We can’t cut spending…. and the consequences don’t look good

Posted by Richard Russell - Dow Theory Letters

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“President Obama promises to cut spending in the US. But can he? Read this column out of Forbes by Bruce Bartlett, former Treasury Dept. economist — “Whenever I write about the federal deficit, some nitwit always demands to know why we don’t just cut spending,” says Bruce Bartlett. “Here is the simple, if unsatisfying, answer. We can’t. Nearly two-thirds of spending — 62% is mandatory, entitlements and interest on the debt. The defense budget — which will never be cut substantially, — consumes more than half of what remains, leaving a total of $485 billion for everything else. Given a deficit of $459 billion last year, a balanced budget would require the elimination of virtually every single domestic program, including all social programs, education, highways, border patrols, air traffic control, and the FBI. The only alternative is to reduce mandatory spending on Medicare and Social Security — and good luck with that. The elderly will fight anyone who tries to cut their benefits, even as they hypocritically demand fiscal responsibility. And seniors’ political power will only get stronger, as baby boomers get old. Face it, if the US ever stops running a deficit, it won’t be because Congress made massive cuts in federal spending. The votes aren’t there, and never will be.”

Ed Note: Full article “We can’t cut spending HERE or below this appropriate Alexis de Tocqueville quote:

A Democracy cannot exist as a permanent form of government. It can only last until the citizens discover they can vote themselves largesse out of the public treasury. After that, the majority always votes for the candidate promising the most benefits from the public treasury with the result that the Democracy always collapses over a loose fiscal policy, to be followed by a dictatorship, and then a monarchy. The average age of the world’s greatest civilizations has been 200 years. Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.

We Can’t Cut Spending – by Bruce Bartlett

Every time I write about the need to raise revenues to pay for federal spending, some nitwit always demands to know why we don’t just cut spending. That is not a viable option to deal with our fiscal problem.

The first point that people need to understand is that we live in a democracy. We don’t have a dictator who can just wave his hand and abolish government programs. We have a president who may propose spending cuts, but before they take effect he must get agreement from both the House of Representatives and Senate, both of which may be controlled by a different party. Congress’ efforts to cut spending on its own are futile without prior agreement from the president to support them, as Republicans found out the hard way in 1995.

Direct presidential control over spending is extremely limited. By law, he must spend every dollar appropriated by Congress. And presidents have no control at all over three-fifths of the budget devoted to interest on the debt and entitlement programs–those like Medicare for which spending is automatic. Even Congress can’t reduce spending for entitlements unless it changes the law governing eligibility and programmatic operations. In other words, Congress can’t just appropriate less money to Medicare. It doesn’t work that way.

Even if the president’s party controls Congress by a wide margin–as is the case today–getting agreement even on popular measures, such as expanding health coverage, is very, very difficult, as we are seeing. One reason for this is that the Constitution gives the minority party influence disproportionate to its numbers in the Senate. Thus even though Republicans only have 40 seats, they have been very successful in blocking Obama’s health care reform initiative.

How much more strongly do you suppose 40 Senate Democrats would fight a Republican effort to massively cut spending if party control were reversed? What is the likelihood that every Republican would stand in unity for highly unpopular spending cuts that threaten the health and well being of millions of Americans? Just look at the so-called Blue Dog Democrats who are making life difficult for House Speaker Nancy Pelosi despite having a 78-seat majority. There undoubtedly would be an equally large group of Red Dog Republicans fighting every specific budget cut no matter how small.

If Democrats controlled Congress, as they do now and usually have when there was a Republican president, they could easily ignore a presidential effort to slash spending just as they ignored George W. Bush’s plans to privatize Social Security. At the end of the day, presidents may only propose, Congress must dispose.

Therefore, it is simply stupid and a waste of time to say that massive budget cuts are the answer to our problem without taking account of inevitable congressional resistance. Of course, presidents can try to influence Congress to be more supportive of their requests. They can give speeches to joint sessions of Congress, as Barack Obama recently did, or go over the heads of Congress to the people and try to create grass roots pressure, as Ronald Reagan often did, or they can try to pressure, cajole or threaten individual members of Congress the way Lyndon Johnson did. But at the end of the day, a president has to find at least a majority of congressmen and senators to vote for something or it doesn’t become law.

Devising a package of budget cuts large enough to prevent national bankruptcy must also deal with other realities that make them almost impossible to achieve. These include the changing nature of the federal budget and the changing composition of the population.

Many of those favoring budget cuts have ridiculous notions about how much of the budget can be cut without reducing services. A recent Gallup poll found that Americans generally believe that 50% of the budget is wasted. This suggests that they believe the federal budget could be cut in half without cutting anything important like Social Security benefits or national defense.

Just so people know the round numbers, total spending this year is about $3.6 trillion. At most, $200 billion of that represents stimulus spending, so even if there had been no stimulus bill and the economy had done as well as it has done, we would be looking at a $3.4 trillion budget.

Revenues are only about $2.1 trillion, so we would be looking at a substantial deficit even if the stimulus package was never enacted. Revenues would be even lower if Republicans had gotten their wish and the stimulus consisted entirely of tax cuts. How tax cuts would help people with no wages because they have no jobs or businesses with no profits to tax was never explained. But many right-wingers are convinced that tax cuts are the only appropriate governmental response no matter what the problem is.

Looking at last year’s budget, only 38% was classified as discretionary; that is, under Congress’s control through the appropriations process. All the rest was mandatory: entitlements and interest on the debt. Within the discretionary category, 54% went to national defense. Just $37.5 billion, 3.3% of the discretionary budget, went for international affairs including foreign aid. Over the years I have encountered many conservatives who thought that abolishing foreign aid was just about the only thing needed to balance the budget. Obviously, that’s nonsense.

Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.

This means that it is impossible to get control of spending without cutting entitlement programs. Many Republicans agree, but they never make any serious effort to do so. On the contrary, they defend entitlements when Democrats suggest cutting them. The Republican National Committee has run television ads opposing cuts in Medicare because Obama proposed using such cuts to fund health reform. Many demonstrators at right-wing tea parties were seen carrying signs demanding that the government keep its hands off Medicare.

Last year, we spent $456 billion on Medicare, and it is the fastest growing major government program. How likely is it that the people protesting Obama’s Medicare cuts will stand with Republicans if they propose cutting that program even more to balance the budget? They will switch sides in an instant. The elderly will fight anyone who tries to cut their benefits even as they hypocritically demand fiscal responsibility and rant about the national debt. The elderly are the reason why we have a national debt.

Unfortunately, the ranks of the elderly are rising. In 1980, those over age 65 constituted 11.3% of the population. Today they represent 13%, a figure that will rise to 16% in 2020 with the aging of the baby boomers and increasing longevity, 19.3% in 2030 and 20% in 2040, according to Census Bureau projections.

Furthermore, the elderly are a rising portion of the electorate. Back when Medicare was established, those over 65 constituted 15.8% of voters. Last year, they made up 19.5%. This is due to the rising percentage of elderly in the population and their increasing propensity to vote. In 2008, 72% of those between the ages of 65 and 74 reported voting while only 48.5% of those between the ages of 18 and 24 did.

When I raised these facts with a prominent Republican recently, he countered that Reagan had cut spending. But he didn’t. Spending rose from 21.7% of the gross domestic product in 1980 to 23.5% in 1983 before declining to 21.2% in 1988. And that improvement came about largely because favorable demographics caused entitlement spending to temporarily decline from 11.9% of GDP in 1983 to 10.1% in 1988. (Last year it was 12.5% of GDP.)

When I noted these facts, my friend pointed to British Prime Minister Margaret Thatcher as someone who showed that spending could be slashed. But she raised spending from 42.4% of GDP when she took office in 1979 to 46% of GDP in 1985. Only in her last years in office was spending cut to 38% of GDP. But keep in mind that Thatcher was in office for 10 years, longer than a U.S. president may serve, and had compete control of Parliament the whole time–something Reagan could only dream about.

In short, there is no evidence that it is politically possible to cut spending enough to make more than a trivial difference in our nation’s fiscal problems. The votes aren’t there and never will be. Those who continue to insist otherwise are living in a dream world and deserve no attention from serious people.

Bruce Bartlett is a former Treasury Department economist and the author of Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Bruce Bartlett’s new book is available for pre-order:The New American Economy: The Failure of Reaganomics and a New Way Forward. He writes a weekly column for Forbes.com.