Monday, March 4, 2013

Obama's Mythical Spending Cuts

by Peter Wilson

President Obama has engaged in a two-pronged attack during the recent budget battles -- which, given the failure of sequester negotiations, will continue with our next budget crisis on March 27th when the Continuing Resolution funding the federal government expires. On the one hand the president uses scare tactics to make the point that cutting any government spending will cause pain. On the other hand, he praises himself for his enormous ongoing deficit-cutting efforts. 

We read about this latter strategy on a recent post at

The President has already reduced the deficit by over $2.5 trillion, cutting spending by over $1.4 trillion, bringing domestic discretionary spending to its lowest level as a share of the economy since the Eisenhower era. As a result of these savings, together with a strengthening economy, the deficit is coming down at the fastest pace of anytime in American history other than the demobilization from World War II.

The $1.4 trillion in spending cuts referred to is for a 10-year period -- $140 billion for each year. In a $4 trillion budget, this amounts to cutting spending by 3.5%.The ten-year timeframe isn't clear in the above statement -- in fact the word "already" is confusing. The White House email on Friday afternoon announcing the failure to stop the sequester is similarly unclear; it refers to a chart with Obama's "$4 trillion of Deficit Reduction," which begins with: "Spending cuts to discretionary programs enacted over the past two years: $1.4 T." Apparently the cuts were enacted in the last two years but will unfold over the next ten years.

This ought to lead to some head scratching, since there have been no spending cuts in the last two years. Obama has run trillion-dollar-plus deficits every year of his presidency. According to the Treasury Department's "Debt to the Penny" calculator, on Inauguration Day, 2009, the national debt stood at $10.6 trillion. Obama's deficits have increased our debt by $6.1 trillion to $16.7 trillion -- a 58% increase.

According to the Center on Budget and Policy Priorities, Obama's claim comes from comparing projected deficits to a baseline projection of the 2010 budget, allocated in 2009, excluding stimulus funds. Under the government's "baseline budgeting" rules, budgets are increased every year by around 6% to account for population growth and inflation. Ultimately the concept that government spending grows with inflation is not unreasonable, but it is often misused by politicians, leading to Newspeak situations where a spending increase in actual dollars can be called a "spending cut" if the increase is less than the preordained increase. Obama therefore can spend 2.5% more each year and claim that he's cutting spending by 3.5%.

It gets worse. For one, there's not really any such thing as "the deficit." A deficit is the difference between receipts and outlays in a single budget year. In 2012, for instance, the federal government took in $2.5 trillion in revenue but spent $3.8 trillion, running a $1.3 trillion deficit for that year. The national debt is the cumulative total of all this deficit spending. The statement that Obama "reduced the deficit by over $2.5 trillion" is deliberately obfuscatory. We know he didn't reduce a $1.3 trillion deficit by $2.5 trillion, and even if we are aware of the 10-year timeframe, it's tempting to assume that Obama is referring to reducing the national debt. In fact, an email Friday from my Congressman Michael Capuano reports: "In the past two years, total debt reduction amounts to approximately $2.4 trillion." Note that bit about "the last two years" comes up again. While Capuano refers to debt reduction rather than deficit reduction, but the resulting statement remains complete nonsense; in the last two years the national debt has risen from $14.1 trillion to $16.4 trillion, an increase of $2.3 trillion, up 16%.

Obama wants to give the impression that he is spending less, cutting deficits and debt, being a fiscal hawk who knows how to spend wisely, unjustly accused of excessive spending by duplicitous Republicans. None of this is true, which becomes clear when we look at Obama's projections for 2011 to 2022, presented in Summary Table S-1 of the 2013 federal budget.

The top line is "receipts," or income from taxes and fees. Receipts dropped during the recent recession, but the budget optimistically projects a rise from $2.3 trillion in 2011 to $5.1 trillion in 2022 -- more than a doubling of tax revenues. Either our economy has to grow dramatically, or taxes will be punitive.

"Outlays" -- federal government spending -- likewise follow a steep upward trajectory, growing every single year from $3.6 trillion in 2011 to $5.8 trillion in 2022. This compares to Bill Clinton's 2001 budget of $1.9 trillion and George W. Bush's 2009 budget of $3.1 trillion (unadjusted for inflation).

In every one of these years, the federal government will run large annual deficits. The trend in deficits is down, falling from the $1.3 trillion to a low of $575 billion in 2018, and then climbing again. Even when you reduce a deficit, however, you're still spending more than you take in, still adding to the national debt.

And the national debt picture is not pretty. Obama's budget table reveals a sharp increase, nearly doubling from $10.1 trillion in 2011 to $19.5 trillion in 2022. These figures disingenuously omit debt classified as "intergovernmental holdings," which this year adds another $4.8 trillion to our total debt. A closer estimate for 2022 is a national debt of over $25 trillion.

Obama's chart illustrating that the deficit is coming down at an historically rapid pace contains this footnote: "3% Threshold for Debts Stable as a Share of GDP." It's referring to the out years, from 2015 to 2023, when deficits "stabilize" at under 3% of GDP.

There is however nothing stable about this situation. Obama wants us to focus on the change in the slope of the line, doing budgetary calculus, but the simple arithmetic is what counts. Adding hundreds of billions to the national debt every year is better than adding a trillion every year, but it's still destabilizing and dangerous.

In the next ten years, according to Obama's own projections, taxes, spending, and the national debt will roughly double. Obama's rapidly rising budgets are only offset by unreasonably optimistic revenue projections, and the 3% ratio will only hold if we have 4.3% GDP growth assumed in Table S-1, every year for the next decade. Given our current anemic growth and the historical U.S. average of 3.2% growth, it won't take much for everything to spin out of control.

The interest on this debt will be staggering, and if rates spike, we'll have to learn to calculate oil prices in Chinese Yuan. And we won't go into the depressing subject of unfunded liabilities for pensions and medical benefits, which are rocketing toward $100 trillion, with a T.

Peter Wilson


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