Tag: inflation

Misinformation from Heritage

The Heritage Foundation has a chart up on its blog, showing defense spending as a percentage of gross domestic product and declaring that “Obama plan cuts defense spending to pre-9/11 levels.”

This is a standard rhetorical device for defense hawks (see the Wall Street Journal editorial page, Mitt Romney and lots of others) so it’s worth pointing out that it’s misleading. The unfortunate truth is that Obama is increasing non-war defense spending this year and seems likely to increase it at least by inflation in the near future.

It’s true that defense spending will probably decline as a percentage of GDP, assuming the economy recovers. But that’s because GDP grows. Ours is more than six times bigger than it was in 1950.  Meanwhile, we spend more on defense in real, inflation adjusted terms, than we did then, at the height of the Cold War. The denoninator has grown faster than the numerator. 

By saying that defense spending needs to grow with GDP to be “level,” you are arguing for an annual increase in defense spending without saying so directly. That’s the point, of course.

To be straight with readers, charts that show defense spending as a percentage of GDP should either show GDP growth over time or include a line that shows defense spending in real terms. Otherwise they fail to demonstrate that the decline in defense spending as a percentage of GDP is a consequence of growing GDP, not lower spending.

Here’s a chart from the Congressional Budget Office’s report, “The Long Term Implications of the Current Defense Plans,” that does this.

The assumption in analysis like Heritage’s is that defense spending should be a function of economic growth, not enemies and strategies for defending against them.  It’s easy to point out that this is strategically and fiscally foolish. And it’s worth noting, as I have on many occasions, that we face a benign threat environment and can cut defense spending massively as a result.

But there is something weirder going on here that warrants mention.  Arguing that wealth creation should drive defense spending is to attempt to divorce the military from its strategic rationale. That’s an implicit acknowledgement that defense spending is not for safety.  High military spending in this worldview is either an end in itself or a partisan or cultural tool.  That’s not much of a revelation, I guess.

Hold the Presses! Public Doesn’t Believe Obama on Deficits!

Shocking, I know.  But while the public likes President Barack Obama personally, they are just a bit more skeptical when it comes to his policies.  Such as deficit reduction. 

Reports the New York Times:

A substantial majority of Americans say President Obama has not developed a strategy to deal with the budget deficit, according to the latest New York Times/CBS News poll, which also found that support for his plans to overhaul health care, rescue the auto industry and close the prison at Guantánamo Bay, Cuba, falls well below his job approval ratings.

This shows that the public is paying attention to what is going on in Washington.  In fact, the president’s policy is debt inflation rather than reduction.  You know – $13 trillion in bail-outs (so far; who knows what new financial disasters await!), nearly $1 trillion in “stimulus” spending, proposed budget deficits of nearly $10 trillion over the next decade, health care “reform” which will run trillions (the only argument is how many) over the same period, and more, much more.

Yes, I’d say that the president has no strategy to deal with the budget deficit, other than to increase it at every opportunity.

The GOP Is Not Serious about Cutting Down Spending

A month ago, President Obama issued a list of proposed spending cuts that I dismissed as “unserious” due to the fact that they were trivial when compared to his proposed spending and debt increases.  Today, the House Republican leadership released a list of proposed spending cuts.

I’d love to say I’m impressed, but I can’t.

Both proposals indicate that neither side of the aisle grasps the severity of the country’s ugly fiscal situation, or at least has the guts to do anything concrete about it.

The GOP proposal claims savings of more than $375 billion over five years, the bulk of which ($317 billion) would come from holding non-defense discretionary spending increases to no more than inflation over the next five years.

First, it should be cut – period.  Second, non-defense discretionary spending only amounts to about 17% of all the money the federal government spends in a year, so singling out this pot of money misses the bigger picture.  At least, defense spending, which is almost entirely discretionary, should be included in any cap.  But it has become an article of faith in the Republican Party that reining in defense spending is tantamount to putting a white flag in the Statue of Liberty’s hand.

The second biggest chunk of savings would come from directing $45 billion in repaid TARP funds to deficit reduction instead of allowing the money to be used for further bailing out.  That’s a sound idea as far it goes, but I can’t help but point out that the signatories to the document, House Republican Leader John Boehner and Minority Whip Eric Cantor, voted for the original $700 billion TARP bailout. Proposing to rescind the Treasury’s power to release the remaining funds, about $300 billion I believe, should have been included.

According to the proposal, the rest of the cuts and savings comes out to around $25 billion over five years.  Like the specific cuts in the president’s proposal, they’re all good cuts.  But the president detailed $17 billion in cuts for one year and I generously called it “measly.”  What am I to call the House Republican leadership specifying $5 billion a year in cuts?

Take for example, proposed cuts to the Department of Housing and Urban Development (HUD), which is likely to spend around $65 billion this year.  Having recently spent a couple months analyzing HUD’s past and present, I can state unequivocally that it’s one of the sorriest bureaucracies the world has ever seen.  Yet, the House Republican leadership comes up with only one proposed elimination: a $300,000 a year program that gives “$25,000 stipends for 12 students completing their doctoral dissertation on issues related to housing and urban development.”  The only other proposed cut to HUD would be $1.7 billion over five years to the Community Development Block Grant (CDBG) program.  This notoriously wasteful program is projected to spend over $8 billion this year alone.  Eliminate it!

The spending cuts the country needs must be substantial, serious, and put forward in the spirit of recognizing that the federal government’s role in our lives must be downsized.  Half-measures are not enough, and from the Republican House leadership, wholly insufficient for winning back the support of limited-government voters who have come to associate the GOP with runaway spending and debt.  For a more substantive guide to cutting federal spending, policymakers should start with Cato’s Handbook chapter on the subject.

Tough Words

In the Wall Street Journal, Mary Anastasia O’Grady got Dallas Fed president Richard Fisher to go on the record about current Fed policy. He talks tough about inflation. “Throughout history, what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen.”

What is lacking is a plan to match the tough words with tough actions. Only when a tough and resolute U.S. president, Ronald Reagan, was matched with a tough and resolute Fed Chairman, Paul Volcker, did the Fed turn into an effective inflation fighter. There is no such match up now in the face of trillion dollar deficits forecast with no end in sight.

Ms. O’Grady describes Fisher as “the lead inflation worrywart” on the Federal Open Market Committee of the Fed. But Fed officials do not act in a political vacuum, and regional Fed presidents cannot on their own stop the Fed’s printing money in the face of the deficits. That requires leadership at the top from both the Fed chairman and the U.S president.

The Administration’s plan appears to be “to print their way out of an unfunded liability.” Thus far, despite tough words from some quarters, the Fed seems ready to accommodate “the political class.”