Tuesday, February 15, 2011

Budget conundrum

I dislike paying taxes as much as anyone. But I have to wonder when Washington politicians are going to get serious and talk about tax increases to stem the tide of progressively deeper national debt.

President Obama's 2012 budget proposal, according to The New York Times, totals $3.7 trillion with a $1.1 trillion deficit. That means it budgets $2.6 trillion in revenue. Obama says it's fiscally responsible; Republicans say it doesn't cut deep enough. All kinds of arguments are taking place about little nips and tucks to the budget of a few billion here and a few billion there to try and bring it into better alignment.

But here's the thing. Four areas of the budget that no one is talking about cutting add up to a figure that already surpasses total revenue by a wide margin. Thus, it's mathematically impossible to make enough cuts to areas of the budget where everyone is looking to bring this budget into balance, or even to reduce the projected deficit by a meaningful amount.

Three of the four areas -- Medicare/Medicaid, Defense, and Social Security -- are supposedly untouchable for political reasons. The fourth is interest on the national debt, which we have to keep paying because defaulting on it would truly collapse the world economy.

Those four areas added together total about $3 trillion in spending (see table below). With projected revenue of $2.6 trillion, this means that if every remaining dollar in federal spending were eliminated, the country would still be in the hole by $400 billion. Read that carefully. Not just trimming some programs, but completely eliminating EVERY federal agency except for the Defense Department, Social Security Administration, and portions of Treasury and Human Services that deal with debt issuance and Medicare/Medicaid, respectively, wouldn't be enough to get the budget back to positive.

And the cuts that are being talked about are, by comparison, a pittance. $1 billion sounds like a lot of money, but here's an analogy to explain what that amount means in relation to the overall budget situation:

Picture an upper middle class family with a very comfortable -- what some people would consider truly lavish -- income of $260,000 a year. But for a variety of reasons they were overspending their income by around $110,000 a year, and need to cut back. How effective would they be in closing the gap with savings of $100 here and $100 here? Equivalently, that's what $1 billion is in a $3.7 trillion spending plan. So when you read about $5 billion here or $10 billion there, it's like that family trying to close its six-figure deficit with tweaks of $500 or $1,000. Realistically, it cannot be done.

This federal budget has reached a point at which it cannot be balanced with cuts. Sadly, none of our political leaders has the courage to say so.

$1100 billion (1.1 trillion) Medicare and Medicaid
$808 billion Social Security
$677 Defense
$474 Interest on debt

= $3059 billion ($3.059 trillion) total spending on "big four" areas


$2600 billion ($2.6 trillion) projected revenue

= $459 billion deficit

No comments: