Fiscal Cliff

No Real Cuts In Those Fiscal Cliff "Spending Cuts"


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.

Federal spending vs. revenue

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.

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  1. Mordor on the Potomac – awesome!

  2. Of course there are no cuts. No one wants to cut spending. Even the few in DC who do want spending to be cut want it to happen somehow in a manner in which they can’t be held responsible.

    What’s particularly galling is that this is really a crisis time in the U.S., yet the politicians and the media pretend that there’s something here to debate, and that the Democrats’ play for tax increases has anything whatsoever to do with solving our fiscal problems. Of course, they could raise taxes 100%, and we’d still be in trouble. Fucking morons.

  3. So all the talks about spending “cuts” are like all spending “cuts” a bunch of bullshit about how increasing spending by 20% instead of 25% is a cut or how 10 years of doing so is a 50% cut? I’m shocked shocked I tell you.

    Businesss Insider
    It’s Certainly venomous.

    1. I’ll let you in on a little secret: I run my finances the same way the government does. There is a Ford dealer here that promises $5000 savings on a new truck, so I go by and buy a new truck every month. Saving $5k a month beats the hell out of working for a living! (I must admit, I occasionally get greedy and buy two. I actually saved close to $100k last year.)

  4. But my bosses in the military say it’s going to be a disaster that leaves us completely defenseless!!!1!

  5. This post contains no new information.

  6. We need an audit of everything we spend money on. If the stated purpose hasn’t been achieved and/or if federal money isn’t necessary, cut. With extreme prejudice.

    1. Oh, ProL, I admire your optimism.

      Federal Employees justify spending money? Hah. Never happen. Never.

      1. That’s why they need outside auditors.

        1. Its called buying and selling treasury bonds.

          1. Which appears to not being doing enough to stop the bad behavior.

            I’m afraid I’m going to have to invoke my citizen powers and place the federal government under receivership until we can untangle this mess.

          2. In its infinite wisdom, the Fed is in the process of removing the discipline of the bond market.

            QE in its many variations has involved the Fed buying Treasuries, and thus removing them more or less permanently from the secondary market (the notion that the Fed will sometime sell these back onto the open market is laughable, but that’s another post).

            You may have heard that the recent round of QE was “sterilized”, that it didn’t involve increasing the Fed’s balance sheet because for every long-term bond bought, an equal value of short bonds was sold. That’s a cheap illusion; as those short-term bonds mature, they are redeemed. How are they redeemed? Well, by auctioning new bonds. Who has been clearing Treasury auctions?

            Why, the Fed. Of course.

            The Fed, by comprehensively monetizing US debt, has taken it out of the bond markets and immunized it from the discipline of the bond markets.

          3. Monetized debt held by the Fed is immune from the discipline of the bond market.


      Oh ProL, you are a comic genius.

      1. I demand an audit as my right as heir to the throne of Scotland!

        Wait, that isn’t quite right. But you know what I mean.

    3. There are literally 100s, if not 1000s, of little programs that can be cut that would hardly affect the working class Joe Schmoe at all. Like the unlimited moving and storage given to foreign service officers. A friend tells me of a diplomat couple who moved into her neighborhood who were just returning to DC from an extended stint in various countries. They had 2 full-size (18 wheeler) movings trucks full of crap, and the wife cherry picked what she wanted for the new house, and sent the rest back into taxpayer-funded storage.

      Anyways, there has to be a shitload of programs like that that can be slashed & burned.

      1. Sure, you can cut those sorts of things, but in the big picture those programs are nothing…pocket change. The big problems are Medicare, Medicaid, Social Security, and military spending. Until we address those, we could cut everything else and we’d still be in trouble.

  7. Fucking scumbag still campaigning.

  8. “…apparatchiks such as Secretary of Defense Leon Panetta…”

    I remember when, as a Congressman representing my district, Mr. Panetta had a reputation for intelligence and integrity. This was, indeed, one of the reasons he was picked to head the scandal-ridden CIA. Now look at him. Sad.

  9. Today’s headline feed from the NYT says “Unthinkable” cuts are imminent. And yet, no real cuts will occur. We CAN manage to actually CUT spending to levels of five or ten years ago, which would be comparable to a REAL household’s belt-tightening in these troubled economic times. We can start paying off debt and effectively addressing deficit spending. We are doing it at my house, Mr. President, Mr. Speaker, Mr. President Pro Tem, and have made very nice progress in avoiding our own Fiscal Cliff over the past several years. We’ve even enjoyed a few luxuries along the way: ours has not been a life of spartan asceticism. Neither need America’s be, but if we don’t take sincere and substantial steps to deal with the problem NOW, how can the future hold anything but chaos and poverty for this nation?

    We had a chance to sweep out the bastards in November, and we squandered it, in the same way that they continue to squander our treasure, our freedom, and even our lives. What will it take for the people to wake up and act to turn this bus around?

    1. What will it take for the people to wake up and act to turn this bus around?

      Mass privation and social disruption.

      Only when the bus runs out of gas and bursts into flame, will the passengers put down their smartphones and take notice.

      Their demands, no doubt, will include going through the luggage and confiscating all firearms and easily resaleable items of value, to fund the hiring of a consulting firm of Top. Men. to DO SOMETHING.

    2. James Anderson Merritt| 12.31.12 @ 2:54PM |#

      Today’s headline feed from the NYT says “Unthinkable” cuts are imminent.

      I believe that is referred to as “Epistemological Accounting”

      Its fascinating. It creates an absense of potential spending out of *thin air*! the mechanics of it are so arcane that even my accountant Zeno of Elea has trouble explaining it.

  10. If there was only some way to extend Blodgett’s lifetime securities ban to journalism.

    1. Cdr Lytton| 12.31.12 @ 3:07PM |#

      If there was only some way to extend Blodgett’s lifetime securities ban to journalism

      It *is* a bit galling to get this sort of ‘Nanny poo-poo progresive ‘fiscal consensus’ attitude from a guy who purposely pumped up bullshit pre-ipo tech stocks to land IB deals for his bank and take multimillion$ kickback payments.

      Blodget discussing fiscal/financial ‘ethics’ is like getting relationship advice from a serial rapist. Really he needs to confine himself to some topic where his utter moral and intellectual bankruptcy isnt so glaringly apparent. Like Ladies Home Journal or something. What irritates me about him the most isn’t just the fact he made millions as a complete fucking shameless liar (*he should have been in politics!), its that whenever I read his articles, it strikes me that he never actually learned anything about economics at all while on Wall St.

      A la this piece = where he puts up ‘a chart’, and then gets precisely the wrong take-away from it. Its a contest between ‘sheer ignorance VS. intellectual dishonesty?’ Whichever you choose, he’s a fucking jerk.

      1. Why on Earth would this mountebaank need the slightest knowledge of economics? His only job on Wall Street was to puff up shit stocks for investors that trusted him to deliver unbiased, accurate information. Knowing economics would only have gotten in the way of the pitch.

  11. Fun fact:

    By making all their spending and tax bills short-term, Congress games the scoring by CBO, which has to assume that the tax rates will increase on schedule, spending cuts will be made on schedule, etc.

    Just remember: whenever CBO does a 10-year projection, that’s what they are assuming: that a Congress that couldn’t bring itself to raise taxes or cut spending last year will suddenly decide to do so next year.

    1. Congress games the scoring by CBO

      Are they gaming the CBO or are they gaming the fiscally illiterate media who are incapable of reporting without “official” numbers?

      1. The media are willing accomplices.

        Think of them more as a steno pool for the Obama administration in particular and liberal Democrats in general.

  12. Sometimes you jsut gotta roll with the punches dude.

    1. A misspelling by the anon-bot?

      I’m suddenly getting a “2001: A Space Odyssey” vibe right now.

      1. I’m sorry Brutus, I a’m afraid I can’t do that…

  13. Oh, and since it hasn’t been said yet – “no, fuck you, cut spending”.

  14. For example, in 2012 revenue as a percent of GDP was only 15.8 percent.

    That’s not what the chart says, unless I’m missing something. Maybe in 2010 it was that low. According to the chart, the latest revenue figures are around 17.5%.

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