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Time Is Running Out For Truth In Budgeting

If something seems too good to be true, it probably is. So, if your president promises to chop the deficit while increasing spending for job creation and college tuition, all without any tax increases for 98 percent of taxpayers, you might want to look at the numbers a little more closely.

And if the president’s opposition says it can balance the federal budget without tax increases for anybody, history teaches us to be pretty skeptical of that, too.

After unveiling his budget proposals for 2011, President Obama said yesterday, “We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax money of the American people can be treated like Monopoly money.”

But the president is proposing $3.8 trillion in spending, and 42 cents out of each of those dollars represents borrowed money. That's a deficit of $1.6 trillion for the year, which divides out to $133 billion per month. The average monthly deficit for 2011, under Obama’s plan, would be only about $27 billion less than the entire deficit for the year ending Sept. 30, 2007. In four years, the deficit has increased tenfold.

The president's budget would increase the budget gap by $150 billion over the current year’s projected total, despite the fact that when this year’s budget was prepared we had just concluded the worst financial crisis in decades, while the economy today is beginning to recover. That increase in deficit spending makes no economic sense, but it makes plenty of political sense.

The president is asking for $100 billion for economic stimulus and job creation. Much of the money allocated by the previous rounds of stimulus spending has yet to be spent, so putting additional spending further back in the pipeline is not going to create many jobs any time soon. It is also unclear that the president’s proposed subsidies for small companies that hire additional employees or increase pay will have any real effect on unemployment. If companies were going to hire, they would probably do so with or without the subsidies.

The administration itself recognizes this in its projection that even with the president’s proposals, unemployment would stand at 9.8 percent at the end of 2010, barely below today’s 10 percent level.

But Obama and fellow Democrats have concluded that they cannot allow themselves to be portrayed as standing by while Americans struggle with double-digit jobless rates. Apparently $100 billion of deficit spending is the price of seeming to do something useful without actually doing anything.

Obama included some spending cuts in his budget, but they, too, are more about show than effect. The president has called for a three-year freeze on discretionary spending. But, even in the unlikely event that the freeze ever makes its way through Congress, it would do little to resolve this country’s budget woes. The spending Obama proposes to freeze amounts to only one-eighth of the budget. The real problem is the growth of entitlements, mainly Social Security, Medicare and Medicaid, none of which is touched by the proposed freeze.

Instead of working to reduce spending on entitlements, Obama has just spent a year trying to broaden the nation's medical entitlements to include health insurance for everyone. In his budget proposal, he also advocates turning spending on Pell grants for college students into yet another entitlement, exempt from future Congressional efforts to restrict spending.

Democrats can rightly point out that they handed stable budgets to the George W. Bush administration, and that the deficit spiraled out of control while Republicans had control of the White House and Congress. Democrats like to blame tax cuts and the wars in Iraq and Afghanistan for the runaway spending. However, they often forget to mention the unfunded addition of a Medicare prescription drug benefit that they enthusiastically supported as a new entitlement.

When it comes to paying for all these stimulus packages and entitlements, Obama is counting on just 2 percent of the population to shoulder the load. His budget calls for repealing the Bush-era tax cuts on households earning $250,000 or more, while extending the tax cuts for everyone else. Unwilling to break his campaign pledge not to raise taxes on families earning less than $250,000, the president now seeks to impose the entire financial cost of balancing the budget on about 5 million Americans, so he can insulate the remaining 300 million.

Even the president realizes that his approach cannot work. In his own forecasts, Obama acknowledges that his budget will not bring the country’s deficit down to a sustainable level. Economists recommend that a country’s deficit should be no more than 3 percent of its gross domestic product, but, in Obama’s forecasts for the next decade, the deficit never falls below 3.6 percent of GDP. The forecasts anticipate that, by the end of the decade, the deficit as a share of GDP will actually start to rise because of growing demand on entitlement programs.

The president is in a bind. He wants to assure Americans that he will reduce the deficit, but he doesn’t want to break his promises to hold down taxes for those earning less than $250,000.

Another recent president found himself in a similar bind. George H.W. Bush campaigned on a no-new-taxes promise. Yet when deficits threatened to get out of control in the early 1990s, he reversed himself and acceded to modest increases in the Reagan-era tax rates. The move caused a lot of Republicans to turn on him, and probably cost him re-election in 1992. His successor, Bill Clinton, signed another tax increase in 1993, which helped eliminate deficits within a decade, but also helped Republicans seize control of Congress in 1994.

Obama seems to be well aware of his predecessors' fates, and he has no apparent intention of following in their footsteps. So he will bury Americans under a mountain of debt rather than do what it takes to get the problem under control.

Employing one of the oldest tricks in the bureaucratic playbook, the president who rode to office on a promise of changing the way government works will thrust this difficult problem into the laps of an appointed commission. The commission will have no legal authority and no ability to bind Congress to an up-or-down vote. But, while it will not have the power to do much in the way of actually solving the budget problem, it will have the power to take some of the heat off the president.

To make any real progress toward reducing the deficit, politicians will have to get tough, something that neither party has been willing to do. If you want to lose weight, you have to exercise more and eat less. If you want to reduce a fiscal deficit, you have to collect more taxes and spend less money. Until those in Washington recognize this, they will continue to produce deficit reduction plans that are nothing more than a combination of obfuscation and wishful thinking.

These politics of denial threaten to put an end to America's tenure as a superpower within the next few decades. True global strength begins with financial strength, and American financial strength is being dissipated at a frightening rate. Just as Britain's near-bankruptcy after World War II brought an end to that empire, America’s financial weakness will lead to a diminished role in the world. That doesn’t sound so bad, until you take a look at the nasty characters who are eager to take America’s place.

In a democracy, we get the government we deserve. If Obama and fellow Democrats don't want to face the facts, voters can put Republicans in office. Unfortunately, the last time they did that, the Republicans showed no more willingness to limit spending than the Democrats.

The next four federal elections, in 2010, 2012, 2014 and 2016, are crucial. By the end of that time, Medicare will be sucking great gobs of cash from federal coffers, and interest on the accumulated debt will be skyrocketing. If we don't get sound management in place by the time we elect the next president, the battle to save America's finances probably will be irretrievably lost.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.

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