Saturday, September 27, 2008

I'm No Economist But I Can Do Arithmetic

During the first Presidential debate last night, Jim Lehrer challenged each candidate about what he would do to take account of the new fiscal reality likely to result from the bailout (or whatever action is taken). Sen. Obama said he would invest in vital infrastructure and look to cut unnecessary programs, singling out private insurance for Medicare; he also suggested he would delay some of his other proposals, presumably including health care; and he said he would seek an expeditious reduction in our spending on Iraq. Sen. McCain said he would consider an across-the-board spending freeze on non-military, non-veterans, non-entitlement programs.

How much would such a freeze (described post-debate by a McCain campaign spinner as a "bold" answer) save? Well, according to the government figures, in 2006, total discretionary spending was $843 billion. Of that, $411 billion was spent on defense, and another $33 billion on veterans. So, the category of spending McCain singled out totaled $399 billion. In 2007, non-military, non-veterans, non-entitlement spending totaled $389 billion. The source cited only has requests for 2008, rather than actual allocations, but that number is $410 billion. So, without a freeze, from 2006 to 2007, this category of federal spending actually declined, but let's give McCain the benefit of the doubt and assume that without a freeze this time, we would see the growth equal to what we see between the actual 2007 number and the President's 2008 request. That would be an increase of $21 billion.

In other words, the "bold" McCain plan to offset the $700 billion bailout would be to reduce federal spending by at most about $21 billion. But of course it's not even that much, because if we use the President's numbers, military and veterans' spending increases from FY 2007 to FY 2008 by $58 billion. So, before we even take into account the annual growth in entitlements spending, McCain's "freeze" would actually leave the government $37 billion further in the hole. To be sure, he could seek less in military spending than Bush has, but over the course of the Afghanistan and Iraq wars, the President and Congress have tended to budget too little money for ongoing operations, requiring periodic supplemental spending bills.

The most optimistic scenario for McCain would seem to be something like modest growth or even no growth in defense spending, coupled with modest growth in entitlements. According to HHS, federal entitlement spending rose from $561 billion in 2006 to $631 billion in 2007 to a projected $671 billion in FY 2008. So let's be extremely generous to McCain and assume that entitlement spending only grows by $40 billion. That still more than wipes out the savings from his across-the-board freeze, even assuming flat military and veterans' spending.

Bottom Line: Obama was correct when, in the debate, he said that McCain's approach would use a cleaver instead of a scalpel, but the much bigger problem with McCain's freeze is that McCain's cleaver is orders of magnitude too small to do the job.

Posted by Mike Dorf