You Call Those Cuts

Ouch, That Hurts

In the US, the Congress has the constitutional power of voting taxpayer's money to fund the government. If Congress fails to pass a budget authorising funding, or if the Senate fails to approve that budget, or finally if the President does not also put his signature to it, then the government is de-funded and has to shut down.The US defaults on its debt and China takes over. 

The Republican Party controls the Congress; the Democratic Party the Senate and the presidency. The Republican Party wants to reduce the huge government deficit by cutting spending. The Democrats want to attack the deficit by raising taxes and reflexively oppose spending cuts. Consequently, at least until the next election in 2012, the threat of government shutdowns due to money drying up will loom periodically.

Over the weekend just such a shutdown was averted by all agreeing to a stop-gap budget. It involved some $40bn in cuts to federal government spending. Mr Obama described some of these cuts as "painful" and something he would rather not have done. Nevertheless, he also claimed that the spending cuts represented the largest annual spending cut in the history of the United States. According to the Sydney Morning Herald:

Party leaders clinched an agreement, including about $US38.5 billion in extra spending cuts, after intense political bargaining, barely an hour before the federal government effectively ran out of money at midnight on Friday (2pm yesterday, local time).

''This agreement between Democrats and Republicans, on behalf of all Americans, is on a budget that invests in our future while making the largest annual spending cut in our history,'' Mr Obama said after a long day of tense negotiations averted a potential political crisis.

''Some of the cuts we agreed to will be painful … and I would not have made these cuts in better circumstances. But beginning to live within our means is the only way to protect those investments that will help America to compete for new jobs,'' he said.

"Beginning to live within our means" sounds great. What it actually represents, however, is that acutely dangerous phase in a polity where political rhetoric and framing has replaced reality. Below is a graph representing the reality.

In three years of fiscal wreckage, Obama has outspent them all.  The vaunted historic "painful" cuts amount to shaving a few hairs of the biggest deficit ever recorded in the history of the world.  The cuts--those painful cuts--have not reduced the deficit at all.  They have only slowed somewhat the pace of increase of the debt.  It is like a household that has been overspending by fifteen hundred dollars a week cutting back to overspend by fourteen hundred and ninety seven dollars.  Anyone that claims this as a political victory has lost perspective.  Anyone who suggests that it represents "beginning to live within our means" is, as they say, living in an alternate "reality".


Sarah Palin has it right:

Let’s look at the numbers. We have a $1.5 trillion deficit this year. We’re paying $200 billion a year on our interest alone. That’s half a billion dollars per day on interest. And our $1.5 trillion deficit means that we’re borrowing $4 billion per day just to keep afloat. So, we pat ourselves on the back if we cut a billion dollars here or a billion there in discretionary spending, as we borrow $4 billion a day and pay half a billion a day in interest. The deficit for the month of February alone was the highest in our history at $223 billion. That’s more than the entire deficit for the year 2007. And there’s no end in sight. We’re not heading towards the iceberg. We’ve already hit it. Now we’re taking on water. We must find a way to get back to harbor to repair our ship of state before it’s too late.

The caterwauling amongst the Democrats over these minor scrapes rather than genuine spending cuts was both histrionic and appalling. When the Republican Congress starts to put together its budget for 2012--which is going to represent some real and meaningful cuts to government spending--the faux-outrage will likely be heard over the entire world.

In order for the US to put its fiscal house in order at least two things are critical. The first is that the Commentariate needs to give up the idea that government spending is the fundamental and most important driver of economic growth. The second is that conservatives need to relinquish or repudiate the notion that the US, via its military, must ensure that the world is "safe for democracy" and return to an older, more humble notion that its vital interests are only those which abide reside within its own geographical borders. In other words the US needs to come once again to regard itself as an ordinary nation, not an idolatrous geo-political messiah. Only then will true cuts to government spending become feasible. Neither condition is likely to emerge.

Ergo, things will likely get a whole lot worse before the turning of the tide.