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Monday, February 21, 2011

Budget Fights: First You Don't Like Spending: Then You Don't Like Cutting

2/15/2011. I’m watching the current controversy on the budget and the proposed cuts of $1.1T over ten years. Funny, last year, just about everyone I know was raising hell over the spending policies. The new budget has a combination of freezes, cuts and tax increases (on the upper two brackets, of course). The hue and cry abounds: “It’s too much!” “It’s not enough!” I thought I’d risk the pain and have a look at the budget, and based on my first review, here’s what I see:


The Deficit is Worse. This Budget has a deficit of $1.645T. (I think we should require them to list the actual number: $1,645,000,000,000; and also list it by taxpayer: about $12,000 deficit per taxpayer!) Now I may not be too good with numbers, but the 2011 deficit was $1.65T. So to my feeble brain it looks like we’re spending $50B less that we don’t have out of $1,645 billion that we don’t have. By the way, the 2011 budget had a projected deficit of $1.267T when it was announced. So the budget actually was about $380 billion worse than bad.

We’re Spending More than Ever. In 2001, the US budget had a surplus and government spending was at about 18.2% of GDP. It’s now about 24.7% and rising fast. To put it in perspective, the entire 2001 budget outlays were $1.835T, compared to a deficit of $1.645T now. GDP at the beginning of 2001 was about $10T. Today, GDP is about $13.5T. The US economy has grown about 35%, but government spending has just about doubled.

The REAL Big Three. There are three reasons why the current budget cutting program won’t work: Social Security, Medicare/Medicaid, and interest on the National Debt. I bet you thought I’d say defense (which I believe we need). Here’s the stark reality: Social Security, Medicare/Medicaid and interest payments (presuming we don’t borrow another penny) constitute about $2.125T of this budget, or 75% of total receipts (which I might add, the government has projected an increase in their revenues of 18.7%). If you add in defense, you have a modest deficit of $4B. So have a look at that: you could cut out ALL federal programs (including Congress, Transportation, Health and Human Services, Agriculture, Education, Post Office, all international aid, the judiciary, the Congressional barber shop and everything else) except those four things and you can barely balance the budget. Any true action on a budget requires Congress and the President to look at the mandatory programs. It’s like the movie ‘A Few Good Men’ “You want the truth? You can’t handle the truth!”

Japan, for Example. Want an ugly example of what can happen? In 1995, Japan’s per capita GDP was about $41,968 per person, 51% higher than the US. In fact a popular treatise in 1989 was ‘The Japan That Can Say No’ an essay on Japan’s global dominance. In 1995, Japan debt to GDP ratio was 92.43%, compared to ours at 71.02%. Today, Japan’s GDP per capita is just about the same as it was 16 years ago ($42,325). Ours is up 69%, China’s is up 612%. Japan’s debt to GDP ratio today is the second worst (only to Zimbabwe) at 225.85% (It should be said that one good thing about Japanese debt is that they owe it to themselves); ours is at 92.72%. Japan just got their bond rating downgraded. Hmmm? See any comparisons?

Bottom Line: If we want to get serious about deficit reduction, we need more than a $50B cut. Washington sounds to me like a couple in a dysfunctional marriage: they want to argue, but they’re unwilling to step up and solve the problems. Who knows, maybe a good place to start would be the Budget Deficit Reduction Commission. But then again, that might be like the dysfunctional couple listening to the marriage counselor.

C’mon kids, play nice.

Leon