Shrinking the Budget May Not Be As Easy As Trump Thinks

Real Clear Markets ^ | November 21, 2016 | Jeffrey Dorfman

[expat_panama]

For believers in small government, there is a ray of hope on the horizon. We have a (nominally) Republican president-elect who loves to point out how he is not beholden to the usual special interests and Republican majorities in both the House and Senate. If federal spending is ever going to be reined in, now would appear to be the time. Federal spending for the 2016 fiscal year ran about $3.95 trillion, a record high. Without any spending cuts, federal spending is projected at $4.15 trillion for the current fiscal year which started on October 1 and runs through September 30, 2017, breaking the $4 trillion barrier for the first time. It seems like cutting spending would be easy, but the reality might be quite different.

At a quick glance, spending cuts look like they can be found everywhere. For an easy comparison, I took the federal fiscal year 2001 budget, President Clinton's last budget, then adjusted it for inflation and population growth. The idea is that Democrats cannot complain as strenuously about budget cuts if the remaining federal spending is still as high as it was under President Clinton. In fact, adjusting for both inflation and population growth is quite generous toward the big spenders because many departments' spending has nothing to do with the population in the U.S. (think Departments of Defense and State, for example).

This exercise provides a possible budget cut of $1.09 trillion, based on 2016 spending of $3.95 trillion and the adjusted 2001 figure of only $2.86 trillion. Federal spending that has risen over $1 trillion more than needed to keep up with inflation and population growth in just fifteen years makes it look like budget cuts can be found everywhere. Republicans should be able to make huge cuts in spending without breaking a sweat, right?

Unfortunately, as soon as you look at the cuts, problems start. Because the population is aging, $284 billion of the spending increase is in Social Security benefits which President-elect Trump has vowed not to cut. Veteran's Affairs is another $109 billion of the "excess" spending growth, not an area Republicans are likely to want to cut. Just these two agencies have shrunk the easy money from $1.09 trillion to $702 billion.

The Department of Health and Human Services is responsible for $457 billion of the spending growth above inflation and population growth. Some of that is for Obamacare subsidies, but a lot is for Medicare and Medicaid spending. Even if Republicans repeal and replace Obamacare, it is unclear how much money will be saved under the replacement and when those savings might arrive. A safe bet is that little of the savings will occur this year or next, but will more likely be realized in later years, after the replacement plan is phased in.

If we take spending on healthcare out for now, we are down to $245 billion. That is certainly not a trillion dollars, but it's not small change either. If President-elect Trump and Congressional Republicans cut spending by $245 billion, representing about a 6 percent cut in federal spending, most small government advocates and fiscal conservatives would consider that a huge victory and an excellent start. It would even cut the deficit by about one-third.

However, the caveat to that is that of the remaining $245 billion in spending that has grown above inflation and population growth, $131 billion is in military spending. If one believes that President-elect Trump and Republicans in Congress want to cut defense spending by over $100 billion, then we have hope for a more frugal federal government. If not, then they are left looking through the remaining agencies for small cuts that might reduce spending by around $100 billion.

Even a cut in federal spending of that size would be good for the economy and a great sign that Republicans are going to follow through on their promises to reform and shrink government. Lowering federal spending by three percent, which translates to about $125 billion, hasn't happened in the over 50 years of data I examined. The closest we came was in 2013 when the federal government spent a little more than two percent less than in 2012, mostly accomplished with cuts in defense spending and a drop in unemployment benefits after the recession (yes, the sequester worked).

This column is not to suggest that federal spending should not be cut (it should) or cannot be cut (it certainly can be and I, for one, would support cuts to well below the adjusted 2001 levels). The point is that given expected Republican priorities and the Democrats' commitment to fight cuts in domestic social programs tooth and nail, budget cuts may be harder to come by than they think. There doesn't really appear to be a simple place to go to cut federal spending. President-elect Trump and the Republican Congress will need to get down in the weeds and make some tough choices. They should, and I hope that they do, but they better be prepared, because it won't be easy.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch.

[expat_panama]

OK, now that we won the election and we can chuck the party slogans and get back to work.  Those of us who earn a living having to decide what's going to be happening w/ the economy need to look at what we got.  Fed spending thru Oct. '18 will be the highest ever -just like last year.  

Nobody knows for sure whether Trump's FY19 budg. will continue the annual increase   What we do know is that so far we got the ten % annual increase for base line budgeting and no clear promises for cutting anything near that much:

Someone tell me what I'm missing but what even though I'm seeing is a lot of changes for the better, puttingthe fed budget in order won't happen until free Americans are allowed to create enough wealth to make it worth their effort.

[refermech]

A journey of a thousand miles starts with a single step. Trump will take that step and more.

[Libloather]

No need to pay for the 16,000 freshly hired Husseincare IRS ‘enforcers’. It’s a start...

[DungeonMaster]

I just predicted for my kids that Trump will cut the deficit 10 trillion dollars in 8 years.

[hoosiermama]

Some will learn the meaning of budget !

[stanne]

I am sure Trjmp knows what is easy and what isn’t. I dont believe he called any of it easy. He HAS said that te would make things happen; that difficulty does not equal impossible. That’s not the same as saying things are easy.

Truth is going to drive liberals crazy

[trebb]

I’d wager that Trump and his advisers know full well that it will be a complex task - they just won’t be deterred because “it’s sooo hard to do...”.

[bray]

Why does he have to throw the (nominally) in there?

Pray America woke

[RummyChick]

[Steely Tom]

It certainly seemed pretty easy for Obama to expand it.

[silverleaf]

Trump did not enter polititical life to take on what was easy, but what was necessary

I do not think there is a person on the planet who has a better chance at starting the process of recovery and reform

[SoFloFreeper]

Trump will teach them.

[Gen.Blather]

Let’s ask the question; what is it the national government is for? Education? Why is there an education department that has no students. Axe the whole thing. The Rural Electric Board, created to bring electricity to outlying farms, is still in existence and has grown every year. Axe the whole thing. Department of energy, created by President Carter to make us independent of foreign oil, has done nothing for us and has grown every year. Axe the whole thing. Why is government supporting “the arts?” Every year the taxpayers, us deplorables who don’t have time or inclination or money to buy pictures of a bullet up somebody’s butt pay millions for just that every year. Axe the whole thing. EPA? It has grown from something to protect the environment to a multi-billion dollar agenda regulating Democratic love fest. Axe the whole thing and start over.

You give me half an hour with the budget and I’ll find you a pile of cuts.

[Godebert]

Haha.... Classic!

[expat_panama]

Top 'o the morning to all as stocks are at the top of the range.  Ordinarily a sell signal (it has been for most of the past year) but these are not ordinary times.  That's what futures traders seem to think pegging stock indexes up +0.15%

The good news (sort of) is that precious metals stopped falling and gold/silver's now going for $1,216.87/$16.75, and futures see 'em up +0.75%

fwiw:

How Trump Could End the U.S.'s New Feudalism - Joel Kotkin, Daily Beast
'Economic Anxiety' Doesn't Explain Donald Trump - Bryce Covert, TNR
Trump's Turn: GOP Presidents Rule Recessions - Matt Krantz, USA Today
Will Santa Save the Market's 'Trump Rally'? - Mark Hulbert, MarketWatch
How Apple Empowers and Employs the Working Class - Vindu Goel, NYT
JFK vs. Richard Nixon: Gold Vs. NGDP Targeting - Nathan Lewis, Forbes
Trump Should Consider Sen. Cruz for Fed Chair - Editorial, New York Sun
The Dollar Replaces a Broken VIX Index - Brian Kelly, RealClearMarkets
As U.S. Banks Decline, So Shrinks the Fed's Power - John Tamny, Forbes
The Myth of Financial Deregulation - Editorial, Investor's Business Daily
Infrastructure Spending & Its Major Pitfalls - Reuven Brenner, Asia Times

[RummyChick]

George Clooney Talks Donald Trump at Money Monster Cannes Press Conference from May

Suck it up Buttercup
https://www.youtube.com/watch?v=_fQHfRJvjew&feature=youtu.be

[randita]

Entitlements are the killer and they are growing at exponential rates. States are facing this as well and they can’t print money so the reckoning for them will come sooner.

Factor in a Fed rate hike and servicing our debt just added more to our deficit.

Economic growth of 4-5% a year will help stabilize the debt, but as long as entitlement spending continues to rise, it’s only temporary.

[HiTech RedNeck]

Migrating personnel out of the Federal sector and into the private sector will be necessary. Trump does not seem the kind to want to shove someone out on the street with nothing more than a “good luck!”

But this is important, because work in the private sector goes onto the free market. Public sector work, beyond what is unquestionably necessary to stem chaos, doesn’t add any value.

[DoodleDawg]

I just predicted for my kids that Trump will cut the deficit 10 trillion dollars in 8 years.

Are you taking bets?

[FlingWingFlyer]

Stopping Obama’s illegal alien invasion of America could easily shrink the budget big time.