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Paying for Stimulus II

President Obama unveiled his latest jobs plan before a joint session of Congress last night.  Click here to read the summary of the proposals included in the American Jobs Act.  Since many of the proposals are essentially the same as the $827 billion Stimulus Bill passed in February 2009, many people consider the recent proposal to be Stimulus II.

The debates and discussions about the effectiveness of such the programs can be tackled later.  In this article, I simply want to explore the way the government is going to pay for any new spending, should it pass Congress.

Although many of the details are still being hammered out, President Obama estimated the cost of his proposals to be $450 billion.  He expects to pay for the additional spending by closing corporate tax “loopholes” and raising taxes on wealthier Americans.  Closing loopholes usually involves minor tweaks to selected tax provisions, and typically don’t raise huge amounts of revenue.  For the past few months, President Obama has been touting the need to close a “loophole” for corporate jets.  The “loophole” is all about depreciation, which is merely a timing issue.  Jet owners will still get to depreciate their aircraft, but it will take a little longer.  The additional tax revenue from closing this “loophole” is estimated to be $3 billion, over ten years, or the equivalent of $300 million a year in additional revenue.

See the graph below of the total government revenues.  You’ll notice total tax revenues are approximately $2 trillion annually.  Thus, total tax collections would have to increase by nearly 25% to raise an additional $450 billion.  Congress will need to close a lot of “loopholes” and increase rates substantially to raise an additional $450 billion, which is extremely doubtful in the current political environment.

Although this may seem like simple arithmetic, but there is a twist.  You need to understand Washington code to decipher what President Obama really means.  Just like the $3 billion in savings from closing the corporate jet depreciation “loophole,”  the $450 billion will come trickling in over the next decade, not next year.

Members of Congress and the President frequently talk about the current budget and the 10-year budget horizon simultaneously and interchangeably.  It most applications, it means spending will be paid in the current year, and any additional revenues or spending cuts take place over the next decade.

Time will tell if I’m correct, but I expect the President wants us to borrow the $450 billion over the next 12 months in an attempt to spur economic growth and pay it back over the next decade.  Given our current economic situation, you may think this is a wise decision and/or necessary.  I’m not convinced.  With a $14.7 trillion debt, which is growing by $100 billion a month, I’m not sure adding another $450 billion is the best for our long-term financial future.

Before you decide if it’s a good idea or not, at least make sure you know what the President and Congress want to do.  Like so many other things in Washington, you may think they mean one thing, only to find out our leaders meant something else.

If anyone says the American Jobs Act will be fully paid for, check to see how and when.

Effects of the Credit Downgrade

Late Friday afternoon, Standard & Poor’s (S&P) announced it was downgrading the credit rating of U.S. Treasury securities from AAA to AA+ and retained its negative outlook.  Although S&P previously announced it was considering a downgrade, the announcement was a bombshell dropped at the end of a tumultuous week of economic and political news.

  • After weeks of political posturing and rancorous debate, Congress passed the Budget Control Act of 2011, increasing the debt ceilingPresident Obama signed the legislation on August 2, thereby avoiding a potential default by the U.S. government.
  • After the debt deal was done, Moody’s and Fitch Ratings announced they would retain their AAA rating of U.S. Treasuries but continue to monitor U.S. fiscal health.
  • The Dow Jones Industrial Average ended a 9-day losing streak with a blistering 334 point decline; wiping out all of the gains for 2011.
  • S&P capped the week by announcing their downgrade.

Since Friday afternoon, politicians, economists, and pundits have been discussing the impact of the downgrade.  There has also been a lot of pointing fingers of who is to blame for  tarnishing the image of the U.S.  It has also left a lot of people wondering about the real implications of a downgrade in the credit rating of the U.S. Government.

Here are a couple of things I think you can expect from the downgrade.

  • There is a bruising to the American pride and psyche.  Nothing has changed since Friday, but most Americans want to believe we are the best of the best.  The downgrade is likely to increase the uncertainty and pessimism of the American consumer.
  • Interest rates won’t change immediately.  Interest rates are effectively determined by the free markets, not by S&P.  A credit ratings agency simply tries to assess the risk of a particular security, but it’s up to the market to decide the interest rate.  Don’t expect interest rates to change in the near future, but there could be some upward pressure on rates if investors become more leery about the fiscal stability of the U.S. government.
  • The stock markets aren’t going to crash.  As anticipated, the markets were battered yesterday and lost about 5% of their value, but it’s not a direct correlation to the S&P ratings change.  Remember the Dow took a 334 point hit last week before S&P made its announcement.   Furthermore, the 10-year Treasury yield fell from Friday’s rate of 3.558%. This means investors bought more Treasuries; the very securities that are supposedly more risky.  The selloff is more attributable to the poor outlook of the global economy and European sovereign debt worries.  Investors are seeking stability, so they’re buying up Treasuries and gold.

There is one potential redeeming element which may come from the downgrade, but it’s far from certain.  This might serve as a wake-up call for our political leaders to get serious about the fiscal future of our country.  As I wrote last week, the debt deal was long on promises and short on spending cuts.  In my opinion, a 0.6% cut in spending for 2012 is a pittance in light of overall spending.  The rating downgrade could prompt our leaders to get serious about tackling the debt and deficit.

No longer is it just extreme fiscal conservatives who think it unrealistic for the U.S. government to overspend by $1 trillion each year without consequence.  Standard & Poor’s is a significant player in the global economy.  You may question the timing and motivation of their downgrade, but it should serve as a clarion call of the long-term risks and ramifications of our debt and deficit spending.  I can only hope our politicians are listening and have the courage to do something about it.

Details of the Debt Deal

After weeks of political wrangling, Congress and President Obama enacted the Budget Control Act of 2011.  The legislation provides for an immediate increase the debt ceiling of $400 billion, averting a potential default by the U.S. government.  Avoiding default is probably the one thing most Americans are pleased with in this bill.

The debt deal is long on political rhetoric and short on details.  While many of our political leaders are touting the success of this legislation as a significant step towards dealing with the fiscal challenges of our country, there is little discussion of what is actually going to happen.  Beyond deferring the most significant spending cuts to a Joint Select Committee (JSC) composed of 12 Congressional leaders, evenly divided by house and party, there are few details of how the actual spending cuts are going to be achieved.

The Congressional Budget Office scored the spending cuts to be $2.1 trillion between 2012 through 2021. Of this amount $917 billion is supposed to be guaranteed in exchange for allowing the Treasury to sell another $900 billion in bonds.  The remaining $1.2 trillion is supposed to be determined by the JSC.  At this point, no one knows what is going to be cut to achieve any savings.

From what has been released, the bill calls for $21 billion of spending cuts in Fiscal 2012 and $42 in 2013.  Not surprisingly, the substantial cuts happen far in the future, which means there is always the chance the cuts won’t happen.  For those of us who believe government spending is on an unsustainable path, this is not very encouraging.  Here are a couple of things to consider.

President Obama’s 2012 Budget  proposal calls for $2.6 trillion in revenue and $3.7 trillion of spending; resulting in a $1.1 trillion deficit.  The House passed a budget with $2.5 trillion in revenue and $3.5 trillion of spending; racking up a $1 trillion deficit.  According to the debt deal, spending will be trimmed by a measly $22 billion.  This is about 0.6% of all federal  spending for the coming year.

Talking in trillions and billions can seem rather esoteric, so think in these terms.  Assume you make $50,000 this year.  If you managed your finances like the federal government, you would spend over $70,000, borrowing the difference.  If you cut your spending like Congress and the President have proposed, you would only trim your spending by $420 for the next year.  That’s right… just a mere $8 per week, even though you’re overspending by $20,000.  Given those parameters, would you say you were serious about changing your spending habits by cutting $8 per week?

Many politicians and commentators are calling this a historic piece of legislation.  They refer to it as a down payment on our debt and an important first step.  This may be true, but it’s an indication of how difficult it is for Congress to cut federal spending.   If they can barely manage to trim $22 billion, how are they going to come anywhere near close to $1 trillion?  It would take over $1 trillion of additional cuts and/or revenues to balance the budget, before we can even begin to pay down the debt.

The debt deal further illustrates the Congressional propensity to defer hard decisions.  Effectively, it will be a future Congress and potentially a different President, who will have to make the hard decisions to cut spending and balance the budget.  Given the history and culture of Congress, it’s no wonder the debt deal is long on politics and promises and short on specifics and spending cuts.

Debt Ceiling Extension – Short or Long-Term

One of the issues in the debt ceiling debate is the size of the increase in borrowing capacity, which effectively determines how long before the government runs out of money again.  President Obama and some Congressional leaders have demanded any debt ceiling increase cover the projected federal deficit for at least 18 months, thereby deferring the next debt ceiling vote until after the November 2012 election.

Congress has passed and the President has signed three debt ceiling measures over the past 2 ½ years. Here is the  history of the debt ceiling votes since President Obama took office in January 2009.

  • February 2009 – debt ceiling increased to $12.1 trillion, lasting 10 months
  • December 2009 – debt ceiling increased to $12.4 trillion, lasting 2 months
  • February 2010 – debt ceiling increased to $14.3 trillion, lasting 15 months

President Obama’s current insistence for a limit to last 18 months is longer than any of the three extension bills he previously signed.  Given the acrimonious nature of the current debate and political wrangling, it’s understandable why he prefers to push any future debate beyond the 2012 election.   However, a political preference to avoid a contentious issue does not justify vetoing legislation with a shorter time frame.

Many Republicans are willing to pass a shorter-term measure because they believe the political sentiment on this issue is in their favor.  In all fairness, if they believed a short-term measure was detrimental to their political future, they would be pushing for a longer term solution as well.

The supporters of the 18-month measure have argued a short-term increase will continue to negatively impact the economy and jeopardize the U.S. Government’s credit rating.  However, neither Moody’s nor Standard & Poor’s have indicated the size of debt increase as a significant factor in assessing the credit rating of U.S. Treasury securities.  Both have stated there are two primary factors they are considering; 1) the U.S. not defaulting on any of its payments and 2) a meaningful reduction in future budget deficits.  The length of a new debt ceiling has not been mentioned as having any bearing on their assessment.

The markets seem to echo this sentiment.  We’re days away from the August 2nd default date, yet there has been no appreciable change in the trading or pricing of U.S. Treasuries.
It appears traders and investors assume Congress will pass some measure to prevent the government from defaulting, even if it’s short term.  Although investors prefer Congress to act sooner, they understand the political landscape and realize such issues often result in deals being cut at the last moment, or Congress passes a short-term extension to grant themselves more time to reach a deal.

The 2011 Budget is a good example.   Rather than shutting down the government for failing to reach an agreement, Congress passed six continuing resolutions to fund the government from October 1, 2010 through April 8, 2011, before the final budget deal was reached.  The shortest continuing resolution was 3 days, keeping the government operating from December 18 – 21, 2010.  Although it may be annoying and unnecessary, short-term extensions to keep the government operating have become rather common.

At this point, I think a short-term resolution is probably the most likely bill to pass.  As much as the President may want an 18-month limit and some conservatives want no increase in the debt ceiling, neither one of them wants to be the blame for the U.S. government defaulting and the potential economic chaos which could result.  Political winds can shift rather quickly, and no one wants to be caught downwind of decision which freezes the markets or dramatically increases interest rates.

If you have read any of my prior articles, you know I strongly believe dramatic long-term changes to our fiscal policies are necessary. At the same time, significant changes in policies or spending should not be hastily passed, and I would much prefer good legislation over expediency.

Everyone may be tired of the debate and just want it to be over, but don’t allow politicians to obscure what they’re doing by waiting until the last minute to present and pass something.   Spending cuts and tax increases affect real people.  Tough choices need to be made… that’s a given.  Let’s just make sure we all have time to understand the choices being made by our elected officials; before they are enacted.

Decoding the Debt Debate

If you’re following the current debate on raising the debt ceiling, you’re probably frustrated.  Your angst may be triggered by, the partisan bickering, the lack of great leadership or the uncertainty of what may happen and what it all means.

Politicians from all political persuasions and affiliations have become very adept at obfuscation.  Knowing whatever they say or do can and will be used against them in a future election, politicians have become very proficient in deflecting and dodging direct answers.  They speak in vague terms and try to boil everything down to a 30 second sound bite.

Politicians and political commentators often use terminology that is confusing and often misleading.  You almost need a secret decoder to decipher what they are saying.  I don’t all of the secret codes, but I have a few.

As you listen to the debate, the following are a few terms to keep in mind.

  • The National Debt – The cumulative amount of money owed by the U.S. government. These are actual bonds held by various investors (including the Chinese government and your friendly bank).  The total outstanding debt is approximately $14.5 trillion.
  • The Debt Ceiling – The total amount of bonds the U.S. Treasury is authorized to issue.  The debt ceiling is currently equal to the National Debt.  A law must be passed to increase the debt limit.
  • Deficit – This is the amount of money the government is spending in excess of revenues it collects in one fiscal year (October 1 – September 30).  The deficit for fiscal 2011 is projected to be $1.4 trillion.
  • Credit Rating – Every bond traded on a public market is rated by an independent credit rating agency, which assesses the financial strength of the issuer and the likelihood of default.  The lower the rating, the higher the interest rate required.  For bonds already issued, a change in credit rating will often influence the price at which the bond is traded on the market.

Aside from these terms bantered about, I believe there are a few important factors you need to pay close attention to in any deal that is reached.  These will be the types of issues our  political leaders will attempt to obfuscate.

  • Time Horizon – The time horizon for the spending cuts and additional revenues will be calculated over the next 10 years.   If Congress and the President agree to cut $1 trillion in spending, it won’t all come in fiscal 2012.  They may sound like everything is happening this year, but any plan will be adopted over the next decade.  Raising the debt ceiling is the only thing to take effect immediately.
  •  Timing – Look at the timing for when additional revenue is received and spending cuts are enacted.  If history repeats itself, the revenues will start to be received soon, and the  bulk of the spending cuts will happen in the latter years.  In the world of pork barrel politics, elected officials use government spending to buy votes, and the termination of programs will frequently cost votes.  Thus, politicians have a real incentive to defer spending cuts to another day.
  • Details –It won’t be easy, but do your best to understand the details of the plan.  Congress is trying to make major changes to the tax code, Social Security, Medicare and  Medicaid, and they’re rushing to get it done in the next few days.  I don’t think you want a repeat of Nancy Pelosi’s famous quote, “We have to pass the bill so you can find out what is in it.”

I believe this is a serious issue, and how it is resolved could have far-reaching implications for the future.  No one knows what will happen if the government defaults on its debt, since it has never happened.  As I previously wrote, I think Congress will and should raise the debt ceiling, but it also needs to curtail government spending.  Racking up over $1 trillion of debt each year is just as perilous as defaulting on the current obligations by not raising the debt ceiling.

I also have serious reservations about our leaders’ability and willingness to cut spending.  The 2011 budget compromise is a good illustration of this.  Although they supposedly agreed to $38 billion in spending cuts, most of it was accounting gimmicks and money that wasn’t going to be spent anyway.  One analyst calculated the reduction in spending on specific programs to be less than $1 billion in comparison to fiscal 2010.

As the debate continues forward, follow closely.  Here’s why.  Last week, President Obama was pushing a plan to cut spending by $3.7 trillion and add $1 trillion of new revenue, for a net decrease of $2.7 trillion over the next decade.  Sound like a reasonable compromise?  Before deciding, you may want to consider this.  When the Administration presented their 2012 budget to Congress, they also provided a 10-year budget estimate.  The Administration projected total deficits over the next 10 years to be in excess of $9 trillion.  If the current deal cuts it by $2.7 trillion, that still means we’ll add over $6 trillion to the national debt, pushing out total debt close to $21 trillion by the end of the decade.  Still think it’s a good deal?

To me this is a good example of why we must watch this closely.  Despite the political rancor, everyone in Washington is looking for a deal which will make them look good.  Let’s just make sure the American people get as good of a deal as our politicians.

Cost of a Job

What is the cost of a job?  Priceless… if you’re without one.

The American Recovery and Reinvestment Act of 2009 (a.k.a., the Recovery Act or the Stimulus), was enacted in February 2009 to create jobs and stimulate business investment in the recession which became severely pronounced at the end of 2008.  The original cost estimate was $787 billion. The most recent estimate is a $862 billion price tag.

President Obama and the supporters of the Stimulus argued that unemployment would exceed 9% without the Stimulus, but it would never be higher than 8% if the Stimulus was enacted.  Sadly, the unemployment rate reached 8.2% in February 2009, the month the Stimulus was passed, and exceeded 9% in May 2009. The rate has remained above 9% for over two years, except during February and March of 2011.

The Stimulus proponents have maintained that it was beneficial, and things would have been much worse without the Recovery Act.  This may be true, but it’s a difficult argument to make.

On July 1, 2011, the President’s Council of Economic Advisors released the most recent report on the progress and effect of the Recovery Act.  The report touted the Recovery Act’s success in creating or saving 3.6 million jobs.  Even if you accept the inclusion of a “saved job”, which is a controversial claim itself, the average cost per job is currently estimated to be $278,000.

The opponents of the Stimulus seized on this number to further criticize the Stimulus.  In their mind, the cost per job is highly excessive and is further proof of the government’s inability to spend money efficiently and effectively.  The White House argues the calculation was skewed, and the Recovery Act was intended to do much more than create jobs.

Despite all of the rhetoric coming from all sides of the political spectrum, the long-term benefits of the Recovery Act remain questionable.  One long-term effect is easily quantifiable – the additional debt incurred to fund the Recovery Act.  Since the government didn’t have $862 billion of extra cash on hand, we had to borrow it.  Thus, every American is responsible for an additional $3,800 of debt as a result of the Stimulus.

The effectiveness of the Stimulus may be debated a long time to come.  Whether we are better off or not, no one will ever truly know.  However, one thing is probably clear.  We’re not likely to see another $800 billion Stimulus Bill anytime soon.  With a $14 trillion debt, which is growing by over $3 billion per day, we simply can’t afford it.

If your job was created or saved as a result of the Stimulus, you probably think it was money well spent, although I doubt you actually got $278,000.  If you did, let us know how you achieved it.  Then again… maybe you better keep it to yourself.

Controlling Oil Prices

President Obama announced yesterday that he was authorizing the release of 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) over the next 30 days.  The decision was made in coordination with our European allies who also will be releasing an equal amount.

Supply disruptions from the ongoing conflict in Libya were cited as the rationale for the release, but several industry analysts and commenters question this rationale.  The current stockpile of oil and gas hasn’t dramatically decreased since the Libyan conflict began, and most industry analysts believe there are adequate supplies, irrespective of what happens in Libya.  Although oil prices climbed dramatically at the beginning of the conflict, they have dropped nearly 10% over the past few weeks.

Many commentators suspect the real motivation is an attempt to drive potential speculators from the market.  If this was the intent, it seems to be working… at least for the moment.  Yesterday, the market price for oil dropped $5 per barrel, and gasoline futures dropped $0.14 per gallon.

Although we may all profit from lower fuel prices, the long-term cost of this decision may not be worth the short-term benefits.  The effects of this strategy may be short-lived.  By current estimates the world consumes nearly 89 million barrels of oil per day (the U.S. consumes 21 million barrels each day).  Thus, releasing 1-2 million barrels per day isn’t going to have a dramatic effect on long-term  supplies.

If hindering the profits of traders and speculators was a primary motivation, then it’s huge misappropriation of power.  The SPR was created to protect the country against a sudden disruption of oil supply, especially for the military.  Although the SPR has been tapped for non-military uses in the past, it was never intended to be a tool to control market prices.  It’s dangerous for politicians to use a strategic asset to achieve a political or economic result.

In my mind, such actions raise serious questions.

  • Where in the Constitution does the government have the power to manage the price of a particular asset or commodity?
  • Is the government now in the position of trying to make or break a market?
  • Who gets to decide when the price is too high or too low?
  • How does a national asset become a tool to manage a particular market?

I agree that government has a role to enforce free and fair trading practices.  If illegal and unethical trading occurred, then go after the culprits, or pass legislation if rules need to be  changed.  Absent illegal or immoral activities, the government doesn’t have a right to control the market because our political leaders don’t like the result of what is happening.   Government’s attempt to regulate and control market prices sounds a lot like socialism – not free enterprise.

We may never know for certain the true motivation for this decision, but the people who work and study this stuff full-time, have reasonable suspicions of the real intent behind the release of oil from the SPR.  If the chasing speculators out of the market was the primary motivation, it was a terrible decision.  The government’s attempt to artificially control prices never works out well in the end.  Furthermore, this type of foray into the free markets is a dangerous exercise/abuse of power.

Raising the National Debt Ceiling

Within a matter of days, the U.S. Treasury is expected to hit the ceiling on its authority to borrow money on behalf of the U.S. Government.  Treasury Secretary Geithner has already made plans to extend this timeframe by a couple of months.  Most of it involves deferring payments and accounting gimmicks to buy the President and Congress more time.

I have no doubt that the debt ceiling will be raised.  With a projected budget deficit of nearly $1.5 trillion this year, there is no way our politicians will balance the budget any time soon.  Thus, the Treasury will need to continue to borrow more money to fund the government.  The real issue is how much more borrowing will be allowed and what spending cuts and fiscal reforms will be enacted.

For the most part, the debate over raising the debt ceiling is political theater and brinkmanship.  Sadly, it’s another example of the dysfunction in Washington.  If it wasn’t so serious, it would be funny.  A couple of years ago when George W. Bush was President, the Democrats resisted raising the debt ceiling and the Republicans argued that it was necessary.  Now that President Obama occupies the Oval Office, it’s exactly the opposite.  The Republicans are balking and the Democrats are calling them irresponsible.

Most of the Members in Congress would like to raise the debt limit by $2 trillion, which would fund the government until after the 2012 election.   At the current rate of overspending, the limit would be reached shortly after the 113th Congress is seated and the President is inaugurated in 2013.

Earlier this week, Speaker Boehner said that the Republicans want to cut spending by the same amount that the debt ceiling is raised.  Given the recent agreement on the 2011 budget, it’s doubtful the Republicans will come anywhere near this goal.  While campaigning in 2010, the Republicans promised to cut $100 billion from the 2011 budget.  The final  agreement was $38 billion. Of that amount, a substantial portion included accounting gimmicks and money that wasn’t going to be spent anyway. If they couldn’t agree to cut spending by $100 million, how in the world will they ever come close to eliminating a $1.5 trillion annual budget deficit?

If you believe the U.S. Government needs some significant changes in its fiscal policy, then you must pay very close attention to what happens, and you’ll need to do some digging to get to the truth.  It’s unfortunate, but you can’t take statements by our elected officials at face value.  Most of what they say is political posturing and spin.  Rarely do they tell the whole truth.  There is often more to the story.  The real truth of the $38 million of spending cuts in the latest budget deal is a prime example.

As much as I am troubled by the growing national debt, I think raising the debt ceiling is necessary.  To immediately cut $1.5 trillion of spending from a $3.5 trillion budget is too much too quickly. However, it doesn’t mean that significant changes can’t be made.  The President and Congress need to stop patting themselves on the back for cutting less than 1.5% of total spending.  It’s a pittance in relationship to the magnitude of the problem.

Raising the debt ceiling is necessary to avoid a current crisis, and making significant cuts to the current spending and fiscal policies is needed to evade a long-term catastrophe.

Spending Cuts and Accounting Gimmicks

Three weeks ago, President Obama and Congress reached an agreement on the 2011 Federal budget.  Keep in mind that the government’s fiscal year started on October 1, 2010.  Thus, we were already more than six months into the year before they could reach an agreement of how to spend money for the current year.  How they are able to do that is a different discussion.

After they reached an agreement on the 2011 budget, members of both sides of the aisle trumpeted their success in reducing Federal spending and moving towards more fiscal restraint.  Even for those who wanted greater cuts, they conceded that it was a good start.  According to the budget agreement, federal spending is will be reduced by $38 billion.  This may seem like a lot of money, but keep it in perspective.  This amount is approximately 1% of the total $3.5 trillion of federal spending for 2011 and less than 3% of the projected $1.4 trillion budget deficit.  It’s a good start, but certainly not what you might consider draconian cuts.

The dirty little Washington secret is that a substantial portion of the $38 billion won’t actually reduce federal spending for programs or personnel. Check out this Washington Post article which reveals some of the maneuvers and gimmicks utilized to account for the cuts.   Granted, there will be real cuts and reductions, “But some of the worst-sounding trims are not quite what they seem, and officials said they would not necessarily result in lost jobs or service cutbacks.”  One example cited is the $4.9 billion for the Justice Department’s Crime Victims Fund.  The money was allocated to a reserve fund that wasn’t going to be spent anyway, yet Congress counted it as part of their “spending cuts.”

Although it may seem like a rather trivial matter, it’s a good indication of how Washington works and the way our political leaders think and act.  In  Washington World, money you wanted to spend, could have spent, or even thought of spending all count as “spending cuts.”

If this were true, then I have cut millions of dollars from my spending… but it’s not real.  It makes no difference to my bank account how much money I thought of spending or wanted to spend, but didn’t.  It only counts if I don’t spend it, and it stays in my account.  This is common sense to the rest of the world, but it seems elusive to Washington politicians.

Understanding Washington World and the political spin of politicians will be very important as Congress and the President wade into the battle over the 2012 budget, raising the debt ceiling and tackling the annual deficits and national debt.  It’s in vogue to talk about spending cuts and deficit reduction, but there is often more to the story than what is being said.

This is an issue you should care about whether you support the current spending by the U.S. government or believe it needs to be dramatically reduced.  To me, it’s an issue of honesty and integrity. Hopefully, this matters to you irrespective of your political affiliation or philosophy.

Spinning the 2012 Budget

President Obama delivered his proposed 2012 budget earlier this week.   The budget is for 2012, but also projects spending though 2021.

Here are a few highlights of his spending plan.

  • The budget deficit is expected to be $1.6 trillion for fiscal 2011 and will decrease to $1.1 trillion for 2012
  • The deficit is projected to decrease to $607 billion by 2015 and gradually increase in subsequent years to reach $771 billion by 2021
  • The annual interest cost on the national debt is expected to be $205 billion in 2011 and grow to $884 billion in 2021
  • The total national debt will rise to $26.3 trillion by 2021

Here are some of the statements made by the President and top administration officials regarding this budget.

  • “What my budget does is to put forward some tough choices, some significant spending cuts so that by the middle of this decade our annual spending will match our annual revenues. We will not be adding more to the national debt.” President Obama
  • “The budget that he laid out on Monday, which is actually quite an extraordinary document, it proposes $400 billion in cuts through a freeze on non-defense discretionary spending.” Jay Carney, White House Press Secretary
  • “You’re absolutely right that with the president’s plan, even if Congress were to enact it, and even if Congress were to hold to it and reduce those deficits to three percent of GDP over the next five years, we would still be left with a very large interest burden and unsustainable obligations over time,” Timothy Geithner, Treasury Secretary

President Obama has said that spending will match revenue by the middle of the decade, but the annual deficit is never projected to drop below $607 billion.  He also said that we won’t be adding anything more to the national debt, yet the debt will nearly double over the next 10 years.  The truth about the budget is that he expects to spend more than the government takes in every year, and the national debt will continue to grow.

In making his statement, the President has conveniently ignored the interest cost to the debt.  He’s not counting that as part of the annual spending.  He has tried to make some lame argument that the debt is a different issue and needs to be handled separately.  He made an analogy that it’s like racking up a huge credit card debt, but not charging anything more against it.  In making this comparison, he conveniently ignored the interest payments on the balance due as a required expenditure.

If you follow his line of thinking you could take out a huge mortgage on a house, buy a fully financed car and go on a shopping spree with your credit card, without impacting your budget.   Effectively, you could exclude all of these payments in determining if your expenses exceed your income because those payments are “a consequence of a series of [prior] decisions that were made.” 

You know that this is ridiculous.  One of the consequences of your prior decisions is that you must pay off your debts.  The same goes for the government.  It may sound academic and profound to try to isolate the interest on the national debt, but it is real money and real cash needs to be paid every year to U.S. bondholders.

Politicians are masters of “spinning” the truth to accomplish their objectives, but there is a difference between political spin and dishonesty.  In presenting his 2012 budget, the President is flirting with being dishonest with the American people.  Some might argue he is flat-out lying.

Don’t believe it when you hear that the budget is balanced, and national debt is not going to rise.  It’s simply not true.  Probably the most truthful statement was that made by Secretary Geithner when he said that we’re creating “unsustainable obligations over time.”  That I believe.