The 2012 Budget: A Fake At The Beginnning

The annual budget sent from the White House to Congress is supposed to be the start of a negotiation. It is always rancorous, but will be more than usual this year. That is for two reasons. The first is that the President’s budget is a fake document which is not a reasonable start for a debate. The second is that the Republican House will not accept anything sent by the Executive Branch.

The new budget shadows, to a small extent, what has been done throughout much of Europe, and in the UK and Japan. Expense cuts are the key to lower deficits. There is every reason, based on that logic, to believe that the other side of that coin is GDP growth – at least in the American model. Many economists think that the US government is about to withdraw stimulus too soon to help the US economy lift off after the recession. On the other hand, luminaries like Ben Bernanke, the Fed chief, have warned that prolonged deficits will ruin the nation’s financial future and with it the prospects of many citizens. The 2012 fiscal year budget recommends $3.73 trillion in spending.

The deficit is expected to be $1.6 trillion for fiscal 2011 and $1.1 trillion for 2012. Deficits drop sharply in the years through 2014 when the annual figure is only 4.3% of GDP down from 10.6% this year. From 2015, the deficit begins to rise again the Budget forecast. This can be attributed in part to a slowing in GDP growth after 2017. Growth is expected to be better near term. The 2012 through 2015 GDP growth rate will average 6% a year. That would be unprecedented by long-term annual improvement in GDP over the last two decades. It also assumes that a $17 trillion economy can grow so rapidly.

The most critical assumption for next year’s budget is that receipts will go down because of the extension of the Bush tax cuts. The White House did not mount a bitter fight with Congress over this. That undermines the President’s intention to balance the budget. He had a chance to take a stand on tax reductions late last year. He retreated to the place that some economists believed was the only right place. Obama accepted, at least in public, that low taxes would help economic expansion. It is a cynical view when programs that are supposed to be critical to cause economic growth are sacrificed based on the theory that low taxes make GDP rise.

Obama’s defense of his austerity position is that the nation can do without a number of programs which he considered essential just a year ago. The economy has already begun to do so well that these plans hardly matter. “Two years after those dark days, the stock market is booming.  Corporations are posting record profits.  Momentum is building,” the President writes in the budget’s introduction. “In 2010, an economy that had been shrinking began to grow again.  After nearly 2 years of job losses, America’s businesses added more than one million jobs. ” The president is one of the few people who believes that an employment recovery is underway. He may also think the housing market has begun to recover. If so, he does not mention it in his message.

The goal of almost every Budget introduction is to point out that America’s future is bright, and that the United States can fight off forces that would damage its prospects as the greatest and most prosperous nation on earth. The middle class will always thrive if the map put forth in the Budget is correct. It is impossible to “sell” to voters otherwise.

Most budgets have a “Sputnik” clause. There is at least one straw man. “In 1957, when the Soviet Union beat us into space by launching a satellite called Sputnik, it was a wake-up call that caused the United States to boost our investment in innovation and education—particularly in math and science.”  More than half a century later, the enemy is America’s lackluster educational system which will eventually cripple the engine of innovation and entrepreneurship.

The most reasonable attack of the new plan is that the expense reductions are too modest. None of the reductions address entitlement costs. Almost every politician in Washington has conceded that voters will not accept a cut in these plans, so it is not worth trying particularly if what is at stake is the jobs of Congressmen and Senators.

The attempt to sell rapid growth and sensible expense cuts which according to the Budget will begin and mostly end by the time the President would end a second term in 2016 is cynical. It assumes that Obama alone can solve the current fiscal crisis if only Congress will go along. Expense reductions must be done by the elimination of thousands of small programs because waste only exists with these, and not larger ones. That is hardly even close to the truth.

Douglas A. McIntyre