Just the Facts: A Look At Obama's Budget Proposal

Seemingly thousands of articles have been written over the past few days about President Obama's 2012 budget proposal. Verdicts vary greatly but are invariably opinionated. It's too big. It's not big enough. It cuts too much. It doesn't cut enough.

I looked hard and couldn't find an article that simply lays out where and how much the new budget proposes to spend. Nothing.

Well, here's just that (I also included 2007's numbers to show a pre-recession budget for comparison).                                                                                

Federal Spending (in billions)                                    

Source: Office of Management and Budget.

This is a serious spending jump in just 4-5 years. Given. But keep in mind where the spending increases are coming from.

Break spending into three categories -- mandatory (entitlements, unemployment insurance, interest on the debt), defense, and everything else (nondefense discretionary) -- and here's what you get:

Spending in every category has increased since 2007. But almost all of the total increase has come from either mandatory spending or the sacred cow of defense spending. Within nondefense discretionary spending, the difference between 2007 and Obama's 2012 proposal is $163 billion -- peanuts when dealing with a $1.6 trillion annual deficit.

Leaving aside mandatory and defense spending, Obama's current spending plans aren't drastically different from 2007's.

But therein lies the problem: It's too easy to leave aside mandatory and defense spending.

Mandatory outlays are by far the biggest contributor to the rise in spending -- largely because of increased unemployment benefits coming out of the recession, which taper off automatically as the job market recovers. The other mandatory spending monsters -- Social Security, Medicare, and Medicaid -- are creeping higher by the hundreds of billions of dollars as baby boomers begin retiring. They're a problem now and a nightmare in the years ahead. Even parties determined to slash federal spending habitually throw up their hands and surrender to the surge of entitlements. It's treated like your grandfather's senility: It's just what happens. Don't bother fighting it.

Though Congress is legally obligated to pay mandatory spending obligations like entitlements, this distinction is a copout when punting budget reform. Fed Chairman Ben Bernanke put it best in 2009: "It's only mandatory until Congress says it's not mandatory." If rules are preventing vital change, why not change the rules?

Here's one reason why not: Despite rife disgust with today's federal spending, few voters actually want entitlements cut. Last month, a CBS/New York Times poll found that "two-thirds of Americans choose higher payroll taxes for Medicare and Social Security over reduced benefits in either program." A separate CBS/Vanity Fair poll found that "just 4 percent said they would cut Medicare, and just 3 percent said they would cut Social Security" as the best way to balance the budget. And my personal favorite, from the Tax Policy Center:

Three-quarters of Americans believe that entitlement programs such as Medicare and Social Security "will create major economic problems" over the next 25 years. But two-thirds are opposed to addressing these challenges by reducing benefits, and 56 percent are against raising taxes.

More tellingly, a recent Cornell University poll found that 44% of those on Social Security and 40% of those on Medicare don't even realize they're using government programs -- let alone ones that consume a third of the federal budget.

Some of these survey results seem contradictory, but poll after poll shows a common thread: Very few actually want entitlement spending cut. It turns out people like getting checks in their mailbox, something that affects them directly, more than they like balanced budgets, an abstract concept.

And then there's defense spending. Besides the obvious draw toward defense spending -- it makes us safer (or so the logic goes; someone else can debate that) -- a major obstacle in reining in the Pentagon is how consolidated the defense industry has become. Just five companies -- Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), General Dynamics (NYSE: GD), and Raytheon (NYSE: RTN) -- have defense contracts worth more than $100 billion. As New York Times columnist Joe Nocera recently wrote, "the Pentagon simply can't allow them to get into serious financial difficulty; there are just too few of them."

Furthermore, these five spent more than $60 million lobbying in 2009. The result: when the Pentagon does find the will to cut back, the savings usually find their way back into other defense projects. Exhibit A: Last year, Defense Secretary Robert Gates announced he was gutting $100 billion in waste out of the defense budget, but that almost all of the cuts would be reinvested into "higher priority systems." It's hard to even consider cutting a budget when that's the standard for savings.

In the end, the most honest thing one can say about Obama's spending proposal is not how radical it is -- but how ordinary it is. Today's federal spending is simply following a track it's been on for the past decade. And that's the problem.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.