Friday, March 18, 2011

A little perspective, please...

The budget story, as told by the Washington Post.
The Senate approved another stopgap budget bill Thursday that would keep the federal government open until April 8. The measure, which had already passed the House, is expected to be signed by President Obama on Friday.

The bill would cut $6 billion in federal spending. That makes twice this month that lawmakers from both parties have agreed to slash billions from the budget.

$6 billion! Woo, baby, that's a lot of money, right? And it was what, $10 billion1 last time? So we've cut $16 billion out of the budget so far? That's sure a lot of money, all right. They sure are slashing that budget.

Or not.

Let's step back, just a bit, and see what that "slashing" really amounts to. In order to do this, let's consider what the budget is that they are "slashing" from. The OMB estimates are that the Federal government will take in $2,173,700,000,000 ($2.1 Trillion) this year, and that the Federal government will spend $3,818,819,000,000 ($3.8 Trillion). That $16,000,000,000 looked pretty big a minute ago, but maybe not quite so much now. In fact, $16 billion is less than one half of one percent of $3.8 trillion. (Anyone out there think that losing one half of one percent of their income would require "slashing" their budget?)

But that can still be a little hard to conceptualize. So let's put together an example. Let's talk about my friend Sam. My friend Sam has worked hard, but he's spent more than he's taken in. He bought more house than he needed, he bought more car than he needed, and he's run up a lot of debt on his credit card. Last year he made $49,747.53 and spent $79,500.69. Obviously, his debt went up, and, with it, so did his interest expenses. This year, he expects to make $50,000 and spend $87,841.45. Yes, he's going to spend a lot more than he makes. But Sam thinks that everything in his budget is important, from the house and car payments, to the $225 per month cable bill, to the $14 per week that he spends at Starbucks. His financial adviser explained to him that he could not continue spending that way, but he didn't much want to hear it. His financial adviser continued to press him, and finally Sam agreed to slash his budget. Every Sunday, he buys the Sunday New York Times and walks to McDonalds, where he eats a couple of egg McMuffins and drinks coffee while working on the crossword puzzle. He agreed to give up that indulgence, saving a total of $7.08 per week, or $368.04 per year.

So this is what his budget looks like - income, expenses, and expenses after "slashing" his budget.

That $368.04 cut out of proposed spending of $87,841.45 is the same .42% cut that they're "slashing" the federal budget with. Multiply all of those dollar amounts by 43,474,000 and it's no longer my friend Sam's budget - it's my Uncle Sam's budget.

Have they "slashed" the Federal budget? Not by a long shot. Is $16 billion a lot of money? Not in the context of a $3.8 trillion budget. Can we continue to spend this way without a catastrophic economic collapse?

It's hard to see how...

(H/T - I got to the Post article from Dan Mitchell's post, which makes the same point that I made, without using a fictional friend or a colorful chart...)

1 - I'm not sure, and, since it just doesn't matter, I'm not going to look it up, just going to go with it. It's the right order of magnitude and it's all in the noise anyway...That's really the key point here.  Despite the cries about draconian cuts, none of what's been done, none of what's been proposed, even begins to start to approach addressing the problem of addressing how to approach the problem.  We're thousands of dollars in debt and they're crying about pennies.

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