Sunday, February 20, 2011

Obama's promised "budget cuts" actually increase deficit

Published in The Tennessean, Sunday, February 20, 2011

Obama's promised "budget cuts" actually increase deficit

by Richard J. Grant

The total US national debt has now surpassed $14.1 trillion, which is about 95 percent of annual US economic output. The debt seems to be one of the few things that President Barack Obama is able to make grow, so he is going at it with gusto. His recently proposed budget calls for record spending and is projected to produce a deficit of more than $1.6 trillion. That will increase the total debt by more than 10 percent per year. Expect it to crack $15 trillion just in time for Labor Day.

Before the budget was released, we were told that the “tough choices” had been made and to expect significant spending cuts. The storytellers wanted us to believe that the president had accepted fiscal conservatism, had moved to the center, and was now a well-triangulated moderate.

Then the real news came out: The proposed budget would be greater than $3.7 trillion. So what happened to the budget cuts?

The president has proposed cutting a few programs, but he has also proposed some newly created programs along with increases in others. Politics is full of such dual realities, each designed to please or appease some constituent. During the next election campaign, the president will honestly be able to say that he did propose some cuts, and to another group he can say that he increased funding for their favorite program.

Clearly the president is more predisposed to do the latter. Whatever words he uses, his actions have always been toward a bigger role for government in people's lives. At budget time, this translates into government taking control of a bigger share of people's wealth. That means that we will all spend a greater part of next year working to support some government program.

When predicting the cost of a government program that provides a service that could also be provided privately, a reliable rule of thumb is that the total cost of the government program will be at least double the cost of a private service. Sometimes the government steps in to provide a service that is either not wanted by enough people to be profitable or that has been made unprofitable by other government interventions.

As an example, President Obama seems to have hitched his wagon to high-speed rail. Apparently Amtrak was not losing money fast enough, so the president decided to innovate and build a high-speed rail service to nowhere. Not only does this proposal show irresponsible leadership at the federal level, it would also trap the state governments in the subsidization of this folly.

In a large and prosperous economy, we might not worry very much about the occasional creation of such wasteful showcase projects. But when such projects become the norm rather than the exception, the economy either does not become large and prosperous or ceases to be. The uncontrolled growth of entitlement programs is another sign of squandered potential and a leading indicator of decline.

Government budget deficits add to the debt and push much of the burden of current spending onto our future selves and future generations. This shifting of the burden makes government services appear to be less expensive than they really are. When something appears to be cheaper, we tend to choose more of it.

This is how families get into trouble; and this is how governments get into trouble.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011