Obama's Budgetary Window Dressing

In response to a federal budget deficit spiraling to heights not reached since WW II, the administration is starting to turn its attention toward America's fiscal position. In tonight's State of the Union address, President Obama will likely refer to a new proposal to freeze parts of the budget over the next few years. What is the upshot of this proposal?

Spitting into a hurricane
The areas that are targeted for a freeze fall under non-defense-related spending (not to worry, Boeing (NYSE: BA  ) , Lockheed Martin (NYSE: LMT  ) , United Technologies (NYSE: UTX  ) , and General Dynamics (NYSE: GD  ) ); unfortunately, they only represent about one-eighth of aggregate spending.

This move is purely symbolic in terms of its impact on the budget deficit. The only comfort it provides is as evidence that the administration is somehow aware of the problem. The greatest threat to the government's long-term fiscal position is entitlement costs, specifically, those linked to Medicare/Medicaid. The Congressional Budget Office expects that, under current law, spending on both of these programs will continue to grow faster than the economy through 2020, potentially reaching 10% of GDP by 2035 -- that is clearly unsustainable.

A warning from the East
Obama has repeatedly promised that there would be no increase in taxes on the middle class, all the while trying to expand access to health care (in a manner that is supposed to be deficit-neutral!). Economics can be subordinated to politics for a long time -- but not eternally. The White House should look East for an illustration of the consequences of fiscal incontinence: Greek bond yield spreads reached a euro-era high this week, as reports surfaced that Goldman Sachs (NYSE: GS  ) is struggling to persuade the Chinese government to buy up to 25 billion euros of Greek government bonds.

The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.

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You can follow Fool contributor Alex Dumortier, CFA, on Twitter; he has no beneficial interest in any of the companies mentioned in this article. General Dynamics is a Motley Fool Inside Value pick. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (15)

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  • Report this Comment On January 27, 2010, at 5:10 PM, langco1 wrote:

    obama's address would be a good time for him to resign...

  • Report this Comment On January 27, 2010, at 5:14 PM, Danley2011 wrote:

    and let joe biden take over? HA

  • Report this Comment On January 27, 2010, at 5:14 PM, rqtballnut6870 wrote:

    Great comment langco1

  • Report this Comment On January 27, 2010, at 5:27 PM, BMFPitt wrote:

    Window dressing is giving it too much credit. More like a brightly painted garden gnome.

    Seriously, what was the last SOTU where the President didn't promise that a few years from then, we'd totally get spending under control? How many of us were even alive at that point?

  • Report this Comment On January 27, 2010, at 6:14 PM, TMFDiogenes wrote:

    "The greatest threat to the government's long-term fiscal position is entitlement costs, specifically, those linked to Medicare/Medicaid. The Congressional Budget Office expects that, under current law, spending on both of these programs will continue to grow faster than the economy through 2020, potentially reaching 10% of GDP by 2035 -- that is clearly unsustainable."

    ...

    "Obama has repeatedly promised that there would be no increase in taxes on the middle class, all the while trying to expand access to health care (in a manner that is supposed to be deficit-neutral!)."

    That's the point of health care reform -- to reduce rising health care costs. The same CBO you cite for rising health costs also concluded the proposed reform would save the government $104 billion over 10 years.

    http://thehill.com/images/stories/whitepapers/pdf/hr3962rang...

    Why is the CBO a reliable source for estimating rising Medicare/Medicaid costs, but we're supposed to be incredulous about their estimates for how much money health care reform would trim from the deficit?

  • Report this Comment On January 27, 2010, at 6:28 PM, TMFDiogenes wrote:

    "The greatest threat to the government's long-term fiscal position is entitlement costs, specifically, those linked to Medicare/Medicaid. The Congressional Budget Office expects that, under current law, spending on both of these programs will continue to grow faster than the economy through 2020, potentially reaching 10% of GDP by 2035 -- that is clearly unsustainable."

    ...

    "Obama has repeatedly promised that there would be no increase in taxes on the middle class, all the while trying to expand access to health care (in a manner that is supposed to be deficit-neutral!)."

    That's the point of health care reform -- to reduce rising health care costs. The same CBO you cite for rising health costs also concluded the proposed reform would save the government $104 billion over 10 years.

    http://thehill.com/images/stories/whitepapers/pdf/hr3962rang...

    Why is the CBO a reliable source for estimating rising Medicare/Medicaid costs, but we're supposed to be incredulous about their estimates for how much money health care reform would trim from the deficit?

    The new proposal is indeed window-dressing, but part of the reason why Obama needs window dressing is because pundits continue to attack a health care plan that actually would reduce the deficit significantly as "out-of-control spending." I don't agree with everything he's done, but in this case it's really damned if you do, damned if you don't.

  • Report this Comment On January 27, 2010, at 8:02 PM, TMFAleph1 wrote:

    Ilan,

    The CBO analysis that you link to suggests that the health care care proposal in question does not provide any substantial reduction in health care costs over the *long-term*:

    "In the decade after 2019, the gross cost of the coverage expansions would probably exceed 1 percent of gross domestic product (GDP), but the added revenues and cost savings would probably be greater. Consequently, CBO expects that the legislation would slightly reduce federal budget deficits in that decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates, and the effects of the bill could fall outside of that range."

    Best,

    Alex D

  • Report this Comment On January 27, 2010, at 9:30 PM, xetn wrote:

    What a joke, to think that a few price freezes will do any good. Usually, you get the opposite result from that which is expected.

  • Report this Comment On January 27, 2010, at 9:40 PM, eddietheinvestor wrote:

    The CBO numbers are irrelevant because the data is partisan. The CBO simply runs the numbers that the Obama administration gives them on health care. If the numbers given to the CBO are skewed and biased for partisan reasons, the CBO results must inevitably also be skewed and biased.

    Also, a spending freeze by Obama is quite misleading. In 2009, Obama greatly increased the amount of spending on various parts of the budget. For instance, the amount of money spent on the EPA rose by more than 30% from 2008. Therefore, if Obama has a spending freeze, it will mean that the EPA will get no more than 30% more than it did in 2008. In other words, Obama is freezing the budget at 2009 spending, which is greatly higher than in 2008. So a spending freeze still means that Obama will spend a lot more money every year than was spend in 2008.

  • Report this Comment On January 27, 2010, at 11:54 PM, sisock wrote:

    I really enjoyed the article; however, House Speaker just recently threw her weight behind halting defense contract expenditures, according to Reuters. I just wonder if her proposal will gather support....

  • Report this Comment On January 27, 2010, at 11:55 PM, sisock wrote:

    I really enjoyed the article; however, House Speaker just recently threw her weight behind halting defense contract expenditures, according to Reuters. I just wonder if her proposal will gather support....

  • Report this Comment On January 28, 2010, at 11:09 AM, MotleyPicker wrote:

    Make it illegal to sue for medical malpractice.

    This will reduce the cost of medical care to levels we haven't seen in 5 decades. If a gynocologist or plastic surgeon pays $1M~$1.5M per year for malpractice insurance, and most of his patients are on government medical, guess who really pays the cost?

    Taxpayers!

    If you're paying for Blue Cross, guess where most of that premium really goes?

    Insurance companies!

    Our current system is designed to funnel our tax dollars to insurance companies. Just cut them out of the loop, and we will make huge strides to right the economy, reduce medical insurance costs to where government health care is virtually unnecessary, and restore it to where the part that is necessary can me performed at reasonable cost.

    All we have to give up is this: When you go to a doctor or a hospital, you get to choose which one you go to, but in return you must give up the right to sue them.

    Incompetant doctors and hospitals must be dealt with in another manner. Not one where we pay out billions to cover their butts with lavish insurance at public expense.

    Once you dump the malpractice issue, administration and legal costs for the medical industry will drop like a stone.

  • Report this Comment On January 28, 2010, at 1:11 PM, vegastar wrote:

    As the person MotleyPicker wrote "Once you dump the malpractice issue, administration and legal costs for the medical industry will drop like a stone.". I have researched the issue on the Internet finding in general that fewer than 5% of malparctice cases go to court. I did not find exact dollar amounts or total dollars versus cases settled out of court or cases dropped and the cases that went to court. So I will refrain from stating dollar figures. Malpractice insurance does NOT appear to be an enormous amount of money that would be saved.

    "Once you dump the malpractice issue, administration and legal costs for the medical industry will drop like a stone." what will an individual use to recoup the loss of a "mistake when the correct procedures are not follwed". Your position seems to benefit only the only the medical industry.

    Lastly a statment about "Obama's Budgetary Window Dressing". A person once told me that " there are more horse's buts in this world than there are horses".

  • Report this Comment On January 28, 2010, at 3:00 PM, TMFDiogenes wrote:

    Right. Given our insanely inefficient health care system ( http://baselinescenario.com/2010/01/13/united-states-health-... ), it should be possible to create a bill that would slow down the rising costs of health care much more significantly than this one does. My biggest concern with the proposed reform is that it will not do enough to slow rising health costs.

    But saving $100 billion over 10 years and maybe 0-.25% GDP afterward is a lot different from insinuating that the plan wouldn't be deficit neutral: "Obama has repeatedly promised that there would be no increase in taxes on the middle class, all the while trying to expand access to health care (in a manner that is supposed to be deficit-neutral!)."

    Maybe I misread "supposed to be" for incredulity. It could be that you're simply using the phrase to mean something more like "plans on being" than how I took it.

  • Report this Comment On January 28, 2010, at 5:21 PM, sgotte wrote:

    Reading the comments leaves me with the impression that Obama is responsible for the entire deficit. So was the war in Iraq free? Did Iraq pay for the whole 2 trillion. Did the new Bush Medicare entitlement of 2005 pay for itself. Was anything that last shmuck in the White House enacted offset by spending cuts? Anything? Anything? Please....

  • Report this Comment On February 01, 2010, at 9:58 PM, georcole wrote:

    @sgotte,

    I will not defend Bush. I will also not defend Obama. The main job of the government is not to spend as much money as they can print. The government needs to get out of everybody's life and just take care of the basics. As unpopular as my ideas are, I think that there is a lot of merit to them. We need to do away with pretty much every entitlement program out there. Yes, that means eliminate Social Security, Medicare, Welfare and all of those types of programs. How to do it is the hard part which I do not have a very great answer to. Due to the fact that most people are not financially able to care for themselves, mostly because they were relying on entitlement programs for their retirement, if we just up and cancel those programs we would have a lot of new homeless people. If we were to continue to pay for only those who started collecting their money by a certain date, those of us who would still be supporting the people who would still be collecting would absolutely cry foul.

    Did you know that in January 1835 the government was actually debt free and gave the surplus to the states to use so they could try to pay off their debts?

    I have yet to give the government my permission to use my money to pay for a bunch of people who refuse to take care of themselves and their families; they instead try to get everything they can from the government. Since my only option is to pay my taxes, so the government can waste my money, or go to jail, I continue to pay my taxes and continue to do better than the wasteful people living off the system. I know that the government needs some money to operate, I just know that they do not need anywhere near as much as they take from us hardworking, taxpaying citizens who know the value of money and understand that we as individuals need to care for ourselves.

    The spending freeze is nothing more than the window dressing that Alex says it is. I don't even think it is that much.

    I have grown long winded, as I tend to at times, and will stop now and go to bed.

    George

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