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?
The U.S. government talks about spending cuts measured against some imaginary number that it could have spent, in its fantasy land.