide optimism, but
even as CBO suggests, this is more like political
fantasy, not reality. These spending figures
assume future Congresses abide by spending
restrictions allocated today and certain entitlement
programs simply just disappear into the abyss.

In the Congressional Budget Office’s more realistic
estimate, government spending never drops below
an average of 23.3 percent of the economy (GDP),
resulting in an additional $2.885 trillion of federal
outlays over the next ten years. This alternative
baseline assumes that future Congresses over the
next decade disregard the spending caps
designated in 2011 and provide funding for the “doc
fix.”

We’re Not Finished – More Spending to Come

Politicians have made attempts over the past few
years to quell the public’s concern regarding Washington’s aggrandized spending. We have had a presidential debt
commission and Congressional spending negotiations, which produced such legislation as the Budget Control Act.
Unfortunately, these attempts at solving the problem do virtually nothing to prevent a massive spending explosion in
the future. Even when you take all discretionary spending out of the equation (e.g. defense, education, homeland
security, agriculture, state and transportation, infrastructure spending, etc.), federal government spending, particularly
on entitlement programs, continues to grow at alarming rates. In fact, in 13 years, CBO estimates that spending on
Medicare, Social Security, and interest payments on our national debt will consume the entire federal budget (see
Chart 3).

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Not long after entitlement spending consumes the
entire federal budget, it continues on a trajectory
that eventually consumes the entire economy
(see Chart 4). Unfortunately, Washington
remains uncommitted to any serious attempt at
fixing the nation’s entitlement programs and the
accompanying trillions of dollars in unfunded
liabilities. The willingness to reduce additional
spending has been only attainable by “cutting”
spending in the out years, as in the Budget
Control Act, which assumes that more than $1
trillion of the $2 trillion in spending cuts will take
place after 2018. And it only became convenient
for populist politicians to denounce the bailouts of Wall Street and big business after billions of dollars of taxpayer
money had already been handed over.

Deficits and Debt

In 2007 the federal deficit was $161 billion, about 1.2 percent of GDP. In 2009, the first year President Obama was
in office, the deficit grew to $1.4 trillion and has remained at trillion dollar or more deficits every year since. Based on
the most realistic assumption of deficits over the next ten years, CBO estimates trillion dollar deficits nearly every
year and well above what is considered sustainable (see Appendix figure 3), putting the ability to continue to pay and
finance our debts into question. What worries investors and policy makers around the world is that U.S. deficits are
almost permanently structural and are not due to cyclical weaknesses, which means that even if the economy were
to improve or return to pre-crisis growth, we would continue to see large government deficits.7

In fact, CBO assumes

that if the economy were operating at full capacity, the U.S. would still run a $711 billion deficit in fiscal year 2012
(see Appendix figure 2).

Today, the debt held by the public stands at $10.6 trillion – or nearly $34,435 for every man woman and child alive
(see Appendix Figure 6). By the time every child born today is a middle-aged adult, his or her tab will have increased
to nearly $280,000. In the coming years, the levels of debt the United States will accumulate will create tremendous
vulnerabilities, especially as the ratio of federal debt to gross domestic product continues to climb into unprecedented
territory.

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In the not too distant future, the debt held by the public will exceed 100 percent of GDP – significantly more than any
time during the past century except during World War II (see chart 5). However, there are notable differences
between today’s fiscal climate and WWII.

While the US was highly leveraged in
order to fight the war, it was still the safest
and most reliable place in the world to hold
debt; nearly 40 percent of the nations
around the world were in default8

;
The debt accumulated during the war was
temporary in nature; most debt was
attributed to the war cause, whereas
today’s debt is becoming increasingly
linked to long-term policies such as Social
Security and Medicare;

Our current debt path is on a steep
trajectory with little evidence that trend will
change. Immediately following the
conclusion of WWII, however, the debt
level immediately decreased by 10
percent, and went from 109 percent of
GDP down to 46 percent of GDP in a little
over a decade.9

By studying the history of debt, Reinhart and Rogoff
acknowledge a number of consistent factors
between wartime and peace debt accumulation,
“[W]ar debts are arguably less problematic for future growth and inflation than large debts that are accumulated in
peace time. Postwar growth tends to be high as war-time government spending, typically the cause of the debt
buildup, comes to a natural close as peace returns. In contrast, a peacetime debt explosion often reflects unstable
underlying political economy dynamics that can persist for very long periods.”10

The current debt held by the public for this year is predicted to reach $11.3 trillion; within the next decade, it is
estimated to grow by 106 percent, exceeding more $23.2 trillion by 2022. Even more concerning than the continued
buildup of debt is the milestone this debt reaches by 2020. In that year, debt held by the public will reach 90 percent

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of GDP, leading to serious deterioration in the economy based on historical precedence. When the ratio of debt to
GDP rises above 90 percent, there appears to be a reduction of about 1 percent of GDP, mostly as a result of
crowding out effects and capital outflows11

As shown in the Appendix Figure 1, economic growth that is as little as
one- tenth of a percentage point lower than CBO’s estimated baseline will add more than $300 billion to the deficits
over the next ten years.

Crowding out Private Investment

As deficits and debts continue to increase, America’s ability to finance both a growing debt and private investments
diminish. With more of the country’s capital and savings allocated into government securities, less money will be
available for investment in the private sector, which will lead to a smaller capital stock and lower output and incomes
in the long-run than if the debt was reduced.

In addition, as this growing debt increasingly becomes financed by capital inflows from other countries (foreigners
currently own nearly 45 percent of total debt held by the public, see Appendix Figure 4), the debt service will require
more and more U.S. capital to flow to countries such as China, Japan, oil exporting countries, and other foreign
nations. Such a trend will continue to weaken economic growth and hurt the standard-of-living in the long-run.
Without private investment in new factories, research and development, and innovative expansion, the economy will
be stymied from the lack of increasing productivity growth and new job creation.

Investor concerns/Interest Rates

In their book, This Time Is Different, Reinhart and Rogoff point out that one of the most important features that impact
the fragility of the system is mere confidence, “Perhaps more than anything else, failure to recognize the
precariousness and fickleness of confidence… Highly indebted governments, banks, or corporations can seem to be
merrily rolling along for an extended period, when bang! – Confidence collapses, lenders disappear, and a crisis
hits.”12

Unfortunately, the point at which individuals and the world refuse to continue to finance our debt, or alternatively,
request significantly higher rates of return for holding Treasuries is difficult to determine. For example, Japan has a
very high ratio of debt to GDP and has so far avoided default, whereas Russia in the late 1990’s defaulted with debt
as little as 12.5 percent of GDP. The U.S debt held by the public is a staggering 71 percent of GDP.

Without the political will to make the necessary and difficult decisions to reduce the unsustainability of government
spending and debt accumulation, investors will increasingly lose confidence in the ability of the government to
maintain such a high debt to GDP ratio, and in the interim, will begin to demand a higher risk premium for holding the
bonds issued. Higher interest rates will have significant adverse effects on the economy, leading to higher borrowing

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costs, making it more expensive for consumers to finance new homes and vehicles, take out student loans, expand
businesses or make capital equipment purchases.
Increased borrowing costs hit all sectors, but it
especially impacts the government’s spending on
servicing the debt. If interest rates rise to the
average rate during the 1990’s, the government will
have to pay out more than $1 trillion in additional
interest costs. And, if rates should increase to the
average rates during the 1980’s, net interest costs
will increase by more than $5 trillion.13

Unlike Japan, which has very high domestic
savings rates and owns the majority of their public
debt, the United States is increasingly relying more
on foreign investors to purchase U.S. Treasuries, making the U.S. more vulnerable to political and global fluctuations.
Foreign investors now own more than 45 percent of the U.S. government‘s debt, up from 34 percent in 2000. And
although their holdings create more fragility, they have provided the means for cheaper borrowing costs and
increased consumption over the past two decades. Studies have shown that foreign inflows into U.S. bonds reduce
the 10-year Treasury yield by an economically and statistically significant amount. Foreign inflows have contributed
to a reduction of 90 basis points on the 10-year treasury over particular years – and inversely, the loss of such
foreign inflow would have resulted in an increase in the Treasury yield by as much as 180 basis points.14

Not only do
we need to prove to domestic investors that we have a handle on our nation’s finances, but we also need to convince
the world.

The Federal Reserve and Monetization of Debt

“With the exception only of the period of the gold standard, practically all governments of history have used their
exclusive power to issue money to defraud and plunder the people.”

--F.A. Hayek, Nobel Prize Economist

The Federal Reserve was created in 1913 with the prime mandate to protect the purchasing power of the dollar, but
that achievement has seen little success. Since 1913, the dollar has lost 95 percent of its value. James Rickards’
book, Currency Wars, makes an important comparison:

The Fed’s track record on dollar price stability should be compared to that of the Roman
Republic, whose silver denarius maintained 100 percent of its original purchasing power for
over two hundred years, until it began to be debased by the Emperor Augustus in the late
first century BC. The gold solidus of the Byzantine Empire had an even more impressive

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track record, maintaining its purchasing power essentially unchanged for over five hundred
years, from the monetary reform of AD 498 until another debasement began in 1030.15

The deterioration of the dollar through inflation
creates tremendous economic distortions to
investment decision making, misallocation of
resources and capital, asset bubbles and income
inequality. And the perilous impacts of high
inflation are at our doorstep. In 2008, as the U.S.
entered a recession, the Federal Reserve began to
inject large amounts of money into the system.16

Since 2007, the Fed’s balance sheet has
skyrocketed from $840 billion to nearly $3 trillion,
leading to a monetary base that has increased 220
percent. With falling prices as a result of a credit
freeze, deleveraging, bankruptcies and high unemployment, the Fed’s policies were primarily focused on the threat of
deflation; completely ignoring what history has taught us about financial crisis and the threat of high inflation. As our
nation has experienced a severe solvency crisis, coupled with huge accumulations of debt, the Federal Reserve has
injected large amounts of dollars into the system, hoping to artificially reverse the pains of the irresponsible debts and
ignoring free market tendencies of prices to realign.

While the Federal Reserve has the printing press on full throttle, many wonder why we haven’t seen large scale
inflation, with core consumer price index (CPI) running at only about 2 percent. The answer is twofold: the Federal
Reserve has succeeded in exporting a lot of the inflation, and the velocity of money has been falling.

First, as a result of particular countries, such as China, pegging their currency to the dollar, the U.S. running large
current account deficits, and capital chasing safer investment opportunities overseas, a great deal of this newly
printed money has gone abroad.17

Once this trend reverses, or once these foreign countries begin to send this
capital back to the U.S., we will be flooded with dollars, faced with real inflation, and the value of the dollar will have
been destroyed

The second reason has to do with the velocity of money, which is the speed at which money is spent. All things
constant, as the velocity of money begins to drop, as it does during both liquidity and solvency crises, gross domestic
product will begin to fall. The velocity of money is a function of GDP, equated as P=MV, where V is the velocity of
money, P is the nominal price of GDP, and M is the quantity of money.

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This means that the Fed can print as much money as it likes, but if the money doesn’t circulate, we won’t experience
inflation. For example, if I have $10 to spend and buy $10 worth of red widgets from you, and in turn, you use that
$10 to buy a blue widget from me, we have created $20 worth of gross domestic product from a total money supply
of $10. If this transaction happens every month, we will create $240 of total GDP over the course of a year.
Therefore, the money supply is $10, and the velocity of money is 24.

If the frequency (velocity) of money in the economy falls to 22, GDP would fall to $220. In step, the Federal
Reserve, as an attempt to restore GDP, increases the money supply by $1. With a money supply at $11 and velocity
at 22, the GDP theoretically should be back around $242. But, as velocity continues to fall and the Fed continues to
increase the money supply, the original $10 widget now costs $11, and if the supply of money is increased too much,
you have too many dollars chasing too few goods, and inflation sets in – particularly if the velocity of money should
accelerate. (The actual current money supply is $9.64 trillion and GDP is $15.294 trillion, resulting in a velocity of
1.59.)

A fall in velocity occurs when economic participants remove excess leverage and debt from balance sheets, a
phenomenon consistent with this current solvency crisis. As a result, the Federal Reserve has begun purchasing
large quantities of assets, particularly mortgage-backed securities and U.S. Treasuries through a mechanism called
quantitative easing, effectively financing deficit spending by printing money (exchanging government debt for cash).
This keeps interest rates artificially low in order to lower the cost of deficit-financed government spending; a process
referred to as monetizing the debt, but also promotes consumer indebtedness in order to spur demand.

The Fed’s expansion of money into the system and willingness to subsidize government deficits creates a dangerous
environment for high inflation. Peter Bernholz, historian of monetary systems and inflation, points out that of all the
hyperinflation events in history, every episode except for one has occurred in the 20th

century, and is attributable to
paper currency. In addition, nearly half of those hyperinflation periods have been connected with huge public deficits.
In Bernholz’s book, Monetary Regimes and Inflation, he states, “…we draw the conclusion that the creation of money
to finance a public budget deficit has been the reason for hyperinflations.”18

Most important, Bernholz comes to the
conclusion that high inflationary periods are not caused by central banks alone. High inflationary periods are caused
by both irresponsible and proliferate legislatures that spend beyond their means by accommodative central banks all
too willing to lend a helping hand.19

High inflation can wreak havoc on a society as it destroys the purchasing power of the currency and both private and
public savings. Inflation forces a society into excessive consumption and hoarding to acquire assets before the
prices rise further, and discourages investors from engaging in economic activities. It also leads to mass
unemployment and high capital outflows to foreign countries as individuals look for a safe-haven for savings.

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Inflation also leads to a poorer general population; as the value of wages and real income begin to drop, disposable
income has less purchasing power, and the standard-of-living begins to deteriorate. High inflation would be
particularly detrimental to the baby-boomer population nearing retirement, as they plan to live on a fixed amount of
monthly income from pensions and savings.

Additionally, high inflation will impact the government’s finances. Nearly half of all federal programs and entitlements
are tied to inflation. As spending increases to match the inflation rate, the government accumulates higher deficits.
Social Security, which is officially linked to the CPI, accounted for 21 percent of government expenditures in fiscal
year 2012, and Medicare and Medicaid are also unofficially linked.20

If inflation were to increase by just one percent
relative to the Congressional Budget Office’s estimation, government spending would increase by $2.5 trillion (see
Appendix Figure 1)21

Change in Direction: A Platform to Revitalize America

Financial crises are long and protracted affairs that include a number of similar characteristics, as outlined by
Reinhart and Rogoff22

Asset market collapses are deep and prolonged. On average, real housing prices decline 35 percent over
six years, although Japan has been experiencing housing declines for seventeen consecutive years. Equity
prices on the other hand drop 56 percent on average, but typically over a period of three and a half years.
The aftermath of financial crises are accompanied by declines in output and employment. On average, the
unemployment level remains elevated for nearly five years and output typically starts to increase after two
years.

Government debt tends to explode. Debt increases are associated with bailouts, increased government
spending via automatic stabilizers and government support programs triggered during an economic
contraction, and the significant loss of revenue resulting from slowed output in the economy.

This budget will identify and respond to each of the three characteristics addressed above, and not only attempt to
provide options that would reverse the current policies that have weakened our economy and sacrificed long-term
prosperity, but will create a more competitive economy with less debt, a smaller government, and incentives to
promote greater economic growth.

It is important to understand the basic concepts of the economy, which will be discussed in the following pages.
Gross domestic product (GDP) is the sum of four different components in the economy, which include personal
consumption of goods and services by households (C), gross domestic investment (I), government spending (G), and
net exports (exports less imports). The equation is often seen as GDP = C+I+G+net exports. Each of the GDP
components will be addressed in order to highlight the strategic austerity measures, necessary entitlement reforms,

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and pave a path to one of the most competitive business and workforce environments in the world – all with the
anticipation that it will reduce the fragility of the nation, and increase economic growth and employment.

(Reducing) Government Spending:

“If something cannot go on forever, it will stop.”

-Herbert Stein, Economist

Seen simply in the GDP equation, reducing government spending in the short-term could lower economic output,
holding all else constant. However, by failing to reduce deficit-financed spending now, we face the short-term threats
above, as well as impeding the long-term personal
consumption and investment components of the
equation. In fact, CBO estimates that unless we
get government spending under control, the
crowding out effect will lead to an economy that is
15 percent smaller in 20 years than if we adopt
serious austerity measures today. This budget
proposes policies that would sufficiently offset the
impact of cutting government spending in the short-
term by reducing debt, eliminating regulations, and
promoting a globally competitive tax code that will
increase consumption, savings and investments.

This budget proposal significantly reduces
spending relative to both the President’s budget and the Congressional Budget Office (CBO) baseline. It also brings
spending below the historical average of 19.6 percent of GDP in the first year, eventually reaching levels not seen
since the 1950s. Based on current CBO baseline, the budget would spend $8 trillion less over the next ten years.

A Platform to Revitalize America considers no programs sacrosanct. We reduce future spending by reforming
government’s largest social programs such as Medicare and Social Security; we return many entitlements, such as
Medicaid, Children’s Health Insurance Program, Food Stamps, and Child Nutrition Programs, to the states via block
grants, allowing states to customize and innovate based on their needs. These measures reduce the dependency on
the federal government by both the population and the states, reducing mandatory spending from over 13 percent of
GDP in 2012 to 10 percent of GDP by 2022. The budget preserves and strengthens old-age and disability programs,
and it continues to provide for those most in need, but the budget will begin to lessen the overall dependency on
government. Currently, more than 70 percent of federal spending goes to dependency programs, providing money to
91 million Americans.

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Senator Paul FY 2013 Budget

The budget eliminates four federal departments, including the Department of Commerce, the Department of
Education, the Department of Energy, the Department of Housing and Development, and privatizes the
Transportation Security Administration (TSA). Although the budget does replenish the Defense sequester passed
into law in the Budget Control Act in FY2013, it significantly slows the rates of growth for overall defense spending
and ends current wars. Most of the remaining non-defense discretionary spending is returned back to pre-financial
crisis levels of 2008.

The budget quickly gets spending under control, running a surplus in five years (by 2017). Over 10 years, nearly $2
trillion in surplus is applied toward paying down our debt, decreasing the debt held by the public to 42 percent of
GDP, the lowest level since 2007. With this budget, we will officially begin to deleverage America, paving the path for
a stronger, more resilient nation for future generations

Investment and Consumption

This budget provides a number of incentives to increase investment. During a solvency crisis, the economy is more
engaged in deleveraging than investment opportunities. However, by proposing a flat tax – a reform that will only tax
consumption and not savings (e.g. eliminates capital gains taxes, dividend, and net interest savings) – this budget
will increase the elasticity of individuals and businesses and incentivize them to once again invest in the economy
with less risk or downside. This budget provides individuals with less tax liability via a lower overall rate, less costly
compliance, and immediate write-offs of investments; it also lessens the indirect taxation that results from
burdensome regulation. By allowing Americans and businesses to keep more of their money, we will quicken the
pace of deleveraging, allowing the economy to find its equilibrium, facilitating growth and employment. Consumption
and consumer purchases will increase under this budget by increasing the disposable incomes of individuals and
businesses.

Additionally, the budget will weaken the link between diminished U.S. investments and savings and our social safety
net. By supporting welfare reform and reducing spending for social welfare programs, savings and investments will
increase as Americans have to rely more on themselves and less on their government. The U.S. savings rate was
once similar to that of China’s today, when the U.S. had a much smaller social welfare system. As that system has
been increased, consumption skyrocketed and savings plummeted (in fact, it has been in negative territory since
2005). China, with a small welfare system, has a savings rate that has been fueling massive investment, leading to
continued growth. On average, 48 percent of China’s GDP is saved or invested versus an average of 12 percent in
the United States.23

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Exports

Although the President urged Congress to pass free trade laws in order to elevate exports, which can be applauded,
overall the President’s efforts have been misguided in creating the business atmosphere necessary to make
competitive products in a global economy. The President and the central bank have largely attempted to increase
exports through the promotion of cheaper U.S. products abroad by destroying the value of the dollar here at home.
This budget promotes less costly goods and services by promoting incentives for investment, technology, and
innovation.

Aside from a weak dollar policy, the President’s agenda of increasing taxes is the antithesis of a policy to increase
exports. The fiscal year 2013 budget proposed by the President includes nearly $2 trillion in tax increases, 74
percent of which are the result of increasing the tax rates on individuals, which include small businesses. Tax
experts Alan Vaird and Kevin Hassett have shown, using data proved by the IRS, that 48 percent of net income from
sole proprietorships, S-corporations, and partnerships went to households with incomes above $200,000.24

One of the fundamental keys to export growth is investment.25

The correlation between tax rates, investment and
export can be seen in the example of the tremendous export opportunities and growth of East Asia. Harvard
economist Dani Rodrik explains that, “…in South Korea and Taiwan, the export booms were accompanied by
investment booms that are equally impressive. Indeed, this investment performance is the proximate determinant of
this economic growth.” And former chief economist to the IMF, Raghuram Rajan, highlighted a similar fact in this
book, Fault Lines, “…the more a country finances its investment through its own domestic savings, the faster it
grows. …We found that the more a country invests, the more it grows, which is natural: by investing, it increases
roads and machines, all of which go to make its workers more productive…”26

Tax rates affect the investment
decisions of firms and individuals by altering the cash flow of investment opportunities, and decrease the return on
investment, resulting in a reduced investment.

Conclusion:

If we don’t make the difficult choices today, we will be faced with even more difficult choices down the road, and
people will have to endure even greater pain. While we do not broach the topic of government default directly, this
budget considers it a very real possibility should the debt scenario digress more rapidly than expected. According to
Rogoff and Reinhart, even situations such as high inflation, debt restructuring or changing the terms on the debt can
lead to a partial default.

One of the foremost experts on risk engineering, Dr. Nassim Taleb, author of The Black Swan, has explained why
large government debts, deficits, and corporate bailouts threaten our way of living, capitalism, and the soundness of
our economic system. Dr. Taleb categorizes risk into three types: 1) “fragility,” which is impacted by shocks,

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Senator Paul FY 2013 Budget

disorder, volatility and variability, 2) “robust,” which is unbreakable, can resist shock and volatility, and 3)
“antifragility,” which Dr. Taleb explains is the absolute opposite of fragile - rather than being weakened by constant
shocks and variability, antifragile systems actually benefit from a certain amount of chaos, becoming stronger in the
face of uncertainty, volatility and disorder.27

These concepts explain how this budget leads to a more robust
government and an antifragile economy, resulting in greater freedoms and a stronger society.

As our government runs persistently high deficits and accumulates large sums of debt, it becomes more fragile. With
unsustainable levels of deficits and debt, the government is unlikely to withstand or absorb another shock, from either
a natural catastrophe, unintended global and political volatility such as war, or a serious economic crisis. Any one of
these events would exacerbate our fragile state, leading to a breaking point with serious consequences. This budget
not only lessens that fragility, but returns government to a state of robustness, by reducing its size and debt, and
providing it with the ability to absorb and sufficiently respond to future volatilities.

Over the past few years, taxpayers have sent billions of taxpayer dollars to large businesses, particularly those
associated with the automotive and financial sectors. They were bailed out despite their histories of irresponsible
leverage and unsustainable levels of employee compensation. Protecting a failing entity only increases its size,
reinforces irresponsible practices, and leaves the American taxpayers with greater vulnerability in the future –
requiring greater levels of taxpayer funds to bail them out when they fail again.

A capitalist society allows for success and failure. As Dr. Taleb says, “When you remove failure from the economy,
you eliminate capitalism.”28

A fluctuating economy that experiences and allows failure eliminates weaknesses and
irresponsible behaviors, making the system stronger. This is Taleb’s idea of antifragility. Therefore, when a
government must take money from the average taxpayer to bailout the “too-big-to-fail” corporate giants, the
government is eliminating failure from the free market and weakening our system. Taleb writes:

...governments typically favor a certain class of firms that are large enough to be needed to
save in order to avoid contagion to other business; by doing so, they do the opposite
operation of transferring fragility from the collective to the unfit, and suck up forces from the
weak whose failure does not threaten the system. People have difficulty realizing that the
solution is building a system in which nobody’s fall can drag others.29

This budget allows wealthy corporate titans to face the economy and face the consequences of reckless
compensation and excessive debt. It provides a less burdened federal government, suited to respond to and absorb
future catastrophes with adequate resources. It promotes free markets and capitalism by allowing weak entities to
fail, leaving behind a strong economy. The budget ultimately encourages a robust government and antifragile
economy.

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Major Budget Policy
Options

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Senator Paul FY 2013 Budget

Legislative Branch

Policy Proposal: Reduce funding to FY2008 levels and limit growth to rate of inflation.

The spending increase in the Legislative Branch epitomizes the growth of government over the past 10 years; since
2000, the budget of Congress and its support agencies has increased by more than 100 percent. This aggrandized
spending has outpaced what is achievable through taxation. Historically, the country has collected revenue equal to
roughly 18 percent of gross domestic product, regardless of the tax rate. For example, during the mid-1950s and
early 1960s, the top marginal tax rate was above 90 percent, yet revenue as a percent of GDP averaged only 17
percent.

According to CBO, this is the fourth year that will have deficits greater than $1 trillion. This fiscal year, the federal
budget will be approximately $1.1 trillion, with unemployment rates remaining above 8 percent for both this and next
year. This out-of-control spending has done nothing to ease our fiscal crisis. Economic growth remains stagnant,
unemployment rates are at levels not witnessed since the Great Depression, debt and deficits have been
accumulating at an unprecedented pace, the Federal Reserve has pumped up the monetary base beyond
sustainable levels, and increasing taxes has become the status quo.

The solution to our problems begins by returning the government to the people, once again empowering the states,
and decreasing the size and scope of the federal government. There is no other area of the government more
appropriate to begin to addressing our fiscal crisis than the Legislative Branch.

Policy Proposal: Eliminate the Government Printing Office (GPO)

Advancements in technology have led to the electronic age, an era that eliminates the need for the government to
print exorbitant numbers of documents,
many of which can be accessed and read
on the Internet. Currently, approximately
97 percent of all government documents
originate in digital form and are distributed
electronically. Every government office
and agency should budget for their own
printing costs.

The waste at GPO is incessant. In 2010
alone, GPO spent nearly $30 million in
taxpayer dollars to provide Congressional offices with the rarely read Congressional Record, and in September 2010

Table 1

Estimated Prepress and Printing Costs per Page of Selected Congressional Publications, FY2011