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The Truth About the Budget Cuts

April 9th, 2011
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04.09.2011
04.14.2011 update (page bottom)


The Truth About the Budget Cuts

original article written by Net Advisor

Washington DC. The major political parties came to an agreement – to keep the government running… deficits.

There were emotionally driven arguments this week how the “Statue of Liberty, will close,astronauts grounded, government furloughs, fears about trash not being picked up which is really a municipal issue, not a federal issue unless you live in Washington DC.

In the end, the two major political parties agreed to a trivial $2 Billion in short-term spending cuts and a token $38 Billion in “long-term” spending cuts. These “long-term” spending cuts are good until the end of 2011.

“With a little over an hour to spare before a midnight deadline, Obama’s Democrats and opposition Republicans agreed to a bitterly fought compromise plan that will cut about $38 billion in spending for the rest of the fiscal year.”

— Source: Reuters

Bitterly fought? $38 Billion? Just for the rest of 2011? Are they serious?

To try and give a visual example comparing government deficit spending to these budget cuts, might be like throwing a penny in ocean. Once you tossed a penny in the ocean, no one will notice what happened.

Thus, with $38 Billion of (arguably short-term) deficit cuts, that is only 2.4% off from the revised $1.6 Trillion 2011 projected deficit. This $1.6 Trillion 2011 deficit is up from the $1.4 Trillion deficit the Congressional Budget Office (CBO) estimated last month. And the $1.4 Trillion CBO projected deficit from last month is up from the $1.27 Trillion deficit estimated just last February 2010.

Government Accounting Errors?
Clearly, there seems to be some accounting problems where some people just can’t seem to figure out how big the deficit is growing, even though all the spending is supposedly accounted for, even if it is borrowed money.

So if we take the current Obama $1.6 Trillion deficit, and subtract that against the February 2010 estimated deficit of $1.27 Trillion, we have an extra $330 Billion increase in the 2011 deficit (Math: $1.6 Trillion – $1.27 Trillion = $330 Billion).

Thus, the deficit will increase by an extra $330 Billion compared to Obama’s own February 2010 forecast, with a total (record) deficit for 2011 at about $1.6 Trillion.

We have heard how Congress fought all week and up until midnight and they finally agreed to — cut $38 Billion.

Thirty-eight billion cut from $1.6 Trillion is a trivial budget cut, no matter how you spin it. Even after the budget cuts, the deficit will still increase by $1.562 Trillion just this year.

What Budget Cut?
Two-percent is not a material budget cut. It is an insult to American tax payers who sent a message in the November 2010 Mid-term elections for government to rein in deficit spending and get their economic house in order. Somehow I would argue based on the 2010 election that Americans were probably not looking for a 2.4% cut in the current budget while still racking up a $1.562 Trillion deficit in the same year. Yet, somehow the President seems to respond favorably as if Congress just gave birth.

“President Barack Obama made separate appearances before TV cameras to hail what they said were its historically large budget cuts.”

— Source: Wall Street Journal

Large budget cuts? 2.4% is large?

Reality Check
If you got a coupon in the mail from your local retail store and it said, “take 2.4% off any item” — would you rush out to buy it? Just going to guess, probably not. Why? Because the discount is trivial isn’t it? We’ll that is exactly what Congress did with the rest of the 2011 budget – make a trivial cut, yet Obama and company seems to think that this congressional effort is, “historic.”

A Brief Government Shut-Down Would Not Kill the Economy – It Might Help It
The talk that a government shutdown would “weaken the economy” is debatable. Laying off 800,000 government employees would save tax payers money, reduce carbon emissions from traffic, and prevent the government from creating bigger deficits – at least in the short-term.

It’s hard for Congress to stay away from a check book that never requires balancing and overdrafts are always guaranteed. The stock market, considered a leading economic indicator, barely moved last Friday with the Dow off just 26 points to close at 12,380. The market is more concerned about higher oil prices right now than the Washington mess.

A short-term government shut down of a few days to a couple weeks or so is not likely to be a material issue on the economy. A 3 to 6 month shut down would be material. If government didn’t seek policies for the public to be so dependent on government services, this would be even less of an issue, and so would the deficit.

Voters Still Unhappy with Government’s “Hope” and “Change”

Obama Approval Index Month-by-Month to 04.02.2011 (Poll Source: Rasmussenreports.com)

Presidential approval ratings for Obama have plummeted ever since he took office (graphic above). As of March 27, 2011, 72% of Americans say the country is heading in the wrong direction.

“Seventy-two percent (72%) of voters now say the country is heading down the wrong track, tying the highest level measured since early January 2009.”

— Source: Rasmussen Reports, 04-06-2011

Clearly Washington has not got the message about making real government reform, eliminating deficits and balancing the budget. If Congress does not get their act together soon, the risk to them is being ousted in the next election. For now, the current minor budget cuts seem to be much to do about nothing.

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04.14.2011 Update:

The so called budget cuts may be ~$38 Billion, but after factoring in new non-war spending increases, the actual “historical” budget cuts Obama paraded this week on national television actually amounts to just $352 Million says the Congressional Budget Office (CBO).

— Sources: CBS News (PDF), Fox News (PDF), Washington Post/ Associated Press (PDF)

How can anyone honestly call $32 Billion or now $335 Million “historic” budget cuts when the reality is the net result from the budget is an increase in spending by over $1.562 Trillion deficit just this year? Well, the White House seems to be drinking the artificially flavored Budget-Cut Kool-Aid.

Obama hailed the (budget cut) deal as “the biggest annual spending cut in history.”

— Source: MS-NBC [PDF – highlight added]

This could not be further from the truth. With an administration who promised transparency, that should include making accurate public statements. Here is the reality check:

“We (the CBO) estimate that, if current laws remain unchanged, the budget deficit this year (2011) will be close to $1.5 trillion, or 9.8 percent of GDP. That would follow deficits of 10.0 percent of GDP last year (2010) and 8.9 percent in the previous year (2009), the three largest deficits since 1945.

As a result, debt held by the public will probably jump from 40 percent of GDP at the end of fiscal year 2008 to nearly 70 percent at the end of fiscal year 2011.”

— Source: Congressional Budget Office, 01-26-2011 [PDF copy – highlight added]

Read the full 2011-2021 CBO Projections (192 pps) (Direct PDF Link) (Local PDF). Keep in mind that after reading ongoing government reports and projections, we have found that even independent, non-partisan committees have tended to be more optimistic than realistic.

The deficits and government spending have tended to be higher than the projected amounts, and government revenues have been less than expected.

We will give them this. It is hard to project 10 years in the future, let alone 2 years. But what we do know is if you spend more than you earn, eventually that can be a financial disaster. Let’s “hope” for “change” in less government spending, but we wouldn’t bet your house on it.

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  1. kz cude
    April 3rd, 2013 at 02:16 | #1

    Thanks a bunch for sharing this with all of us you really know what you are talking about! Bookmarked.

  2. Matt
    August 13th, 2011 at 20:07 | #2

    wonderful points altogether, you just gained a new reader. What would you suggest in regards to your post that you made some days ago? Any positive?

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