April 21, 2013

Obama Budget: Triangulation Lite…Very Lite

by Hal Gershowitz

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We assume President Obama was trying to channel former President Bill Clinton when he proposed his 2014 fiscal budget a week ago.  He didn’t even come close.

Clinton really accomplished something big and bold when he triangulated  initiatives from the Republican’s playbook, one of which truly reformed welfare and, ultimately, helped to produce a balanced budget.  President Obama, it seems, is making a pretense of triangulation by proposing a change in how cost-of-living adjustments are made in calculating social security payments. He is dangling before Republicans what policy wonks call chained- CPI to entice them into some semblance of a grand bargain that is really anything but grand.  In fact, it’s not a bargain at all.

Now, it is true that the traditional way we calculate the CPI does, over time, exaggerate the true cost of living because it is only revised once a year, while chained-CPI measures the cost of more than two hundred items in over three dozen geographical locations every month.  Both Republican and Democratic economists have expressed support for using chained-CPI for calculating cost-of-living adjustments for Social Security payments. This is a more sensible way of tracking the real price effect of consumers altering purchasing habits based on fluctuations in the cost of goods over the period of a year.  In other words, it recognizes that more people will buy hamburger instead of steak if the price of steak goes up. It would be, today, simply a very slight downward inflation adjustment amounting to a quarter of a penny on a dollar. In other words, someone who would have received a social security check of $1,000 using current CPI calculations would receive about $997.75.  While this offering by the President does have merit it, in and by itself, impressed few Republicans and infuriated a lot of Democrats.

All other spending cuts in the budget are chimerical because they are simply redeployed as increased spending elsewhere in what turns out to be a gargantuan budget (even with the so-called sequester).  The actual deficit reduction (which comes almost entirely from increased tax revenue) amounts to about $600 billion over ten years while spending over that same period amounts to nearly $50 trillion.  The proposed Obama 2014 budget calls for $160 billion more in spending than the current 2013 budget.

Okay, we understand that cutting spending is anathema to the President, but shielding half the budget ($1.7 trillion which we spend on Social Security, Medicare, Medicaid and most government retirement) from those cuts that are mandated by the sequester really does burden the remaining agencies that have to take the hit.  Our military will be squeezed as a percent of national income to the lowest level since 1940.  We’re sure that’s just fine with many people in this country, but we would remind them that 1941 wasn’t such a good year for America or the rest of the world.

The budget is, in our judgment, a rather sad commentary on raw politics trumping sound policy.  Economic columnist Robert Samuelson writing for the usually liberal Washington Post seems to agree.  “It (the budget) lets existing trends and policies run their course, meaning that Obama would allow higher spending on the elderly to overwhelm most other government programs…What’s happening is that savings from shrinking defense and discretionary programs are financing expanded spending for the elderly…Obama remains unwilling to grapple with basic questions posed by an aging population — high health costs and persistent deficits. Why shouldn’t programs for the elderly be overhauled to reflect longer life expectancy and growing wealth among retirees?…It’s phony (White House spin that the president is putting coveted entitlement spending on the bargaining table).  Compared with the size of the problem, Obama’s proposals are tiny.  The much discussed shift in the inflation adjustment for Social Security benefits to the “chained consumer price index would save $130 billion over a decade; that’s about 1% of projected Social Security spending of $11.23 trillion over the same period.

For the record, we’re not much happier with Republican proposals either.  Republicans correctly warn that our entitlement spending is simply unsustainable, but they, too, seem intimidated by the fact that seniors vote while our youth do not.  Paul Ryan, Chairman of the House Budget Committee, who we do credit with focusing more public debate on the absurdity of our fiscal priorities than any other politician in Washington, fails to touch this perennial third rail in American politics. While Ryan calls for reducing federal spending by $4.6 trillion over the next ten years, he doesn’t lay a finger on Social Security and proposes a measly 2.0% cut in Medicare spending.  His Medicare voucher proposal, which we think has considerable merit, wouldn’t kick in for ten years.  Regrettably, Ryan treats the elderly with kid gloves for the next ten years at the expense of programs designed to help the poor.  Other Republicans such as Rep. Greg Walden (R-OR) demonstrated a gratuitous zeal for hypocrisy by referring to the shift to chained-CPI as “a shocking attack on seniors”.

The famous psychologist C.G. Jung famously said, “You are what you do, not what you say you’ll do.”  That seems to be worth pondering as we assess the difference between what President Obama does and what he says he’ll do.

He says he will reduce spending, but his budget really doesn’t.  Obama’s budget will hike spending over the next two years by $247 billion compared with the “baseline”.

He says he will reduce the deficit but even after his proposed new tax hikes his budget will add nearly $160 billion to the deficit.

He says he wants a balanced approach to resolving the nation’s budget problems. There is, however, no real cut in spending, while there is $1.14 trillion in revenue virtually all from new taxes.  That equates to about six dollars in new taxes to every one-dollar in supposed spending cuts.

He says his budget will reduce the nation’s deficits by nearly $2 trillion, but the budget only shows total deficit reductions of $1.4 trillion and a return to increased deficits beginning in 2019.

President Obama says he can finance a new $76 billion “preschool for all” program by raising tobacco taxes again. But he can’t. Common sense suggests that after an initial spike, tobacco tax revenues will start trending downward as more people quit smoking.  So the revenue curve will turn down, while the cost curve for the new program will, of course, trend up.

The President’s budget assumes a ratio of public-debt to GDP of 73% in 2023 (we’re not including the non-public debt which is what the government owes to the Social Security Trust Fund and a myriad of other agencies). This, of course, assumes that there are no budgets busting expenses during the next decade.  This means that, conservatively speaking, beginning in 2020 our defense budget of $601 billion will be eclipsed by our interest on the national debt of $609 billion.  Then, during the next three years from 2020 to 2023 interest on the debt would climb to $736 billion, which would be $132 billion more than we will be allocating to defense.

And lest anyone think we’re overly concerned about defense in this very safe world in which we live, we note that the Obama budget provides $116 billion less for all discretionary spending for all government departments and agencies by 2023 than it provides for interest on the public debt.

Is anyone listening?

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7 responses to “Obama Budget: Triangulation Lite…Very Lite”

  1. mark j levick says:

    In answer to your question — No one is listening. No one is leading. No one is governing. Everyone is playing politics. Common sense is dead. Political Correctness rules. The hens are in charge of the chicken coop. No one has noticed that everyone has a strategic plan to re-arrange the deck chairs on our national Titanic so as not to rock the political boat. Thus we look to 2016 and the next Clinton administration. That would be Hillary Clinton whose tenure as Secretary of State left us with the Arab Spring, a dead ambassador, a nuclear armed North Korea and a soon to be nuclear armed Iran and who authored whose authorship of the original healthcare overhaul nearly destroyed her husbands Presidency. Hope and change lives on with smoke and mirrors.

  2. Janice Marcus says:

    I believe the saying is “the fox are watching the chicken coop.” which brings me to another saying which is, ” You are what you eat.” our country has a very expensive epidemic of diabetes and heart disease which is both curable and preventable often simply by changing our eating habits!!!! And yet every time Michele Obama brings up healthy eating the Republicans say she’s meddeling in Americans rights to eat whatever they want! So spread the news if you want health care cost to go down, hence bringing taxes down, stop complaining when nutrition is discussed by this administration. Treating an overweight person with diabetes is very expensive and preventable.

  3. mark j levick says:

    Perhaps proper diet can indeed cure our $17 trilion deficit and the cost of insuring an additional thirty million people and any pre-existing conditions they may have! Those heartless Republicans should pay better attention to Mrs. Obama. In the meantime time I’m off to find a fox to replace my confused hens.

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