Obama's Budget Proposal
Now here comes the challenging part. No, I’m not talking about the challenges around Obama’s budget, but about the challenge of keeping this blogging hobby of mine up while going into tax season. This ought to be interesting.
Of course, my personal challenges pale beside the challenges of our nation as reflected in Obama’s budget proposal which will dominate the news cycle for the next few weeks. To be sure, we’re all going to hear sniping from all sides of the political spectrum over tax increases and accusations of pork barrel spending. You know, the type of stuff that makes your eyes glaze over and at the end of the day, you actually know nothing more of what’s in the budget than you did when they first began talking about it. By design, the debate over these matters evinces an emotional response rather than a rational one. To really appreciate what’s going on, there has to be some rational discussion had.
Obama said something interesting during his state of the union speech which both political parties agree with. He mentioned that he’d like to see a spending freeze on discretionary spending with the exception of the defense and entitlement budgets. Well, those two areas account for the largest slices of the federal budget. I don’t have the figures right in front of me now, but as I recollect that these two areas account upwards to 70 to 75% of the budget, which means we’re going to have a protracted battle over the remaining 25%. Somehow that just doesn’t make sense to me, particularly in light of the fact that the military and entitlements expenditures are the main things that aren’t sustainable over the long haul. Given that, it would seem that the main thing we ought to be talking about is those two areas—particularly military spending, but it seems that both citizens and politicians lack the political maturity to explore these areas honestly without hysterics. To pull these areas off the cutting table continues the sort of dishonesty that got us here to begin with. No one wants to see these areas cut, but no one wants to pay more taxes, so the political solution is to borrow, print up some more money and put off addressing the issue off in the future. The future is here and we really need to deal with these issues now. We’re all really to blame for this.
The federal deficits are as big as they are for much the same reason that the majority of the states are having budget gaps—there’s been a steep drop off in revenues while the expense base remains unchanged. In my opinion, much of the drop off is structural or permanent Moreover, since the private sector has shrunken back so much in the wake of the Great Recession, the idea is for government spending to replace private sector spending and create jobs. While it may be possible for the government to support job creation in certain areas, widespread job creation is beyond what it really can do. A robust private sector can, but it’s currently in retrenchment, so the most a jobs program is going to do is put a salve on the wound and I don’t have a problem with that, but I think it’s wise for folks to keep their expectations in check and not look for much beyond that.
The chart immediately above depicts what the administration believes will be the deficit situation over the next ten years. This is a little like looking at death in the face and there’s no doubt that they’ve likely underestimated the deficits, which means the problem is even worst. These have to be financed and we lack the domestic savings to do so. We also lack the will to raise taxes, so that means that China and Japan have to agree to come along to the dance and continue to loan us money. They may be reluctant to do so as they’ve enough exposure to the US already with their existing holdings of our debt. So the real question is who will finance us and at what cost?
We’re really at a tipping point now and some hard choices need to be made right now. Unfortunately, all we’re going to hear over the next few weeks of posturing is about the 25% of the budget that’s up for grabs because they’ve all agreed that the remaining 75% is “untouchable”. Beyond the fiscal crisis, the next biggest crisis we face is one of leadership across the board. That will become even more apparent as we go forth.