No Real Cuts In Those Fiscal Cliff "Spending Cuts"

For those of you who haven't slipped into an ennui-fueled coma after weeks of artificially tense fiscal cliff discussions, here's a reality check: There are no real cuts under discussion by our fearless leaders in Mordor on the Potomac Washington, D.C. This is business as usual for federal budget discussions, but we still need the occasional reminder as apparatchiks such as Secretary of Defense Leon Panetta whine about the horrendous impact of reductions in their budgets (even while reassuring Pentagon workers that their jobs are safe). The fact is, the discussions in D.C. are all about how much to increase taxes and spending. Anton Wahlman at The Street has a nice roundup on what "spending cuts" means in Washingtonese:

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.

If Wahlman's take sounds too loaded, too awfully tendentious, to you, try tax-hike advocate Henry Blodget over at Businesss Insider, who responds to critics who took him to task for defending an emphasis on tax increases.

… I received some notes explaining that the Republicans were absolutely right to reject Obama's plan because "our problem is not a tax problem—it's a spending problem."

And you know what, Democrats? The writers of those notes were partially correct:

We DO have a spending problem.

If we are ever to get our budget deficit under control, we need to trim long-term spending growth.

But blaming the whole deficit problem on "spending" ignores the other half of the problem: Taxes.

Our federal tax revenue right now is historically low.

To begin to address our deficit problem, therefore, we need to trim spending growth and increase taxes.

Blodget helpfully provides some graphics derived from St. Louis Federal Reserve Bank data. He thinks these support his case for the need to increase taxes to meet the demands of ever-rising spending. I think it shows that Americans aren't in a position to supply high levels of revenue to support even the levels of federal spending we saw a few years ago — let alone the run-up-the-credit-cards-before-they-find-out-I'm-dying levels we see now.

Since Blodget draws from St. Louis Federal Reserve data, it's probably worth seeing what that institution has to say on the matter. And, in fact, there's quite a lot of information from which to draw. Here's an interesting excerpt from an article by Fernando M. Martin.

From 1950 to 2008, federal revenue averaged 18.0 percent of GDP. Revenue fell substantially below the historical average in recent years, mostly because of a series of tax provisions (in 2001, 2003, 2009, and 2011-12). For example, in 2012 revenue as a percent of GDP was only 15.8 percent. Before 2009, only 1950 had a lower figure. Back then, unlike now, the budget was roughly balanced. If current law is not overturned, revenue as a percent of GDP is expected to rise drastically over the next few years—to 18.4 percent in 2013, 19.6 percent in 2014, and 20.3 percent in 2015—and surpass its historical maximum by 2019. In contrast, the alternative scenario, which would extend most tax provisions, would eventually return revenue to its postwar average. The difference in revenue between the two scenarios accounts for about two-thirds of the difference in the projected deficit over the next 10 years.

Total federal outlays averaged 19.8 percent of GDP between 1950 and 2008. If interest payments on the debt are subtracted, outlays drop to 17.8 percent of GDP. Given the revenue figures above, then, we can see that the federal government has, on average, run a postwar policy of a zero primary deficit. The government deviated drastically from this policy with its response to the recent financial crisis and subsequent recession; total outlays averaged 24.0 percent of GDP between 2009 and 2012.

Martin favors the automatic "sequestration" mechanism over a political solution on the assumption that politicians will devise a scheme that will keep both debt and government growing. Note that, in Martin's article, the "low" levels of revenue about which Blodget complains are relatively close to the historical average even during a time of economic distress, and projected to merge with it, while federal spending is wildly higher than the norm, as a percentage of GDP.

So yes, we have a spending problem, not a tax problem. And that means the only serious solution involves real spending cuts.