Government isn't supposed to 'Make a Profit'

I worked for government for over a decade. Local government, not federal, but still government. I did budgets. Way back when I did their first ever budget on a computer, something that enabled my department to get their budget turned in on time for the first time in many years. I understand how a governmental budget is developed from the ground up, from every individual budget line, and how it all comes together to make a total budget. And I understand how that happens for both the regular budget and the capital budget, which in local government, although not the federal budget, is a separate thing.

Now, let’s look at your claims, vantage49.

No government ever makes a profit. If revenues exceed expenditures it runs a surplus. That surplus may be allocated in any of a zillion ways. It can fund new programs, or add funds to old programs, or pay off loans, or redeem bonds, or be used for capital projects, or it can just sit in a bank and await a future deficit.

The federal government, unlike most state and local governments, can run a deficit. Let me emphasize this. The federal budget never has to be balanced. Ever. It is not designed to be balanced. Ever. Not even in the Clinton days when the government was running a rare surplus did anybody think of balancing the federal budget.

What happens when a surplus comes in? First, you need to remember that a departmental or project surplus does not go into a bank account marked for that particular department or project. It goes into the general fund. In fact, when the budget is created there is not even a line to associate revenue. This makes sense in the world of government. Budgets are costs. Revenues are certainly taken into account by both the department and the budget bureau, but the latter has to allocate money according to total revenues.

Let’s look at allocation, then. You have an imaginary department that has costs of $10 million but raises $1 million in revenue. What happens next year? Do you drop the budget of that department to $9 million? Probably not. Just as with any business you have certain fixed costs to deal with. You can’t expect to cut staff or hours or services and still make the same amount of money. It’s more likely that if you added staff etc. you’d make even more money. This would increase your budget but the added revenue would be worth it. In the world of government, where making money is secondary, the end result might very well be to hold the budget steady (or adjust for inflation). In real world terms, you can look at such attractions as national parks. These bring in money from visitors, but have huge fixed costs. In recent budget cuts, services have been cut and tourism discouraged. This lowers revenues, but in the overall context of the federal budget it was deemed necessary.

Or take the IRS. Each additional IRS agent brings in revenue to the government by catching tax cheats. The value of a new agent is high, in the millions of dollars a year. Yet the IRS has been starved of money for years. Why? Because revenues are separate from costs. The public sees the costs of government so there are huge incentives to cut costs. And the revenues disproportionately come from business, since that’s where most audits are done and tax cheats are caught. This is discouraged by administrations with large business support, as with Bush. Obama may reverse this trend and add more agents. This will likely increase revenues. But the added revenue will have little or nothing to do with the way the agency is sized or budgeted.

Government is not business. There are parallels at times, but government cannot and is not run as a business. It is not true that “those actual workers in the government - the non-elected or appointed, the ones who work day-to-day and administration-to-administration - the concept of keeping both sides of the ledger even is paramount and not just a guideline or recommendation.” Most areas of government do not generate revenues of any kind. If so taxes would not need to be levied. Revenues in government are a very small percentage of the total inflow. They are usually not even priced to break even. People expect that a governmental charge will be lower than an equivalent private sector charge. The museums on the National Mall are free, although I bet you pay just as much in their gift shops as any other museum’s. The gift shop certainly looks at revenues but none of the employees of the museum proper are working to keep both sides of the ledger even. There isn’t a second side.

I’ve tried to provide a general look at how government budgeting functions. I would refute your points one by one, but you don’t say anything specific enough for me to do so. The bottom line is that government revenues don’t work the way you say they do. Nor does the budget process. Nor do the workers. And to apply anything of what you said to federal government is even more wrong, since the federal budget does not have to be balanced. Budgets are a negotiation and politics does play a very large role in determining them. This is also true in the private sector, though, much more than most people understand. Only the interest groups change.

In Canada our federal government has had a budget surplus for the last 12 years in a row. They have been using this surplus to pay down the national debt. Our unemployment fund has had a massive surplus for many years. They could have used this to reduce primiums or increase benefits but no they used ti to pay debt.
We have another aspect to the government making money in this country. Publicly owned corporations,“Crown Corporations” We have hundreds of them and many of them are mandated that they must make a profit. For example, in the energy field we have huge publicly owned electrical generation and distribution companies. When they make a profit they use it just like any corporation does except there are no dividends to pay to stockholders. They could choose to use the profits to reduce the cost of energy to their customers. They could use it for expansion or retiring debt or any other things that companies use profits for. One thing is for sure. The government will not allow them to raise rates if they are making a profit. If they have had a few good years they might even say, Hey it’s a good time to sell this company to the private sector and get our investment back.

I’d say the best economic model for government is to regard it as a good or service that you’re purchasing. If you’re buying a TV or a vacation or a dinner at a restaurant, you don’t ask yourself if you’re going to make a profit from the purchase. You ask yourself if you’re receiving sufficient value for the payment you give.

I also worked for the government - the federal government. And I worked there for thirty-two years. I’ve been part of several agencies and departments of the government including the military as a civilian and active duty, and the State Department. I’ve not been a budget specialist but I’ve managed many accountants, finance administrators, federal contractors and auditors. The Fed is a lot different than any local government and I do resent you telling me that I don’t know what I’m talking about. Especially when I cannot easily understand what points you are actually trying make about what I said. It looks to me that you are talking for the sake of talking, and trying to cover up with verbiage what you do not know about the subject. I actually can provide some argument for some of your remarkable declarations because I do know what I’m talking about. Let me try to educate you again and I’ll try to keep it as simple as I can.

"No government ever makes a profit. If revenues exceed expenditures it runs a surplus … surplus does not go into a bank account marked for that particular department or project. It goes into the general fund." This sounds a lot like what I said (“No matter how ‘complex’ the federal government is - it cannot CANNOT make a Profit. … There is always a chance that an agency will make more money than it had planned. This is called ‘surplus’ and not ‘profit’ and it must go back into the government pool.”)

"The federal budget never has to be balanced. Ever. It is not designed to be balanced. Ever." How exactly do you think the financial picture of the United States was intended by the founding fathers? Do you think that it was ok with them if the government spend as much as it wanted and took in as much as it wanted - that there was no intention to balance what was going out with what was coming in? Of course the intention was that the federal government would never make a profit and never create a deficit. When this happens it is called a “balanced budget.”

"Not even in the Clinton days when the government was running a rare surplus did anybody think of balancing the federal budget." Have you never heard of the Balanced Budget and Emergency Deficit Control Act (popularly known as the Gramm-Rudman-Hollings Act) of 1985? Even today there are politicians and special-interest groups that push for a balanced-budget amendment.

"Just as with any business you have certain fixed costs to deal with … Government is not business. There are parallels at times, but government cannot and is not run as a business." Yes it is a business. It is just not a monetary profit-oriented business.

"Most areas of government do not generate revenues of any kind. If so taxes would not need to be levied. Revenues in government are a very small percentage of the total inflow." All areas of the federal government generate revenues. For most of them the revenue does not come directly from the public. Most come from the U.S. Congress. They generate it by asking for the money in their operating budget request. It comes from your taxes. That is what your taxes are for. Taxes are the revenue of the federal government and the state governments (and most local governments I would presume). Not all parts of the Fed rely completely on the money given them each year by Congress. Some rely partly or entirely on other money provided by taxpayers through services or products provided. Others receive funds from other parts of the federal government, or state governments or from local governments, through services or products provided. Or even from foreign governments.

**“You have an imaginary department that has costs of $10 million but raises $1 million in revenue. What happens next year? Do you drop the budget of that department to $9 million? Probably not. Just as with any business you have certain fixed costs to deal with. You can’t expect to cut staff or hours or services and still make the same amount of money. It’s more likely that if you added staff etc. you’d make even more money. This would increase your budget but the added revenue would be worth it.” **This is definitely not the way the federal government works and I can tell from these statements that you are grasping. The department provides a best guess on how much money they need to operate for the next year based on current or estimated personnel, supplies and costs. Congress can agree and give them the money they ask or disagree and give them less. One thing Congress would take into account is if they are spending too much, if they are making too much, and if they are completing their mission what ever that may be. In the provided scenario, the imaginary department would probably not have its congressional operating budget reduced by the amount of the surplus. But it could be reduced because the department has shown that it does not need as much of the taxpayers money they are getting . That money not allocated can be used for other things like pork. If the budget is reduced then cutting of the staff could happen (it’s called “Reduction in Force”), hours definitely could be shortened and services CAN be reduced or eliminated in order for a balance of outgo-income is established. The departments mission or reason for being cannot be changed because of the lowered budget. Let me make this as clear as I can: MOST AGENCIES AND DEPARTMENTS OF THE GOVERNMENT DO NOT CARE ABOUT MAKING MONEY as most of their operating capital comes from Congress. A part of the federal government would only add more personnel in order to better accomplish their mission - not to make more money.

**“Each additional IRS agent brings in revenue to the government by catching tax cheats … Yet the IRS has been starved of money for years. Why? Because revenues are separate from costs. The public sees the costs of government so there are huge incentives to cut costs … Obama may reverse this trend and add more agents. This will likely increase revenues. But the added revenue will have little or nothing to do with the way the agency is sized or budgeted.” **I have not worked with the IRS but I have a brother-in-law and a sister-in-law who have retired from the IRS. The IRS has never been starved for money - not any more than any other part of the Fed. They have a very specific budget and it is not based on how many tax cheats they catch. Agents do their job and when they do it well they get promoted and get raises. They don’t get bounties. The IRS is not generating revenue for the IRS when catching tax cheats or even when getting you to file your return. That are getting revenue for the Federal government. It is their mission, their reason for existing. But for those federal agencies or departments that do receive incoming revenue for themselves, costs are always tied to any incoming funds. It is hard not to stress this enough.

"It is not true that ‘those actual workers in the government - the non-elected or appointed, the ones who work day-to-day and administration-to-administration - the concept of keeping both sides of the ledger even is paramount and not just a guideline or recommendation.’ Most areas of government do not generate revenues of any kind." This is so untrue and unfair to government employees that it appears to be bigot-based. I have lived this system and I can say without equivocation that all federal employees at their job every day pursue the purpose of why their part of the government was created - their mission - no matter if they are Navy SEALs, building security guards, computer techs, vice presidents or budget analysts. Because completing the mission is the actual profit for any part of the Federal government. Monetary profit does not enter into it because it does not exist. And to do this they need an appropriate and complete budget that requires a balance of income and outgo. They do not need to generate money like car salesmen to be responsible employees.

"People expect that a governmental charge will be lower than an equivalent private sector charge. The museums on the National Mall are free, although I bet you pay just as much in their gift shops as any other museum’s. The gift shop certainly looks at revenues but none of the employees of the museum proper are working to keep both sides of the ledger even. There isn’t a second side." Most federal governmental gift shops are most likely run by a contracted private company. This private company pays for the chance to make a monetary profit from the venture and will base his prices on competitive prices. But even so, I would offer that most governmental gift shops probably are cheaper than private-run tourist spots. Government products and services are usually cheaper than non-government. Look at the price of stamps of prior to 1982 when the USPS stopped taking Congressional monies and had to become a more-or-less private business based on monetary profit.

I believe you probably know a lot about how your specific local government budget operated. It is certainly appropriate to have opinions but I don’t think you know much about how the federal government works. The thing is, I’m not sure why you cannot accept the fact that someone else may know more than you.

Let’s assume for the moment that 18th century politicians are somehow smarter than 21st century politicians. That just leaves us with the problem of figuring out what 18th century politicians thought. Often a problem but not in this case. We know how the founding fathers handled deficits - they loved them. One of the first things the Continental Congress did was start borrowing money. So the United States was already running a deficit before we even declared independance.

You two appear to mostly be arguing over semantics. Why don’t y’all define your terms before you continue? I’m thinking “revenue”, “income”, and “surplus” for starters.

How do you come to that judgment? Seems to me he’s just saying that “profit and loss” is not on the minds of government employees, not that they aren’t trying to be responsible about their jobs.

Seeing that it was not until the institution of the Federal Congress that the United States had the ability to levy taxes, that’s hardly surprising.

vantage49, first let me thank you for responding with a long and detailed post.

And let me also give my appreciation for your 32 years of government service. These days everyone makes it a ritual to thank the troops but hardly anybody thanks the other governmental workers who are just as instrumental in keeping the country functioning. They are damned as bureaucrats and dismissed as overpaid and underworked when the opposite is the daily truth.

That said, I am at a total loss at how to debate someone who declares taxes to equal departmental revenues and who says that completing a mission is profit rather than monetary profits being considered. You are defining revenues and profits in a different way than anybody before in history. We can’t have a reasonable discussion when this is true.

Just for the sake of others, though, let me talk about the IRS.

Obama seeks to double tax law enforcement budget

And a more casual rant:

The IRS budget has been artificially suppressed for many years for political reasons. Increasing their number would increase revenues. Not for themselves but for the government. In this case revenues are received to the general fund as taxes but it is the exception. And the budget of the department is not determined by the extra revenues it produces for the government. That’s a function of the agents doing their job, a job many people don’t want done. As noted above, no business would function this way, but the government is not run as a business.