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Saturday, April 9, 2011

BUDGET CUTS, POLITICS AND REALITY

At the "witching hour" on Friday night, the "Great Government Shutdown" bogeyman was put to rest. After weeks of rhetorical excess and personal hostility, the leaders of the Republican controlled House of Representatives and the Democrat controlled Senate, came to an agreement with President Obama to create a budget for the remainder of the 2011 fiscal year, which is just six months since the federal government's fiscal year runs from October to October. While this "accomplishment" was undoubtedly a big relief to the government’s 2.15 million employees, in the grand scheme of things just how big a deal was it?

In politics, everything is relative but in substance, the negotiated budget which represents a 38.5 billion dollar cut from 2010 levels of spending, is only 2.75% of the predicted 1.4 trillion dollar spending deficit for fiscal 2011 and a miniscule 2.7 tenths of one percent of the rapidly growing 14.26 trillion dollar federal debt.

Politically however, the budget compromise is more significant. It is 78.5 billion dollars less than President Obama's proposed 2011 budget which was 40 billion dollars higher than 2010 levels but fortunately, never passed by the Congress. This is because Obama was never committed to actually reducing federal expenditures. His fiscal "plan" was to "reduce the rate of growth" of federal spending which has been in deficit territory for many years. Although Obama and the Democrat's resistance to these and larger cuts proposed by the Republican House leadership produced the last minute negotiating marathon, they are now trying to make the most of an ideological and legislative defeat by sounding like supporters of the fiscal responsibility that they have so long opposed.

On Saturday morning, Obama proclaimed that the budget compromise was "good news for the American people" and "the biggest annual spending cut in history". Democrat Senate Majority Leader Harry Reid expressed his appreciation to Republican Speaker of the House John Boehner for his efforts in reaching a deal.  Not all Democrats are happy with the result. Robert Reich, Secretary of Labor in the Clinton Administration and now professor of economics at the University of California Berkeley claims that the government was held "hostage" by the Republicans and Obama "gave away too much in the bargaining."
Democrat politicians will try to further gloss over the result by citing their negotiating "victories" which include the omission of proposed Republican cuts to federal support of Planned Parenthood and cuts to the Environmental Protection Agency as well as defunding of the Public Broadcasting System (PBS) and National Public Radio (NPR), all of which are favorite targets of social conservatives.

 Much was made of the proposed transfer of funds from Planned Parenthood funding to block grants to the states to spend as they wished. Harry Reid, kept talking about the attack on “womens health” but the real issue with Planned Parenthood was abortion. Although federal funds currently cannot be spent for abortion services, the reputation of Planned Parenthood as the nation’s preeminent abortion provider makes them a perennial target for conservative abortion foes. But Speaker Boehner was able to use these items, which represented relatively small federal expenditures but are symbolically important to the Democrat Left, as bargaining chips to achieve overall spending reductions important to the Republicans in the Congress. Public opinion made this a safe tactic. In a recent New York Times/CBS News poll, when asked to “name the most important problem facing the country”, the economy came out on top and less than 1% of respondents cited abortion. In another poll last December, only 20% of respondents said abortion should not be permitted. Thus 38.5 billion of the Republican’s starting negotiating position of 60 billion dollars in cuts was achieved, an impressive 64%.

In truth, the negotiating process was probably driven by current political realities, in which a nation wide, and indeed international, shut down of government services would have incited the wrath of the American people against the President, who is suppose to lead us through these crises, and both political parties. Currently President Obama’s job approval stands at 46.8% with 47.3% disapproving (RCP Average). The Congress is held in even less repute. It’s current approval rating is a miserable 23.2% with 70.4% disapproving. A general poll question about the “direction of the country” finds that 64% believe the nation is heading in the wrong direction. The inability of the leaders of the government to pass an annual budget  thus bringing government operations to a halt would have been like the ladies of the Middle East trading their burquas in for bikinis and just hoping for the best. No one in the Congress would have been safe. The nation was split on who to blame if a shut down occurred, with 37% saying the Republicans and 37% saying Democrats and 15% saying “both”.

This negotiation sets the stage for two major political fights of even more importance which will come up soon. The debate over raising the legal national debt limit will probably come first. The debt limit is currently 14.3 trillion dollars and represents the amount of government securities sold by the Treasury to finance the accumulated annual federal deficits. Most of this debt is held by domestic institutions but large portions are held by foreign countries, notably China ($1.154 trillion) and Japan ($885.9 billion) as well as the United Kingdom and various oil exporting countries. The securities are attractive to investors and foreign countries in spite of historically low yields because of their supposed complete safety. A failure to raise the legal debt limit will make future sales highly problematic because of the implied risk of default. It would also make interest payments on currently held securities suspect. Such an outcome is unthinkable for the world’s largest economy. Dedicated fiscal hawks, mostly identified with the Tea Party movement, however will use the budget victories just passed as an incentive to again hold raising the debt limit “hostage” to more dramatic spending cuts. The stakes will be considerably higher however.

Then there are the upcoming negotiations for the 2012 federal budget which is supposed to be complete before October 1, 2011. It is the President’s responsibility to produce a budget and send it to Congress. However, the Republicans in the House have already produced a pro forma budget which will reduce federal spending by 5-6 trillion dollars over the next decade. This proposal is already under attack by Democrats who fall back on their usual tactic of identifying all spending cuts as mean spirited attacks on the “poor”, the “elderly”, “innocent children” and “minorities”. Cuts of this magnitude will inevitably impact some or all of these groups but the simple truth is that there are few government programs for the middle class or the “rich” so any effort to substantially reduce out of control federal spending must include these programs.

Hopefully, the final product will achieve some balance by reducing or eliminating spending in agricultural supports, wasteful bureaucracies and the defense budget. An effort at tax reform with a goal of increasing revenue and fairness by eliminating loopholes and deductions would offset some of the pain of large cuts but that isn’t on the legislative agenda so the coming battle will be enormous. All of this will be carried out in the context of the 2012 presidential and congressional elections. How each party reads the electoral tea leaves will guide their positions. It should be interesting.


ADDENDUM:

Facing their own budget cuts and resulting loss of important learning programs in their school district
 in Colorado Springs, a group of ambitious 4th, 5th and 6th graders have created a web site to ask for help.   Hoping to emulate the web based fund raising success of President Obama and his nemesis Sarah Palin, the students are asking for small donations from large numbers of people. Visit their website: "http://www.dollars-4-scholars.com" to get a glimpse of tomorrow's leaders and if so inclined make an on-line donation of one dollar of more.

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