The Age of Debt

Barack Obama's first budget promises "fiscal responsibility"—and delivers the opposite.

Veronique de Rugy from the June 2009 issue

Beware when politicians promise “fiscal responsibility.” It’s pretty much a guarantee that every word that follows the phrase will be a lie. President Barack Obama’s first budget, entitled An Era of New Responsibility: Renewing America's Promises, is no exception to this rule. Every page comes with a promise to end budget tricks and save money by reforming procurement and cutting various types of waste, but the actual plan boosts spending and deploys gimmicks galore. If this is a new era, it’s one made of debt.

Promise No. 1: “While we have inherited record budget deficits and needed to pass a massive recovery and reinvestment plan…we must begin the hard choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our nation on sound fiscal footing.”

In fiscal year (FY) 2009, the deficit is projected to be $1.75 trillion. This amount is equal to the entire budget of the United States in FY 2000. The deficit represents 12.3 percent of gross domestic product and results from the federal government spending $3.9 trillion—an increase of 32 percent over 2008—while collecting less than $2.2 trillion in revenue. Most tellingly, the public debt stands at 58.7 percent of GDP, compared to 40.8 percent in 2008.

It is true, as Obama says, that he inherited most of the FY 2009 deficit. It was George W. Bush, with the support of most Republicans in Congress, who engineered a series of expensive bailouts and the federal takeover of the mortgage companies Fannie Mae and Freddie Mac. But it didn’t take long for Obama to add his own billions (see table): $789 billion in “stimulus” (25 percent of which will be spent in 2009), a promise to spend at least another $250 billion to “rescue” more financial institutions, and so on.

To fulfill his promise of “fiscal discipline,” the president would have to shave billions off the federal budget. Yet there are no real program cuts in his budget. Instead the president proposes to dramatically boost health care spending and add many new subsidies for energy companies, students, broadband Internet service, highspeed rail, and low-income Americans.

The result is an expansion of the federal government that will persist long after the current spike of stimulus and bailout spending. Based on government data and Obama’s proposed outlays through 2019, Figure 1 shows the dramatic increase in nonmilitary spending as a percentage of gross domestic product between 1990 and 2019. In 2019 nonmilitary spending would reach 17 percent of GDP. That’s 30 percent higher than at the end of the Clinton years.

And this chart understates Obama’s vision. First, it includes only a down payment for his forthcoming health care plans. Second, it assumes that “temporary” stimulus spending actually will be phased out. Which is not happening. Take the Environmental Protection Agency: Do we really believe that after getting a 92 percent increase in the “stimulus” and a 33.9 percent increase in 2010, the agency will let its budget increase drop to 0.7 percent in 2011?

Promise No. 2: “This budget does begin the hard work of bringing new levels of honesty and fairness to our government. It looks at a full 10 years, making good faith estimates about what costs we would incur; and it accounts for items that under the old rules could have been left out, making it appear that we had billions more to spend than we really do.”

To the president’s credit, this budget does contain some positive changes along these lines. For instance, it includes a number of items that the previous administration did not include in the regular budget, such as the cost of the Iraq war.

But the document is not free of tricks. First, Obama told Congress his budget team has “already identified $2 trillion in savings” to help tame record budget deficits. About half of those “savings” come from proposed tax increases. And the administration lists as “savings” until 2019 the annual $170 billion cost for Iraq, totaling nearly $1.5 trillion. Yet even the Bush administration planned on getting out of Iraq by 2012. Cutting spending that was not going to occur isn’t saving; it’s dissembling.

The president’s budget also claims cuts in discretionary spending by merely shifting several programs from one category of spending to another. One example is Pell Grant funding ($116 billion over 10 years), which is converted from a discretionary program to an entitlement. A recent memo from the House Budget Committee explains that “if these accounting changes were not applied, and the spending continued in the discretionary portion of the President’s budget, non-defense discretionary spending would be…$18 billion higher in 2009 [than what the administration claims] and $24 billion higher in 2010, and would rise to $34 billion higher in 2019.”

Finally, the budget relies on utterly unrealistic economic projections. Obama projects that the economy will be growing by 3.4 percent next year and by 6.2 percent in 2012. Those figures are several percentage points higher than any other reputable forecast.

That's bad news, because even Obama’s doctored projections still show gigantic deficits in our future, dwarfing even the deficits of the Bush years (see Figure 2). While President Obama promises a new era of responsibility, what he’s delivering is a continuation of President Bush’s fiscal recklessness—this time on steroids. Unfortunately, we already know the consequences: slower growth, more unemployment, a lower standard of living, and higher levels of poverty.

Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

Comments

|5.15.09 @ 5:09PM|#

I guess we could refer to it as bush league economics.

Craig|5.15.09 @ 6:00PM|#

It's too bad Obama has chosen to follow in the big spending, over-borrowing footsteps of Bush by outspending and out-borrowing him, rather than turning back to the Clinton era's more modest spending increases.

All he had to do was end the war in Iraq as he promised, end the unpopular bankster bailouts, and cut the federal budget by 5% across the board, and he would have really been on a path toward fiscal responsibility.

Of course, the voters can always blame Congress -- spending bills (and hence the budget) are supposed to originate in the House of Representatives, not the White House.

Or voters can blame themselves, for reelecting the Congress that passed the TARP bailout despite so many constituents telling them not to.

alan|5.15.09 @ 6:03PM|#

Obama: Damn it, Rahm, I am out of ideas on things I can berate the American people. I've shamed on every front, not spending enough, spending too much, not spending just right.

Rahm: Well, motherfuck.

Obama: See my wagging finger? It is getting out of shape.

Rahm: Mother --

Obama: You are a lot of help you know that, Rahm?

Ebeneezer Scrooge|5.16.09 @ 12:25AM|#

Or voters can blame themselves, for reelecting the Congress that passed the TARP bailout despite so many constituents telling them not to.

That's it! What the voters should have done, is vote in some other batch of politicians who would have done exactly the same thing anyway. Or worse.

The lesson over the past few election cycles seems to have been that we'd have been better off keeping whoever lost.

Iraq and Afghanistan could, eventually, be paid off and forgotten. But O-mama's health care and "energy" bills, and his whole sale take over of American industry a segment at a time, may be the final strokes that kill The Great Golden Goose that is the US economy.

Wheelock|5.16.09 @ 12:50AM|#

That is a mighty sobering graph. Crap...

Lefiti|5.16.09 @ 1:18AM|#

Eat something, Veronique. Keep it down.

JB|5.16.09 @ 2:35AM|#

Obama lies, America dies.

This fool should be charged with treason; he is far more dangerous than Al Queda and has probably already done more damage.

|5.16.09 @ 8:15AM|#

I love how the level of government spending spikes, sharply, during the next election cycle.

Can you say "Vote Buying" with other people's money?

Taxation is armed robbery, but at least these thugs are telling us where they're going to spend their ill gotten gains: Power maintanence.

I would expect to see the following modifications to the graph as time moves forward, some "unexpected" expenditures that the Dems will realize is "necessary": A massive spike in government spending in 2012, 2014, 2016, etc...

Look out, here comes the economic slavery the Founders warned us about...

Lefiti|5.17.09 @ 12:42AM|#

Arrrrrrgh! The government! Root of all evil! Satan's sandbox! If only it weren't for the evil government, all would be well. Whine, whine, snivel, sniff, sniff. Down with the datsterdly government! Save us from the evil machinations of the government!

The (Real) Expatriate|5.17.09 @ 1:18AM|#

re: Lefiti
Arrrrrrgh! The government! Root of all evil! Satan's sandbox! If only it weren't for the evil government, all would be well

Yeah, pretty much. Anarchy, Action, Agora, motherfucker!

mark|5.17.09 @ 5:32PM|#

Why am I so concerned with the FRN? It's almost unhealthy. Surely Bernake et al are like totally on top of it right?

But any way I slice it, the FRN will always remain a contract, an unbreakable promise to tax the American people for a percentage of their incomes (or to devalue their wealth) in accordance with government expenditures. So I continue to worry about the FRN.

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|5.19.09 @ 3:22AM|#

What was the purpose of excluding military spending from this analysis?