James Pethokoukis

Politics and policy from inside Washington

Obama budget cuts only a start

Jun 9, 2010 19:39 UTC

Cutting 5 percent of optional government spending won’t plug America’s fiscal hole. Still, President Barack Obama’s proposal may buy a bit more time with nervous financial markets. It could even kick-start a needed rationalization of government outlays. Every little helps — but Obama needs to go further.

The tweaks that Obama seems to be calling for land well short of the big cost-cuts eventually needed to get the U.S. budget in order. They would affect only discretionary spending unrelated to security, and only starting in 2012. In that year, the projection for such expenses (outside defense and homeland security) is roughly $600 billion. So a 5 percent cut would be $30 billion, or 0.2 percent of GDP. The budget deficit that year is expected to be $915 billion, or 5.8 percent of GDP, according to the Congressional Budget Office. The cuts, in other words, would easily disappear in the overall deficit forecast’s margin of error.

Entitlements are where the real money is. A 5 percent cut in health and pension programs, for instance, would amount to $105 billion. And such “mandatory” spending will increasingly dominate. Currently, this category of spending is half as large again as all discretionary spending. By 2020, that ratio could expand to 120 percent unless Obama’s deficit commission is able fashion a set of entitlement reductions acceptable to Congress.

Then again, even small cuts in wasteful or inefficient discretionary spending are good news. Obama also wants federal agencies to identify their poorly performing programs, an effort to force them to measure and critique performance — and cut expenditure that doesn’t get results.

And Obama has plenty more scope. Defense spending is half of the total discretionary category. Some Republican budget hawks might even applaud well-chosen cuts. And reducing the federal workforce by 25 percent would save $650 billion by 2018, according to simulations run by the Committee for a Responsible Federal Budget. Eliminating earmarks — self-serving pork slipped into spending bills by members of Congress — would save another $160 billion by that year. It would also show the public that Congress takes austerity seriously.

The 5 percent cuts may be at least 50 percent PR. But if they make voters more willing to accept future fiscal pain, they are 100 percent a good start.



Why Meg Whitman can save California

Jun 9, 2010 13:18 UTC

As former Goldman Sachs CEO and ousted New Jersey Governor Jon Corzine can attest, a business background hardly guarantees political success. Though California is no startup website, former eBay boss Meg Whitman, now the GOP’s nominee for governor, might have the right skill-set to tackle the Golden State‚Äôs fiscal challenges.

Not that getting the top job will be a simple click of a mouse. Although Whitman handily beat primary opponent Steve Poizner 64 percent to 27 percent, it took $80 million to do it. And California is a heavily Democratic state. Candidate Barack Obama won by 24 percentage points over John McCain in 2008. And her opponent in November Jerry Brown, is a former governor and canny pol. But Whitman’s billion-dollar fortune and voter unhappiness with Democrats nationwide might be enough to seal the deal.

Then the fun would really start. The state’s $1.8 trillion economy is afflicted by a 12.6 percent unemployment rate — the nation’s third highest — and a budget gap of $19 billion. And California has at least another $60 billion in underfunded public employee pension liabilities (perhaps as much as $500 billion when adjusted for realistic market returns and volatility), helping it earn the lowest credit rating among the nation’s fifty states.

The dire situation would seem to require a chain-saw-wielding turnaround artist capable of slashing spending and smashing unions. But a governor is not an all-powerful CEO, as many execs-turned-politicos have discovered. Instead of making unilateral decisions, governors must persuade legislatures and interest groups, as well as rally public opinion.

It’s a challenge that would not be entirely unfamiliar to Whitman. True, ebay was a growth business for most of her tenure. But growing the online auction firm into an Internet giant required massaging and nurturing a large and disparate community of buyers and sellers. She had to discern the messages of the marketplace and react astutely. As governor, she would need similar capabilities in balancing the needs of differing constituencies, be they voters, teachers unions or municipal bond investors.

Whitman also understands how government can accidentally create an environment hostile to business. The Tax Foundation ranks California as having the third-worst tax climate in the nation, including high sales and capital gains taxes. The candidate says if she was starting eBay today, she might choose Texas over California. If California voters see things the same way as the Whitman campaign come November, they just might “buy it now.”

COMMENT

Socialism is collapsing, and Jerry Brown can help that process along by finishing what he started.. Whitman, like any Republican, will prolong the agony by negotiating with the Legislature, stupidly believing, like Arnold, that you can do business with liberal fascists. Socialism has to completely collapse to allow freedom to emerge from the ashes. Politics will not solve this problem.

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