Real Spending Cuts on the Table? None.
NEW YORK (TheStreet) -- Something very strange is happening: In a round-the-clock news cycle about the U.S. federal budget, there is no mentioning of the actual government spending numbers involved. I watch CNBC almost every hour of the day, and even the premier financial TV channel has managed to avoid the real numbers like the plague.
The way we talk about tax and spend numbers are a little different from each other. On the tax side, we are dealing with percentages. Individuals can change their behavior if a tax is increased or decreased. So we can increase from 15% to 20%, or cut from 35% to 25%, but we don't know what this means for the total amount of tax collected. We don't know how raising and cutting tax rates impact behavior.
For example, if a tax rate is increased, tax revenue may or may not go up depending on how many people will now choose to retire, move abroad, engage in more tax planning, or shift their income to some other field or into the future.
Spending, on the other hand, is measured in absolute dollars -- not percentages. It's therefore a lot easier to budget. Last year, the federal government spent $3.8 trillion -- not a percentage of anything. It's an absolute dollar amount. We can control it; we set it.But apparently, not talk about it. So let's talk about it, for a change! The "Fiscal Cliff" negotiation, soon to be followed by the surely even trickier debt limit negotiation, is filled with talk about spending cuts. So what are these spending cuts? I'm sure you have all heard the "spending cut" numbers: $1 trillion, $2 trillion, $3 trillion, $4 trillion... wait, did I just say $4 trillion? Wasn't ALL Federal government spending last year $3.8 trillion? Lesson No. 1: These spending cut numbers are always talked about in 10-year terms. It's like giving 10 binding New Year's resolutions in one fell swoop. "I will lose 20 pounds per year for 10 years." But you only weigh 190 pounds, and that's 200 pounds over 10 years? You will weigh less than zero? Huh? That brings us to the second point. Let's take a $4 trillion spending cut, over 10 years. That's $400 billion per year. Does that mean that spending now will be $3.8 trillion minus $400 billion, i.e., $3.4 trillion, per year, for the next 10 years? Uh, no. The U.S. government talks about spending cuts measured against some imaginary number that it could have spent, in its fantasy land. For example, the U.S. government could have spent $5 trillion -- by starting a war with planet Mars or Luxembourg, say -- but luckily Congress and the president agreed to hold off on this expensive enterprise. They estimate this war would have cost $400 billion per year. So now we will only spend $4.6 trillion per year. Since we spent $3.8 trillion last year, a normal person would call this an $800 billion spending increase -- from $3.8 trillion per year to $4.6 trillion. Only in Washington, D.C. is this referred to as a $4 trillion spending cut -- $400 billion per year over 10 years.
The "Balanced" ApproachWe hear a lot about needing to take a "balanced" approach to balancing the federal budget. So what does that mean? Looking at the history of past and projected federal taxes and spending, available at the American Presidency Project Web site, . . . we see that taxes are now $2.5 trillion per year, for an annual deficit of $1.3 trillion per year. Let's say that it were sufficient to make everyone happy to cut the deficit to approximately the level at which it was in 2002 and 2007 -- $100 billion and change, per year. We would need to shrink the deficit by $1.2 trillion. We hear a lot about "$3 in spending cuts for every $1 in tax hikes." So let's apply that 3:1 ratio of spending cuts to tax hikes. That would mean $300 billion in tax hikes and $900 billion in spending cuts, per year. Taxes would hit $2.8 trillion, and spending $2.9 trillion. $2.9 trillion in annual federal spending? That's what the number was in 2008. Let's say that we wanted to achieve 100% budget balance by simply cutting spending -- no tax hikes at all. That would mean that spending would have to be rolled back to the 2005 level of $2.5 trillion. 2008 or 2005? Was government spending too low in any of those years? You might recall that those were close to the peak years for the Iraq and Afghanistan war spending. Half of that money is now off the budget, so we should be able to cut spending another $100 billion or more from those numbers without problem. The problem now is something entirely different: Whether it is the Republican proposal or the administration's proposal, the spending numbers for the next 10 years are way above this kind of $2.5 trillion to $2.9 trillion per year level. The Republicans propose $4.6 trillion per year on average for those 10 years, and the Democrats propose $4.8 trillion per year on average. In the years 2002-2011, the federal government spent a cumulative $28 trillion. An increase even to the stingiest Republican proposal of $46 trillion over the following 10 years would mean a 65% spending increase. The president wants to spend even more than that. What does all of this mean? All of this "spending cut" talk is absolute nonsense. There are no spending cuts proposed, even by the Republicans. In a best-case scenario, even if the Republicans get 100% of what they want, would mean federal spending over the next 10 years would be 65% higher than the previous 10 years. It's all a lie. A 65% (or greater) spending increase, not a cut. It's not anywhere near a cut. It's an epic spending increase of Olympian proportions. Someone will surely emerge from the Church of Keynesianism and explain to us that government spending is really good for us and the economy. But please don't tell us that what is being proposed in Washington, D.C. is anything but a gigantic spending increase. It doesn't pass the "basic facts" test. Follow @antonwahlman This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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