Two hundred and fifty of us sat at tables, listening as a New York City banker explained why we should be optimistic about the economic future, and why we must avoid the coming “fiscal cliff” and its sequestration. He flashed a PowerPoint presentation on the screen so fast that few of us had a chance to absorb what each slide said, let alone what any of them meant.
One slide presented our annual federal budget from 2008 to 2013, which has risen almost $900 billion since 2007. He explained that sequestration requires $1,200 billion in cuts over the next 10 years ($120 billion per year). He then dramatically proposed that it is this 3 percent drop in spending that is the horrendous fiscal cliff we must avoid. I was puzzled. So I asked a few questions.
“Weren’t spending levels in 2008-09 impacted by the stimulus and therefore artificially high?”
He answered, “Yes.”
“And spending levels have not come down since then, right?”
“Right,” he replied.
“Then it appears from your slide that we are just trying to start returning to 2008 spending levels for 2013 in sequestration, isn’t that right?”
“Right,” he said.
“And stimulus funds were supposed to be one-time expenditures and not a new baseline?”
“Yes!” he exclaimed.
Then I asked, “If that is so, then why is this a cliff at all?”
To which I got a gobbledegook answer that basically said, “You must stop asking questions. You obviously do not understand the official, professional, pretentious verbiage from the oracles of Wall Street and Washington D.C.”
In other words, his response made no sense and he pointedly signaled, “GO AWAY!”
That made me wonder, what is this mythical cliff that all the media, politicians, pundits, and beneficiaries of federal government bailouts have been spouting? Yes, tax increases on any part of the public will have a negative effect on the economy. Yes, the automatic spending cuts are draconian in some quarters, and possibly not in the right places, but we are spending greater than $1 trillion more per year than we take in. The numbers are so huge that they almost don’t seem real.
Let’s make this simple. By taking the government’s economic numbers and dividing by $100 million we can simulate a household budget, and here’s what that household financial situation would look like for 2013:
(Estimated debt level in December 2012)
Income $26,000 Spending $37,000 Deficit $(11,000) Debt $170,000
If this were your family’s situation what would you do?
If President Obama’s were your financial adviser he would propose that you cut spending by a whopping $1,000 per year. That plan would take 11 years to get spending in line with income and accumulate an additional $55,000 in debt. Interest payments would increase to greater than 30 percent. I hope that plan sounds as ridiculous to you as it does to me.
If any professional financial adviser put this plan in front of a paying customer he would be laughed out of business. Yet this is what passes for intelligent financial banter inside the D.C. Beltway.