Written by Richard Butrick   

Focusing on debt limits to fix the yearly deficit gap is like setting a speed limit for a boulder rolling down hill. There is no stopping it until the slope changes. Quixotically, the US government has been solving the speeding crisis (expenditures exceeding revenues) by raising the speed limit. It has been raised 74 times since 62. Speeding problem? Just raise the speed limit. See. No more speeding!

The 2010 budget was given the title, A New Era of Responsibility: Renewing America's Promise, “Don’t tell me words don’t matter” It seems Obama believes in word magic. Get the words right and reality will follow. His job is to get the words right. What we need is a “New Era of Responsibility”. Can’t argue with that. “Renewing America’s Promise”. Sounds right. Well, it seems reality behaved incorrigibly. One half expects Obama to scold reality for not heeding his words the way he scolds congress.

In summary, in 2010

The US
made 2.2T
spent 3.5T
debt is 14.3T
interest on the debt is .414T
interest payment as a percent of revenue is ~ 20%
expenditures exceed income by slightly over 50%

With the Budget Control Act of 2011 the focus has at last - courtesy of the Tea Party - shifted from setting debt limits to focusing on deficits - the difference between revenues and expenditures. But games are still being played. It would be more reassuring if it were called The Deficit Control Act. But that would address the problem directly. Better to fool around with all aspects of the budget - which the bill does. It still plays games with setting debt limits (“discretionary spending caps”) and ties other budget items to the debt limit and ties all its numbers to “baseline” accounting. Moreover, addressing the problem of bringing expenditures “in line’ with revenues does not mean they should be equal.

The argument is that expenditures can always exceed revenues to some degree. That is because of GDP growth. The correlation between GDP growth and revenue growth is certainly not one to one but there is a long run correlation. The thinking is that tying expenditures to a percentage of GDP rather than directly to revenue growth is somehow sound policy. That would be a like a steel company measuring its financial health with regard to expenditures not to its own revenue growth but to the revenue growth of the steel industry as a whole.

Instead of focusing directly on the relation between expenditures and revenues, it has been US government policy to focus on keeping expenditure growth at ~18% of GDP. It hasn’t been working. Debt has been growing faster than GDP. In fact debt is crossing the threshold to exceed GDP. Maybe it is time to focus on bringing expenses in line with revenues instead of playing expenses off of GDP. Look at expenses vs. revenues instead of looking at expenses vs. GDP?

So what does the Budget Control Act of 2011 do to directly fix the speeding problem and not get side tracked about expenses and GDP?

It sets up a Super Commission to reduce the yearly expenditures by 2.1T in 10 years. It also directly mandates a .9T reduction over 10 years. Let us say that everything works according to plan (sudden emergency expenditures counterbalanced by corresponding cuts), that means in 10 years spending is to be cut down by 3T.

Enter ”baseline” accounting.

Baseline accounting assumes a “normal” growth rate against which savings and overruns are evaluated. In other words a savings of $10 in the course of a year following a year that had $100 in expenditures does not mean that $90 was spent. If the baseline is expected to grow at a %5 rate then the expected expenditure for the current year would be $105. Thus spending just $95 results in the claim that there was a saving of $10.That is analogous to a person who expects to gain 100 pounds only gaining 75 pounds, and taking credit for losing 25 pounds. The federal government is the only place this absurd logic is employed.

So a savings of 3T over 10 years doesn’t mean that expenditures will be reduced from the current level of 3.5T to .5T. That would be fantastical.

The trillions of dollars in "cuts" that Speaker John Boehner, Senate Minority Leader Mitch McConnell, and Senate Majority Leader Harry Reid now speak of are in reality reductions only in projected spending. In other words, they are fiction. Congress could decide to do them or not and even if lawmakers do them, they're still not actual cuts.

It means that the final level of expenditure after factoring in an expenditure growth of say 3% a year (that is a conservative estimate) would be reduced by an absolute amount of 3T. What would that be? 3.5*(1.03)^10 - 3T or 4.7T minus 3T. That still leaves expenditures at the end of 10 years of 1.7T. So a cut of 3T does not mean expenditures of 3.5T are cut to .5T. It means they are cut to 1.7T. But, mirabile dictu, even if revenues didn’t grow and stayed at the same level of 2.2T, revenues would exceed expenditures. No more adding to the national debt! Of course this is predicated on the assumption that the Super Committee succeeds. If not, expenditures will not be brought into line with expenditures and the National Debt would continue to grow. But of course that will never happen.

If all seems like playing games. It is. Ten year projections? Promises of reducing the growth rate to less than what it would be without the promises? The Tea party has it right. Cap and cut expenditures to revenues now. Stop playing games with 10 year projected cuts that are relative to baseline growth. Moreover, the guidelines of the bill are somehow all to be faithfully followed by future administrations, Democrat or Republican? Sure.

The idea seems to be that by using math magic and 10 year plans, the road to fiscal responsibility will be a walk in the park. Think of a ten year plan to cut an addiction problem. How real is that? Congress is unwilling to bite the bullet and face the reality that fiscal responsibility requires hard choices now. Pain now. Credit to Bachmann who said as much (8/8) on the O’Reilly show.

Cut spending by .2T now. Cut each following year by .2T till expenditures match revenues. No projections. No baseline accounting. No 10 year plans. Cut now and keep cutting till expenditures match revenues. Start with HUD, NEH, DOE. And that is just on Monday.