The social Matrix

The social Matrix

Friday, April 19, 2013

Obama's Budget Shows Signs of Compromise

  As Obama releases his new budget for 2014  the national debt reaches 17 trillion dollars. Moreover, the country hasn't  had a surplus for the last eight years.

Congressional Budget Office


There are a variety of reasons why the government's budget has retain a deficit for the last eight years. Lawmakers on both sides of the political spectrum are urgently trying to find a solution to this problem.

 Stubbornness  exist on both sides of the political spectrum, Democrats are cautious over spending cuts that will increase unemployment, Republicans, wax political over a bloated government that tax too much. The central economic theme of the GOP is built around cutting taxes and spending, while maintaining a strong military. 

Theoretically the problem is quite simple. The government spends more money than it takes in as revenues. 


    The Democrats are known for increasing taxes to spend on  social programs. Democrats, are guided by Keynesian economics that stipulated government spending stimulates the economy. in contrast, the Republicans believe that tax cuts incentivize businesses to expand their operations and hire more people. History shows that neither party are confined to their economic orthodoxies once a member of their own party assumes the oval office.

 The national debt has risen precipitously since this  century began.

Business Insider


  Much of the rise in the national debt can be attributed to the spending habits of Obama's predecessor. In his first year Bush took a $236 Billion dollar surplus and turned it into a $158 Billion deficit. Bush's  spending increased so much that he even had trouble convincing Republicans to allocate a quarter of a billion dollars to community colleges for job training his second term.

 Still, for all the criticism Bush received he did cut discretionary spending as a percentage of GDP from 3.4 percent in 2002 to 3.1 percent in 2006.  moreover, the deficit decreased from 3.5 percent of GDP in 2004 to 1.2 percent in 2007. However, some dispute that number. 

U.S. Government Spending

   Of course, not all the blame should be focused on Bush. Some of Obama's economic policies were far from parsimonious. A month after Obama's inauguration he signed the American Recovery and Reinvestment Act ($787 Billion).  Barely, a week later Obama spends another $750 billion dollars to stabilize the financial sector totaling  $1.3 Trillion.  The public skepticism grew  over Obama's policy as unemployment inched closer to ten percent. Moreover, during this time Neil Barofsky's, special inspector general to monitor the TARP program , concerns about the implementation of the program and potential fraud were ignored.  Also, during Obama's first year in office, many states had to cut their budgets. According to the Center for Budget and Policy Priorities:

  • 27 states reducing health-benefits to low income children
  • 34 states cut college assistance
  • 13 states have announced layoffs 
  • 32 states reduced state workers wages


   Although Obama has been profligate in his first year he has made numerous attempts to cut spending in return for modest tax increases. Obama has proposed to cut spending by $400 billion on health programs and $200 billion from other parts including the democrat's sacred cows such as  federal employee retirement accounts, and unemployment compensation.  In fact, Obama  $3.77 Trillion budget, is expected to cut the annual deficit by more than $200 Billion from $744 Billion to $973 Billion in 2014.

   Still, despite Obama's continuous efforts to move more toward the center, the Republican party has become increasingly intransigent.Obama's original olive leaf to the republicans was an ambitious $1.2 trillion in tax increases over ten years. Realizing the Republicans were not going to budge, Obama moved the chess piece back to $600 billion. Still, many Republicans such as Eric Cantor refuse to concede on raising taxes even though Obama planned to balance the budget over ten years with a mix of spending cuts (80 percent) and tax increases (20 percent.) Under Obama's plan, the deficit would shrink to 1.7 percent of GDP by 2023. 


   It is hard to curtail spending when nearly half of all households receive some form of government assistance compared with 37 percent in 1998. At the same time period the amount of money spent on programs like Social Security increased from close to 40 cents for every tax dollar to 66 cents.  This has led former Republican presidential contender, Newt Gingrich to refer to the U.S. safety net as a spider web. Furthermore, According to the New York Times, for every dollar that is contributed to medicare, the beneficiaries will receive three dollars in return. Indeed, medical benefits are expected to rise by 66 percent in the next decade.

 One proposal suggest by Obama's budget to curtail the growth of Medicaid is to reduce payments to prescription drugs and to minimize fraud and abuse. Another proposal floating around that has upset progressive groups is the implementation of the "Chain CPI" for social security benefits  in exchange for more revenue.  According to the Center on Budget Policy Priorities, CPI would add $230 billion worth of savings.


   Another example, is the sequestration, 85 billion dollars in spending cuts in exchange for allowing the Bush tax cuts to expire. Under this economic policy many government programs, both discretionary ($71 billion) and mandatory ($14 billion), were to receive a 5 percent cut.

  Although 85 billion dollars is not enough to make any significant change, many groups are worried that the cuts will mostly effect people who need the assistance the most. Nearly, a million jobs might be lost due to the sequester. 

 Moreover 775,000 low-income mothers may loose access togovernmental programs such as WIC that provide supplemental nutritional food items. This should be particularly important given the rise in single motherhood over the last decade. According to a New York Times article, more than half of all births in America to women under thirty are out-of-wedlock. More than 66 percent are of all births in America are from women under thirty.  Although, the rate of single mothers has risen sharply in the last decade it only accounts for 29 percent of all white children, 51 percent of Latinos and 73 percent of African Americans.

 One of the items in President Obama's budget that might attract single mothers is expanding preschool. The Center for Budget Policy Priorities notes that Obama plans to allocate $75 billion dollars for states to expand access to preschool for families 200 percent under the poverty level. This program would also help middle income families.

 It will be interesting to see how the demographic shift will influence government spending. 

Source: U.S. Bureau of the Census


 Still, the spending cuts proposed by Obama are mild compared to his GOP counterparts such as Paul Ryan. Under Paul Ryan's "Road to Prosperity" the prince of austerity, would cut the federal budget by 40 percent. Over the course of ten years, Ryan would cut taxes by $4 trillion and reduce spending by $6 trillion.

  Moreover, Ryan's plan is hard to take seriously because he has no intention of cutting the military which, accounts for 20 percent of the federal budget. The Iraq and Afghanistan Wars are prime examples why the government should exercise frugality on military expenditures especially because it is harder to document all the expenses. The lack of accounting transparency has led David Walker, Comptroller General, to testify before Congress on DOD accounting. The interest to finance the wars is estimated to reach $1 trillion by 2017. According to economists Joseph Stiglitz and Linga Bilmes, The Department of Defense spends $500 billion a year with little transparency. Since 1997  DOD has failed the annual financial audit even the DOD"s own Inspector General testified before Homeland Security about the Department's lack of transparency in accounting.

    It is important to note a few things about the Military budget, defense spending is separate  than the spending on war which is done under an appropriations committee. Second, much of the cost are not accrual, which means that the budget does not take into account future costs. This is important because the total cost for caring for veterans of the World War two did not peak until 1993. Furthermore, the wars also have an effect on other parts of the budget such as Social Security and Medicare.In 2007 it was estimated that 45,000 returning veterans will be filing for social security disability claims. Moreover, the cost of treating veterans including medical cost and unemployment insurance may reach $700 Billion. Trying to balance the budget while ignoring military spending is not smart policy.  Of course the Republicans are not the only party reluctant cut the defense budget. With a military budget the size of the next 20 largest militaries in the world, I think Obama can afford to cut more than $100 billion of defense spending  over the next ten years.


  Spending cuts are only part of the solution,  any comprehensive plan is invariably going to include some adjustments to taxes. According to conservative groups like Americans for Tax Reform Obama's new budget is filled with to many tax hikes such as

  • Tax on "carried interest" on investment
  • Tax on private retirement funds such as IRA and 401(Ks)
  • Tax on tobacco products
  • Energy Taxes

 One of the tax  item that have been of particular interest in the media that was identified by the Americans for Tax Reform are the profits earned overseas by American corporations which will add $158 billion in revenues. While the tax bill on corporations is expected to rise, corporate taxes as a percentage of the economy is expected to remain low.

Congressional budget Office

It should also be noted that although corporate taxes have increased so has net profits over the past couple of decades.

U.S. Census 

Still, many conservatives feel that the rich already pay more than their fair share of taxes.

  According to the organization, Center Budget Policy Priorities, Obama's budget would eliminate deductions that are used by the top two percent to lower their total tax bill. This would generate close to $529 billion in new revenue over ten years. Similarly, the new Obama budget wants to tax at least 30 percent of the income of millionaires. Moreover, the budget would like to restore the 2009 estate tax, which taxes the first $3.5 million estate for individuals.

Moreover, the United States still pays considerably less in taxes than other western industrialized countries.


   The government needs to take some action to curtail the rise of the national debt. Although the deficit is expected to drop to $845 billion next year, however,  if no intervention is taken by the government, then the deficit will increase $7 trillion over within the next decade according to the Congressional Budget Office. Furthermore CBO estimates that the national debt will  equal almost 80 percent of GDP by 2023. 

 The Republicans should respond accordingly through raising taxes it would indicate that they are serious about growing the economy. Likewise, the democrats should realize that balancing the budget, will inevitably lead to serious reforms in spending, especially mandatory spending.   While, Obama's federal budget plan is not an economic panacea it's a noble start.