Tuesday, January 26, 2010

Obama's Budget Freeze Proposal - Why Bother?

The initial news seemed to be good out of the Obama administration: the President finally got it and was freezing the Federal budget over the next three years in order to begin coping with the huge budget deficits. The good news lasted for about an hour when the following became evident:
  • The freeze would not apply to the biggest parts of the Federal budget (military, Social Security, medicare) so the total Federal budget would likely increase even though he was freezing portions of it.
  • I initially read the plan as saving $250 billion a year, not bad/not great but at least a start. However, it turns out the President's plan would save $250 billion over ten years or only about $25 billion a year.
  • Despite budget deficits exceeding a TRILLION of dollars each year, he is talking about saving a few dozen billion each year. Last year's total Federal expenditures were $3.5 TRILLION and thus, if we saved $25 billion last year, the percentage reduction would have been less than one percent (.7%).
  • Last year the Federal budget deficit was $1.4 TRILLION so the $25 billion in savings would have reduced the deficit by only 1.8%. Thus, the title of this blog: "Why Bother?"

Let's put these numbers in the context of a Congressional Budget Office (CBO) report that came out today which estimates that the 2010 budget deficit will be about $1.35 TRILLION, marginally better than the 2009 budget deficit. Thus, Obama's spending freeze would have the same negligible effect this year as last year. The report also estimates that unemployment will stay the same at around 10%, it well improve just a little next year and this year the U.S. economy will grow only 2%. If these numbers are right, the budget deficit is unlikely to improve due to higher payroll taxes from falling unemployment.

Some more bad news. If the estimates are right, then in two years the political class would have spent about $2.75 TRILLION more than it took in via taxes, financing the difference with bonds. If you divide the $2.75 TRILLION by the number of households in the U.S., then an average household is on the hook for about $21,000. In other words, to just pay off the deficit from this year and last year, every American household would have to write a check for an additional $21,000 each.

More bad news. Let's do some rough math. Last year the Federal government had revenue of $2.1 TRILLION but spent $3.5 TRILLION. If the unemployment rate had been zero last year, i.e. the 10% of workers looking for jobs actually found a job, then you could roughly guess that government revenue would have gone up by about 10% since those that were unemployed were now paying taxes. Thus, the $2.1 TRILLION would go up about 10% and result in $2.3 TRILLION, still leaving a deficit of $1.2 trillion. If you believe that true unemployment rate is closer to 20%, as some experts claim in order to take into account those people that have stopped looking for a job, than if by some miracle all of those in the 20% got a job and started paying taxes, the Federal government revenue would rise to about $2.5 TRILLION, still leaving it with a deficit of one TRILLION dollars. In other words, even if everyone in the country got a job and started paying taxes, it still does not look like we could easily eliminate the annual deficit, spending is that out of control.

To the President's credit, several days ago he proposed assembling a sixteen member bipartisan panel to come up with a deficit reduction plan. the panel would put together a plan throughout 2010 that would be voted on by Congress later this year. This was the good news and was consistent with the oft-mentioned recommendation of this blog that an expert panel approach is the only way to get Congress out of the way of progress. Numerous times we have cited the Manhattan Project, the Apollo Space mission, the Grace Commission, military base closing commission, etc. as independent panels that made real, positive changes in the country. However, to my surprise and disappointment, the Senate has already voted down the idea and has not come up with a replacement plan fro deficit control.

A few final observations:

  • Spending is truly out of control and there appears to be no fortitude, urgency, or intelligence in Congress to do anything about it.
  • Non-government economists are right in predicting that failure to get the budget under control will result in higher taxes, higher interest rates, sluggish or no economic growth, credit shortages as the government sucks up all available resources to fund the deficit spending impacts, and a continual devaluation the dollar.
  • You cannot get the budget under control without hitting all of the budget lines, unlike the Obama plan that touched only a subset of the budget items and froze those budgets, did not shrink them. An easy first step, as proposed in "Love My Country, Loathe My Government," is to sharply reduce our military commitments overseas. Stationing 47,000 troops in Japan, 30,000 in Korea and over 50,000 in Germany serve no strategic purpose. Bring them home and you can make a significant dent in military spending without a detrimental impact on security. Deep cuts in ALL areas are required.
  • Late last year I hypothesized the theory that President Obama had lost control of the Presidency and that a small handful of Democrats in Congress were now running the show (Reid, Pelosi, etc.). I think the past few days have proven that the President is rapidly approaching lame duck status. Although his efforts to get the deficit spending under control were definitely on the meager side (freeze only a subset of government functions and put a panel together to come up with a deficit reduction plan), it appears that neither of those efforts will get any traction from Congress. While 53 Senators voted to make the deficit reduction panel a reality (60 votes were needed for passage), including 16 Republicans, 23 Democrats defied the President and did not vote to support the panel idea.
Truly scary situation. The reality is right out there in front of the political class but they are either unwilling or unable to face the reality and make the tough choices. Failure to act and get spending under control will have dire consequences for generations to come and Obama, he of the 70-80% approval rating of 12 months ago, now seems incapable of doing anything about it.



Visit our website at www.loathemygovernment.com to order an autographed copy of the book, "Love My Country, Loathe My Government -Fifty First Steps To Restoring Our Freedom and Destroying The American Political Class" and to sign up for the cause. The book is also available online at Amazon and Barnes And Noble.

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