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When you read stories about a proposal in Congress to ‘cut’ trillions in Federal spending, you are justified in being a bit skeptical because the cuts never seem to actually happen. In all of the proposals I have seen, the cuts take place far in the future. If Congress really wanted to cut spending, it would do so now, not 10 years in the future.
Warren Buffett recently made this point:
I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.
Unfortunately, many Americans are falling for news reports that tell of budget slashing or Draconian cuts or whatever. Of course, the cuts are always going to come next Tuesday or next year or in 10 years, just never today. And, any cuts that are actually put in place are not cuts at all as a real human being would view them. Rather, they are cuts in the rate of spending growth. That is, Congress wanted a 10% increase, but only got a 5% increase, so that’s a cut.
The Gang of Six & mythical spending cuts
Consider the proposal from the bipartisan ‘Gang of Six’ group of Republican and Democratic Senators, which aims to cut the deficit by $3.7 trillion over 10 years. How much of those trillions in cuts actually would occur in 2012? Answer: almost none. If you actually drill down into the language of the cuts put forth by the so-called Gang of Six, you find a lot of vagueness and absolutely no specificity as set forth in this piece [emphasis added].
…Though it's being billed as a $3.7 trillion deficit-reduction package, based on the limited details we have, it looks like it defers the actual tough decisions to a later date.
The spending cuts of $2.7 trillion are supposed to come over 10 years. Right. Isn’t that convenient. Defer those tricky cuts to a later Congress. How brave. As though this Congress can direct what Congress is going to do 10 years in the future. Consider the ‘immediate deficit savings’ or spending cuts of $500 billion in the Gang of Six proposal. Well…..immediate has a different meaning in Washington DC than it does at my house. The Examiner piece continues:
The plan claims just $500 billion in "immediate deficit savings," but even these don't seem all that immediate. Here's what's included as "immediate":
– Statutory spending caps through 2015. But that still leaves the actual cuts to be determined.
– "(N)umerous budget process reforms." Again, that's not an actual cut.
– "Shift to the chained-CPI (a more accurate measure of inflation) government-wide starting in 2012, along with the following specifications for Social Security: (1) exempt SSI from the shift for five years, and then phase in the shift over the next five years; and (2) provide a minimum benefit equal to 125% of the poverty line for five years."
…– "Require GAO and the Department of Labor to report to Congress on establishing a more effective unemployment insurance trigger." Okay, so this requires other parts of the government to issue a report. How does that represent "immediate" deficit cuts?
As I noted, these are only the reforms that make up the theoretical $500 billion in "immediate" cuts.
The rest of the cuts are even more tenuous…
In other words, Congress could not cut its way out of a paper bag. It’s just not in the Congressional DNA. Don’t buy the rhetoric because that is all it is…political posturing and tired Congressional rhetoric. And, if you hear a politician recommending yet another commission on spending, just grab your wallet because he or she is just looking in the mirror and blowing smoke.
Kurt Brouwer is a fee-only financial advisor with three decades of experience. He is the chairman and co-founder of Brouwer & Janachowski, LLC. Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics. E-mail: kurt.brouwer *at* gmail.com.
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