Saturday, February 23, 2013

Cuts? What Cuts?

Everyone seems to have their panties in a wad over the coming financial crisis known as the "Sequester".  Even Rush Limbaugh has gone so far as to assert that for the first time in his life he is ashamed of his country.  If you listen to the pundits--of either side--the looming catastrophe that are the "draconian cuts" required by the sequester will rain havoc on every part of the country and our economy.

For those on the left, the claim is that the "hatchet job" these cuts will do on the economy will result in fewer teachers, police, firemen & first responders; as well as risks to health due to fewer resources available for FDA food inspections and water quality testing.  In short, as they always do, the administration is pulling out all the stops; stuffing their campaign-style rallies as full of doom and gloom to the "little guy" as they can.  I even saw an interview on television with the head of the Dept. of Transportation, Ray LaHood, opining about the "impact of these cuts" on transportation.

Those on the right, predictably, are running around bemoaning the drastic cuts to the military and defense, giving the distinct impression that America will be nearly defenseless if these cuts go through.  Leon Panetta's comments that these cuts will necessitate the furlough of as many as 800,000 civilian contractors and Defense Dept. employees are being used by both sides.  And, of course, each side blames the other for our current mess.

It looks to me like both sides are attempting to "not let a crisis go to waste".

Let's just look at the  numbers.  The automatic "cuts" in the sequester amount to $1.2 Trillion over 10 years.  Firstly, that only amounts to $120 Billion each year out of a proposed budget of ~$3.6 Trillion.  Is there anyone who really believes that spending $3.48 Trillion, instead of $3.6 Trillion, is "draconian"?  Here's another way to look at it:  $3,600,000,000,000 vs $3,480,000,000,000.  Yet another: 3.3%.  It's about as "draconian" as leaving a teaspoon of sugar out of your morning coffee. 

But here's the dirty little secret:  There are no spending cuts!

Yep.  That's right.  NO ONE is proposing that we spend even one thin dime less this year, on anything, than we did last year.  In fact, even if the sequester, with it's supposed cuts, goes through and stays in place the entire ten years, our national debt would still rise by several trillions over the same ten years.

How can this be?  How can everything be on the verge of falling apart if we're going to actually keep spending more?  It all has to do with Washington math and something called "Baseline Budgeting".

In short, Baseline Budgeting is the practice of building automatic spending increases into the structural framework of the government's budgetary process.  You take what was allocated in the present year's budget (whether necessary or not) and assume a "need" for a certain percentage increase for the next year.  This increase can either be based on a projection of inflation or, just as likely, just a number they pull out of their ass in order to get to an amount they want to spend.

However they go about it, it is the presumed increase that forms the basis for all of the negotiations, not what is actually needed for each department to meet it's obligations.  This results in budget "cuts" that result in a net spending increase.   Example:  Last year you spent $100 Million on, widgets let's say, and you project that you will need to spend $150 Million next year, for the same widgets (whether that's true or not is irrelevant to budgetary discussions in Washington).  A member of the opposition stands up to say "the American people can't afford to have their hard-earned tax money wasted on these unnecessary widgets!" and both sides begin to "negotiate" "spending cuts".  In the end, you agree on a final figure of only $125 Million.  This is trumpeted by "conservative budget watchdogs" and decried by "widget proponents" as a "severe" 17% cut in spending  ($150 million down to $125 million) when in fact it's actually an increase of 25%!  ($100 million to $125 million) This is an over-simplification, but it accurately illustrates how the budget process works in Washington.

If they were truly serious about getting our fiscal house in order, they'd begin with zero-sum budgets.  I'm not an economist, but that's a term I think of.  It means that when you begin consideration of a new budget you start with exactly what was spent the previous year, with the person(s) responsible for the administration of the budget in question testifying before Congress to justify the expenses of the previous fiscal year before they even ask for any increases.  Any proposed increase in funding would likewise be subject to justification to the Congressional Committee(s) with oversight.  Ideally, these hearings would be held in full view of the public and subject to public comment before any decisions are made. 

This is how ordinary Americans approach their finances, by making the hard choices required and deciding spending priorities in light of available resources, NOT by deciding how much they want and stealing/borrowing what they don't have from others.  It's a lesson we need to teach our "leaders" in Washington, before they "cut spending" so much they put us all in the poor house.

I'm not ashamed of my country (yet), but I have little use for the bureaucrats  currently entrenched on Capitol Hill claiming to represent us while representing only themselves and their own personal fiefdoms.


Before I go, on a personal note I'd like to refer you to a new author I discovered through Twitter.  The author's name is  L. Todd Wood and his first novel is Currency, available on [Direct link:]

In Currency, Todd weaves the past and the near future in a web of piracy, political machinations and international intrigue and conspiracy aimed at the destruction of the last remaining superpower (America) and her economy.  It's well written and given the current world-wide economic climate more than a little plausible.  It's been endorsed by no less an economic authority than the Hon. David M. Walker, Former U.S. Comptroller General:  "Currency combines history, finance, romance and action into a timely and entertaining read on a subject that has serious economic and national security implications. My wife and I both enjoyed reading it."

I found Currency to be a well paced story with enough historical references that it piqued my curiosity to investigate the relationship between Alexander Hamilton, Aaron Burr, the pirate Captain Kidd and the early years of our country's beginning.  I can't recommend it enough.

About the Author:

Todd is a graduate of the U.S. Air Force Academy. He has been an aeronautical engineer and an Air Force helicopter pilot. In the Air Force he flew for the 20th Special Operations Squadron which started Desert Storm. For the past eighteen years he has been an international bond trader with expertise in Emerging Markets. He has conducted business in over forty countries. Todd has a keen understanding of politics and international finance. He has been published in the Armed Forces Journal. He lives on a 300+ year old farm in Connecticut deeded from King George of England with his children.



  1. There actually does appear to be real cuts on the defense side of things, at least in the first year or two of the sequester, but hardly "draconian" and certainly not sufficient to furlough all 800,000 civilian employees of the Department of Defense. As one article I read pointed out, the cuts would reduce defense spending to 2009 levels, and one can hardly make the claim that our borders were wide open and we were defenseless then.

    The sad thing is, that even with minor cuts, neither side can agree to it. This does not bode well for when stuff really starts to hit the fan with the entitlement crisis a few years down the road.

    1. I'll have to go back and check, but I'm pretty sure the source I read referred to the defense cutbacks as being a little bit of politically economic sleight of hand. Much of the "cut" in the defense budgets comes by including the costs of the wars in Iraq and Afghanistan in the budget projections.

      The Obama administration made a big deal in the '08 elections about the Bush administration not including the costs of the wars in it's budgets. Wars are never budgeted for. They can't be. It's a one off event, usually. To include such activity in the budget would mean the assumption that the war is an ever ongoing event, just the same as infrastructure spending or entitlements.

      Wars, just as with spending on any emergency (natural disasters, for example) is an off the books expense, usually funded by borrowing, that is accounted for after the event. WWII wasn't budgeted for, it as financed by a great amount of borrowing and was never accounted as part of the general spending of the country, although it was accounted as an increase in the national debt.

      If you remove the costs of the wars in Iraq and Afghanistan from the equation, you will find that we naturally return very close to the spending levels of 2009. These reductions in defense spending would have happened naturally, as a matter of course. Budget-wise, there's no real cut involved beyond ending the prosecution of these military actions. Whether or not doing so is wise is another question.

      Obama has already used this same trick to claim a reduction in deficit spending of some $4T by counting the winding down of the wars as a "savings".

  2. As for the imminent crisis of entitlements, Obama has already foreshadowed the Democrat "solution". His recent speeches have shown a small, but potentially significant, change in terminology.

    Obama has gone from talking in terms of raising taxes on "the rich" and "asking the wealthy to pay a little more" and closing tax loopholes that "only the richest among us are able to take advantage of" to referring to the "well off" being "able to afford to contribute more". The "well off", eh?

    Hmmmmmm. Let's see, "the rich" (millionaires & billionaires) ended up being those making more than $250,000. Where will the cut off be for the "well off"? Those making more than $100,000? $75,000? Maybe the "well off" will be anyone not currently receiving a government check?