Tag Archives: spending

New Math: State of the Union Speech 2012

New MathObama gave his State of the Union address last night.  It was filled with the usual glowing remarks about accomplishments, and grandeois visions of a utopian future which will (thank goodness) never come to fruition.  In terms of the economy, the President tried to paint a picture of slow but steady improvement.  He made no mention of the credit rating downgrade, the newly breached debt ceiling, the national debt exceeding 100% of GDP, nor the sure effects on America of the imminent European debt collapse.  He neglected to mention the most important entity in the world to investors around the world: The Federal Reserve.  He didn’t mention the passage & his subsequent signing of the NDAA and how that authorizes the executive branch to carry out indefinite military detention of anyone (including citizens) it deems ‘belligerent to the state’ without charges or trial.

So what did he mention?  Well, two particulars that he did mention were especially interesting, regarding the state of the budget & how he hoped to pay for his utopian programs.  And they just don’t add up.

 In the next few weeks, I will sign an Executive Order clearing away the red tape that slows down too many construction projects. But you need to fund these projects. Take the money we’re no longer spending at war, use half of it to pay down our debt, and use the rest to do some nation-building right here at home.

Let’s consider for a moment.  We have a current annual budget deficit of $1.4T give or take under the most optimistic circumstances.  That means we’re spending about $3.5T per year and pry tax revenues from the people of about $2.1T per year.  Let’s assume that indeed war spending is going to zero, that the costs of Iraq & Afghanistan truly are over (that’s a BIG assumption, but ok, let’s play along).  We spent about $160B in Iraq & Afghanistan on the books during 2011.  So if we no longer have that cost, the President would have you believe  we can use $80B to ‘pay down our debt’ and the other $80B for his stimulus construction projects.  The rub is this:

That isn’t cash in the Treasury that we are spending, that is $160B in borrowed funds.

In other words, if that expense does go to zero, it doesn’t leave you with $160B laying around in overflow, it means our budget deficit drops from $1.4T to $1.24T.  Yes, we are still $1.24T in the red even if the war costs disappear.  How exactly does that leave one with any money left over to do anything?  How can you be $1.24T in deficit every year and still pay down debt?

The other major sticking point in the address was a reference to the alleged ‘cuts’ made ‘automatic’ by the failure of the supercommittee:

When it comes to the deficit, we’ve already agreed to more than $2 trillion in cuts and savings.

Sounds good doesn’t it?  $2 trillion in cuts.  What he doesn’t say is that these ‘cuts’ are to be made over a 10 year period.  Reminder from above: we’re spending $3.5 trillion per year today.  Over the next 10 years, this is projected to increase at a rapid rate.  But let’s give the President the benefit of the doubt and assume the level increases at only 3% per year… that’s about $50 trillion total in spending over those 10 years – and he’s bragging that they’ve reached the grand level of cutting that by $2 trillion?  If we freeze spending at $3.5 trillion, we’d spend $35 trillion over that same 10 years.  So his $2 trillion cut is not a cut to current spending levels at all – it is a 13% cut in expected spending growth, not a $2 trillion cut in spending today.

Let’s keep in mind that the economy has been growing at nowhere near a 3% rate; 1% is more accurate, if even that much.  Since tax revenues can only be expected to increase at the rate of GDP, the gap between spending and revenues will grow ever wider, compounding at 2% per year under these assumptions, and the total debt will accelerate.  Additionally, interest payments on the existing and additional debt will swell to take up more & more of the budget, requiring even more printing and borrowing.

This President is ignorantly selling a fairy tale at best, at worst intentionally outright lying, with respect to our financial situation as a nation.  I tend to believe the former.  Much as he may believe his benevolent big brother utopian paradise may be attainable, mathematics is non-negotiable, and he clearly is either incapable of or unwilling to grasp mathematical reality.

What Would You Cut?

Cutting Money
Time for a trim.

With the debt & deficits gaining more attention everyday, focus in the Republican primary has to a large extent been on how to trim the size & scope of the federal government.  Rick Perry proposed cutting three cabinet level departments: Commerce, Education, and Energy.  Not to be outdone, Ron Paul went further, proposing cutting five: the departments of Energy, Housing and Urban Development, Commerce, Interior, and Education, together with other cuts to reduce $1 trillion in spending in year one of his presidency.

I’ve had discussion with more big government minded folk who exclaim: “but if you cut the Department of Education, how will we educate the children?”  Interestingly, the Department of Education was founded in 1980, so I respond with: “gosh I don’t know… since your parents were educated before the DOE existed, they must be absolute blathering idiots.”


The Elephants in the Room

While elimination of various redundant and constitution-stretching departments is certainly not a bad idea, there are two main elephants in the room that make up the bulk of the federal budget: entitlements and defense.  Most of these same Republican candidates, with the exception of Dr. Paul, who want to hack and slash at the department level show no desire to perform similar drastic cost cutting to the Department of Defense.  They give lip service to reducing the entitlement burden, but really at the end of the day propose little more than a dent in cost restructuring.  Worse yet, Democrats show little desire to affect any serious cuts in either defense or entitlement programs.  The debt to GDP ratio just recently rose above the 100% level, and absent a miraculous end to endless red ink after 2012, seems like it will only be accelerating higher.

Now is the time for bold action, not timid minor modifications to business as usual.