The Era of Even Bigger Government

There is very little to be happy about in Obama's first budget


So President Barack Obama wants to shrink the deficit by 2013, the end of his term. If he's serious, he will have to do better than what he has outlined in his fiscal year 2010 budget, titled A New Era of Responsibility: Renewing America's Promise (note: all subsequent mentions of years indicate federal fiscal years, which annually run October 1 through September 30 of the following calendar year). To cut the size of the federal government, one actually has to, you know, cut programs. While Obama's overall numbers do show a spending decrease between 2009 and 2010, he actually increases many categories of spending, which remains far above 2008 levels in any case. In fact, his "cuts" are basically the results of 2009 bailout payments not being extended into 2010.

Moreover, if the spending reductions planned for 2010 look at all promising, that's only because the increase between outlays in 2009 and 2008 was immense, rising by at least 32 percent. Outlays in 2010 represent a whopping 19 percent increase over outlays in 2008. Additionally, although Obama has stressed "transparency" in his budgeting process, his spending and revenue plan relies on accounting tricks in key areas. All of this falls far short of the hope and change Obama promised to bring to the White House.

The just-released document is a summary version of the more detailed proposal that Obama will put out in April. In the 134-page summary, the president forecasts a budget deficit of $1.75 trillion in 2009. That represents 12.3 percent of gross domestic product (GDP), making it the highest deficit as a share of the economy since World War II (see chart).

In 2010, Obama envisions a reduction in the deficit to $1.17 trillion. He also assumes a 3.4 percent increase in GDP between 2009 and 2010, which would mean that the deficit as a share of GDP would decline to 8 percent. That's a very optimistic forecast that actually weakens the foundation of the budget document itself. Other projections for GDP growth in 2010 are much less bright. The Congressional Budget Office (CBO) projects 1.5 percent growth in 2010 and the February Blue Chip Consensus figure is 2.1 percent.

Indeed, if the president is right about this relatively robust growth in 2010, how can he justify spending the bulk of his stimulus funds after the economy would have already recovered? After all, by his own count, 75 percent of stimulus funds won't be released until 2010. Maybe this sort of contradiction is to be expected from a man who signed the biggest spending bill in history one week and then organized a fiscal responsibility summit the next.

The Spending Side

In the federal budget, the two most basic categories of outlays are mandatory spending and discretionary spending, each of which makes up about half of total spending. Mandatory spending includes entitlement programs (such as Medicare) that are provided for by law rather than by new appropriations bills each year. Discretionary spending includes most defense and homeland security spending, farm subsidies, and other programs that are funded each year by congressional appropriations. Beginning in 1962, discretionary spending had itself been split into two large categories: defense and non-defense spending.

In 2009, total spending (mandatory plus discretionary) will reach $3.94 trillion. That's a 32 percent increase over the 2008 level, one of the biggest year-to-year increases in the past 50 years. It represents 27.7 percent of GDP, a serious hike from the 21 percent level reached in 2008. Much of this increase is the product of the bailout signed by President Bush last fall. It is also the result of the federal takeover of Freddie and Fannie as well as the 2009 share of stimulus spending.

For 2010, the president requests $3.55 trillion in total spending. Based on the administration's unrealistic assumption about growth, spending would fall to 24.1 percent of GDP.

Table 1: Proposed Budget By Category





Total Outlays
























Source: OMB (2009), A New Era of Responsibility, www.budget.gov.


Table 2: Spending Increase by Category





Total Outlays
























Source: OMB (2009), A New Era of Responsibility, www.budget.gov.

The decrease in total spending comes from a $500 billion drop in mandatory spending. Where do the savings come from? Almost entirely from the fact that a one-time $247 billion blast of TARP funds and a $250 billion placeholder for potential additional financial stabilization were spent in 2009.

The Tax Side

Moving from outlays to revenue sources, Obama's budget proposes boosting tax collection from about 16.2 percent of the economy this year to 19 percent in 2013. He will do that by allowing some of the 2001 and 2003 tax cuts enacted under Bush to expire on schedule. This affects people in households making more than $250,000 a year. Under the president's plan, the top two marginal tax rates will increase from 33 to 36 percent and from 35 to 39.6 percent, while both the capital-gains tax and dividend tax will rise from 15 to 20 percent.

In addition, he plans to pay for his new health care "reserve fund" mostly by a $318 billion tax hike over 10 years in the form of reduced deductions—such as the mortgage interest deduction—for the wealthiest Americans. These taxpayers would also see their capital gains tax rates go up.

Businesses would also see their tax burdens increase. Obama plans to raise $353 billion over 10 years through 13 different taxes (new or old). For instance, his budget reinstates superfund taxes, repeals manufacturing tax deductions for oil and natural gas companies, increases the geological and geophysical amortization period for independent producers to 7 years, and eliminates the advanced earned income tax credit.

He also proposes to create a new $112 billion tax over the next decade on the energy use and production of every American. This "cap and trade" program is designed to battle global warming by forcing companies to buy permits if they wish to emit heat-trapping pollutants. The permits will be auctioned to businesses beginning in 2012. The money raised will help pay for an extension of the Making Work Pay tax credit originally introduced in the stimulus bill.

However, the controversial nature of the proposal raises the question of whether these revenues will ever materialize.


For several weeks now the president has been emphasizing that he will "restore honesty and accountability" to the budget process. And his budget proposal for 2010 does indeed abandon some of the budget tricks of previous administrations.

For instance, Obama's first budget does not assume that the alternative minimum tax (AMT) will generate billions in revenue. The AMT is a parallel tax system enacted in 1969 to prevent a handful of wealthy individuals from using tax shelters to avoid paying any income tax. Today, this tax hits millions of households and penalizes families with children living in states with high income tax rates. Under Bush's budgets, the president proposed a one-year patch of the AMT to neutralize its effects on taxpayers, yet he would assume the revenue for the following years in order to reduce the projected budget deficit.

Obama is also making good on his promise to stop relying exclusively on supplemental bills to fund predictable costs like the wars in Iraq and Afghanistan and the cost of disaster responses. This is a clear improvement over the previous administration.

The United States spent about $190 billion on the wars in Iraq and Afghanistan in 2008. Obama expects that the costs of the Iraq and Afghanistan wars will total just over $140 billion this year. Half of that money has already been appropriated by Congress. Supposedly, the president will make one final "supplemental" budget request to Congress for an additional $75 billion to cover war costs for the rest of 2009.

The main assumption in the defense budget is that the cost of the wars will be $130 billion in 2010 and that it will drop sharply after that, to $50 billion annually beginning in 2011. Are these assumptions realistic? Maybe. If Obama does withdraw troops from Iraq over the next 18 months or so, we will see the cost of the war drop for sure. Yet he is ramping up the U.S. military effort in Afghanistan, which will cost money. The question is how much? And how long will it take him to shove the cost of the war (or other spending projects) back into supplemental spending bills, which typically get much less scrutiny from the public, the press, and Congress?

Despite some improvements from the Bush budgets, Obama's plan is far from being free of tricks. First, while he told Congress on Tuesday that his budget team has "already identified $2 trillion in savings" over the next decade to help tame record budget deficits, one would be hard press to actually find any programs getting cut. In fact, it appears that about half of the "savings" come from his proposed tax increases. He plans on reducing the deficit by $639.7 billion over 10 years with only his income tax increase and a $311 billion reduction in the debt service.

More importantly, the budget "saves" hundreds of billions of dollars by not continuing to spend $170 billion a year in Iraq until 2019. Obama includes war spending in his baseline projections to be able to show a $1.49 billion savings over 10 years. Yet even under the previous administration we were supposed to be out of Iraq by 2012. It's highly dissembling to say we can get savings by cutting spending that isn't actually going to occur.

The bottom line is that there is very little to be happy about in Obama's first budget. It simply expands the Bush policies of bigger government and increased centralization, which threatens to permanently transform America's culture and economic outlook by making more and more Americans dependent on government.

Veronique de Rugy is a columnist at Reason magazine and an economist at the Mercatus Center at George Mason University.

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  1. He's not serious.

  2. Fucknuts pulled off an awesome trick, doubling the deficit and then promising to cut it in half. I love this dude's chutzpah.

  3. I've decided to drop all pretenses and shill shamelessly:

    Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises. Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.

    And these new priorities are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets, which insulted our intelligence on every page. This is budgeting we can believe in.

    But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it's also true that we were spending more than $100 billion a year in Iraq.

    So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery - two big ifs, to be sure - getting the deficit down to around $500 billion by 2013 shouldn't be at all difficult.

  4. So wait - a budget deficit of $500 billion is better than the deficit of $243 billion because the $243 billion deficit was really more like $343 billion?

  5. So wait - a budget deficit of $500 billion is better than the deficit of $243 billion because the $243 billion deficit was really more like $343 billion?

    Well, a $500 billion deficit spent on unicorns and rainbows and kittens and puppies for everyone is better than a $343 billion deficit, $100 billion of which was for war.

    That's the argument, more or less. Not entirely without a logic.

  6. A Chicken in Every Pot.

  7. I reject all notions and patterns of comparing the Federal Government's budgets and deficits with GDP. As GDP grows, there's no reason for government spending to grow. Certainly, with a higher GDP, we can "afford" more government, but there's no correlating need. Comparisons between national budget and GDP are a farce that allows the pols to keep spending, spending, spending.

    It actually seems counter-intuitive to me, to use GDP as a yardstick for the deficit. As GDP increases, we, as a nation, by definiton, are more prosperous. We should need LESS government as we get more wealthy. Please, reason, stop buying into the GDP/deficit trap.

  8. I'm assuming you all wrote positive, well-reasoned letters, encouraging Obama to look at cutting certain programs.

    Sorry, I used to think libertarians could actually work with Democrats against Republicans. I still hate Republicans, but I hate Democrats too. Please smack me if I start asking you all to contact Republicans and try to find common ground. Fuck 'em all. I'm moving to New Hampshire (FSP), anyone else want to come?

  9. So far it seems like Obama is avoiding making the hard choices he criticized Bush for avoiding as well. The reality is that the following are pretty much certain to avoid fiscal ruin.
    1. Taxes go up for basically everyone, we're not going to come close to balancing this on the backs of "the rich" unless of course you count almost everyone with a job as rich.
    2. The age of retirement will go up, probably by a lot, expect minimum 70, with 72-75 being likely.
    3. Healthcare WILL be rationed to cut the costs of Medicare

    There are a lot of other areas that can use a lot of cutting, but without the first 3, none of the rest add up to a pile of beans.

  10. Obama is a frigging big spending liberal. How any libertarian could have supported him is beyond me.

  11. Never fall into the government's trap of measuring government spending as a percentage of GDP. The federal government has a limited mission, as outlined in the Constitution, the highest law of the land.

    As the economy grows with new technology and new industries, the percentage of the productive economy sucked away by the government should decline over time, not stay the same or go up.

  12. The federal government has a limited mission, as outlined in the Constitution, the highest law of the land.

    The highest law is a tiny thing next to Obama.

  13. Despite some improvements from the Bush budgets, Obama's plan is far from being free of tricks.

    This implies that Obama is somehow a net improvement.

    How about if reasons dumps this kind of MSM crap and gets real.

    The bottom line is that there is very little to be happy about in Obama's first budget.

    Right now I think we might actually have been better off under another four years of Bush.

    Bush did stupid things, but he wasn't jamming carbon taxes and socialst medicine down our throats -- things that were sure-fired, permanent economy killers.

    I humbly submit that Obama is far worse for our long term economic outlook that Bush was.

    But then that wouldn't fit the mantra of the left-leaners, which (after 100 years or so of state run education) today is just about everybody.

  14. (Sorry if this duplicates)
    I'm a non-social Conservative. What puzzles me about Reason and some libertareans is their lack of criticism of the Democrats.

    I live my llfe with no regard to what Social Conservatives say or do.. but what the Democrats say or do impacts every minute detail of my every day.

    How anyone claiming to be a Libertarean voted for Obama mystifies me.

  15. Just because Obama says he's going to make the budget deficit smaller, that actually doesn't mean much. How is he going to pay for the deficit? By printing money? increasing your taxes?

    The far more important question is: Will the government debt - to be paid for in later years by you and your children - be larger or smaller?

    On all these far more important issues, he's still a big spender...

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