In his State of the Union address last night, President Obama proposed a 3 year freeze on federal discretionary spending, as a means of starting to reduce the federal deficit. Pundits from all over the political spectrum had comments on the efficacy of such a proposal, most of them completing their thoughts by saying something to the effect of, “$250 billion in savings over ten years is not insignificant. $250 billion is $250 billion.” and, “while it may not seem like all that much compared to the total budget, at least it is a start.” It’s time for a little perspective.
To begin-with, let’s be clear on what is being proposed. The spending that President Obama is talking about freezing is a portion of discretionary funding present in the annual budget. While he’s projecting the savings from that freeze to be $250 billion over the next ten years (he’s doing so by counting on dramatically increased revenues over that period after the economy recovers), it really should be noted that he only proposed the freeze be in effect for three years. The $250 billion is a completely irrelevant (and in fact, just made up from whole cloth) number. The amount of money Obama claims to be “saving” in the first year of the freeze will be $15 billion. That 15 billion “Projected savings” was based on the fact that in 2009, Obama increased the discretionary spending limit by 24% (essentially from 40 billion to 55 billion). When he says he will save $15 the first year, what he is really saying is, with the freeze in effect, I won’t be increasing that portion of the budget by another 24% to $68.2 billion the first year of the freeze, and $84.568 billion the year after that, and $104.864 billion in the final year of the freeze.
The actual “savings” over the three year freeze would then be $92.632 billion – not $250 – given the numbers Obama is projecting. Okay, you say, $93 billion saved is still $93 billion saved. Now comes the perspective part…. then I’ll get to the bad news later in the screed. The $55 billion dollar discretionary expenditure will amount to 1.5 % of the annual budget for 2010.
To understand how that $55 billion dollar expenditure and the $93 billion “savings” fit into the federal budget, let’s do a comparison in numbers people can actually comprehend.
The annual federal budget for 2010 is roughly $3.55 trillion dollars. Projected revenues (taxes garnered) for that same year are anticipated to be around $2.25 trillion, increasing our debt for the year to the tune of about $1.3 trillion. Let’s put this on a family budget level, with a hypothetical family earning $50,000/ year (instead of $2.25 trillion) , and a credit card with essentially no limits. Let’s say the family uses that credit card for all their purchases. This would mean that in the first year examined, the family charges $76,000 on the credit card and pays off $50,000, leaving them $26,000 in debt at the end of the year. Of that $76,000 spent, $1140 was in discretionary funds. Let’s call that part the annual “movie” budget for the family. That means if the family freezes their current “movie” fund portion of their budget, they are agreeing to only go to $1140.00 worth of movies each year over the next three years. But they are not freezing the rest of their budget, which they are projecting to increase by 24 % each year.
While the amount of additional money owing on that credit card (after they pay off their annual $50k) is $31,000 the first year following the freeze, it is $36,000 the second year, and another $43,400 the third year. That means that after they pay off all their income towards the debt, they still owe $110,400 additional on that credit card after the three year freeze. Oh… and since that debt is, in fact, borrowed money, they have to pay interest in the amounts not redeemed. Let’s say this is an extremely generous credit card company, only charging 2% annual interest. The debt after three years is about $112,000 (rounded off)… BUT, remember, they only spent $1140/ year on movies while this debt was accumulating! My, aren’t they doing well!
Now let’s REALLY put it in perspective. That $112,000 debt the family accumulated during the freeze isn’t what the family really owes. You see, the $112,000 was only the amount accumulated during the time of the “movie budget spending freeze”. Prior to embarking on that freeze, the family already owed $3,100,000 in debts that it had previously accumulated. Their actual debt after the three year freeze is $3.212 million dollars. The head of the family proudly notes, however, that by freezing the movie budget at current levels, he will have saved the family $942 !!
Of course, that $3.212 million debt is only what is currently owed, not what the family could have to cover. You see, the US has a current unfunded liability (monies not actually owing at the moment, but that could potentially come due if certain other funds or debtors go bankrupt – like social security, Medicaid, Medicare, Fanny Mae, Freddy Mac) in excess of $80 trillion. That would be the equivalent of our family having co-signed loans for a bunch of other people equaling $17.9 million dollars. Let’s sure hope those guys pay their debts like they said they would! This could really get serious if one of them went bankrupt (say Medicare or Social Security by comparison). And since Medicare is currently scheduled to go bankrupt in 2017, and social security in 2026, these would be the equivalent of the family suddenly finding itself owing another say….. $8 million dollars. Jeez – let’s hope Fanny Mae and Freddy Mac stay solvent!
Let’s also keep in mind that none of these figures for annual budget as currently projected include monies that may have to be borrowed to cover Obamacare, Cap and Tax, and any other emergency funds that have to be allocated (say in the event of another 9/11 or in aiding an earthquake disaster somewhere – e.g. Haiti). And it generally doesn’t include monies spent in support of the military in the War on Terror. These kinds of funds are all kept on a completely separate set of books from the annul federal budget. It might be the annual equivalent of the family buying a new SUV every year and not bothering to make any payments on it or even really count it in its budgeting. We’ll just add it in to the total owing sometime down the road.
Now the bad news. None of even these numbers are even relevant. President Obama has not proposed a spending freeze on the discretionary budget beginning now, he has proposed one beginning in 2011. This means that the projected savings are only valid if he, in fact, freezes spending this year. Since he didn’t propose that, one really has to assume that by the time the freeze goes into effect, there may well have been (and in all likelihood will have been) yet another increase in the discretionary spending, making all these figures moot. They will all have to be recalculated based on what the actual discretionary budget is when the freeze goes into effect a year from now.
Of course, if Obama increases the discretionary spending between now and then dramatically, he will be able to claim much, much, much, larger savings for the American taxpayer! Aint economics wonderful?