This review of the U.S. President’s FY2011 budget request reflects two underlying concerns: (1) how much of the U.S. taxpayers’ money is being provided for military and diplomatic expenditures in the main theaters of war; and (2) how long can the United States sustain these levels of spending, and at what cost? While these questions are not answered here, some of the key numbers and facts that would go into an answer are provided.

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Perspective

The following environmental factors constrain the degrees of freedom of American decision makers.

Domestic Politics: Two major mileposts lie ahead for Mr. Barack Obama, and the American Establishment that he has been chosen to represent:

• Elections to the 112^th Congress on 2 November 2010 (to be conducted for all 435 seats representing the 50 states in the House of Representatives; plus at least 36 of the 100 seats in the Senate – of which 34 are for 6-year terms; and for 36 of the 50 offices of governors of the states); and
• Presidential elections on 6 November 2012 (some 33 months away).

While the Establishment—described variously as the military-industrial complex, or the constituencies represented by powerful lobbying groups—can work with either political party, now that there are no real differences in the political philosophies of the two, Mr. Obama’s fortunes are linked to the Democratic Party.

The Democrats have already suffered major setbacks—the spectacular loss of the Kennedy seat in Massachusetts, the equally dramatic possible loss of Mr. Obama’s own seat in Illinois, the withdrawal of Senator Bayh of Indiana, upcoming retirements in Colorado, Delaware, Illinois and North Dakota, and the uncertain prospects of Specter, now 80, seeking his sixth term from Pennsylvania—and they appear to be poised for more in the November 2010 congressional and gubernatorial elections (see Gallup poll results below, and earlier post).

Source: Gallup, Accessed Tuesday, February 23, 2010.

Domestic Economy: While the military seeks, famously, to “disrupt, dismantle, and defeat” a variety of real and imagined enemies, the U.S. President’s Council of Economic Advisers, in its February 2010 Report, offers a plan to “rescue, re-balance, and rebuild” an economy that it says is “in Free Fall”. The key problems are:

• The recession: although domestic output rose in the third and fourth quarters of 2009, it fell by 2.5% for the year 2009, after an anemic 0.4% growth in 2008; with the result that real personal income and consumption has fallen for two years in succession; this “average” fall conceals slower growth for the rich, and much sharper declines for the poor.
• Unemployment: Even though output rose in the third and fourth quarters of 2009, unemployment continued to rise, and is estimated at over 10% in December 2009.
• Cost of Living: Fortunately, prices have been stable, but this is likely to end as: (1) China may have signaled an end to its generous funding of the American government (see post); and (2) the Federal Reserve (America’s central bank) raised interest rates from 19 February 2010, signaling the end of a long period of easy monetary policy. Given the low domestic saving rate, the government increasingly will be forced to “print money” to finance its deficit, leading to increased inflation.
• Income distribution: Although it hasn’t received the attention it deserves, not only in the last two years but over the longer term, the rich in America have become richer; and the poor, poorer: “the income share of the top one percent of taxpayers has risen from around eight percent between 1960 and 1980 to over 18 percent in 2007”, while “the share of income accruing to the lower 60 percent of households has fallen from 32.3 percent in 1970 to 26.7 percent in the most recent year for which we have data”—Budget: Analytical Perspectives, p. 455).

The conventional wisdom in the U.S. is that the economic crisis was triggered by a financial crisis—brought about by weak regulatory oversight—that caused production and employment growth to stall, as credit dried up. On assuming office, therefore, while acceding to the military’s demand for more troops and spending, Obama authorized a massive bailout of banks, mortgage lenders, and the automobile industry, and provided tax cuts to small businesses and workers under the American Recovery and Reinvestment Act. “Yet,” as President Obama puts it in his 1 February 2010 Budget Message:

“even after taking these steps, our fiscal situation remains unacceptable. A decade of irresponsible choices has created a fiscal hole that will not be solved [sic.] by a typical Washington budget process that puts partisanship and parochial interests above our shared national interest. That is why, working with the Congress, we will establish a bipartisan fiscal commission charged with identifying additional policies to put our country on a fiscally sustainable path—balancing the Budget, excluding interest payments on the debt, by 2015.” – Barack Obama (Budget Message, 1 February 2010)

Translation: the U.S. government doesn’t have a clue about what more to do—or, alternatively, knows what must be done but is politically helpless—and so, in time-honored bureaucratic tradition, it will appoint a Fiscal Commission to share the blame and shift responsibility for the disaster that lies ahead and can be seen to lie ahead.

Overall Budget:

The long-term trend in government revenues, and expenditures (or “outlays”) is shown in the graph below; the gap between the two being the budget deficit. Up to 2009 the data reflect experience; 2010 numbers are budget proposals; while beyond 2010 they are more hopes than likely outcomes.

While the entire graph is instructive, focusing on the period after 2000 alone provides clear insights into government finances in the Bush presidency—perhaps more accurately called the Cheney Regency after September 2001. The period started with liberal tax cuts for the rich, while holding expenditures steady—but was soon accompanied by rising expenditure on war and occupation. There was an attempt at some fiscal responsibility in the first three years of the second term, but in 2008 and especially in 2009 the gap between revenues and outlays widened to the highest levels in recent history. (In fact, as a ratio of gross domestic product, expenditures have never been higher and revenues never lower, in the last 60 years.) Projections for 2010 (not the actual numbers), and beyond, are just that—projections, that are unlikely to be realized (for a variety of detailed reasons).

In absolute numbers (billions of dollars, rather than ratios to gross domestic product), the key budget numbers are given in the table (Budget FY2011, Table S-1). The FY2010 Estimate, almost certainly, will prove optimistic. The FY2011 Request does not include the impact of any policy measures that the proposed Fiscal Commission might suggest. Even so, it is useful to keep in mind that total government outlays are currently running at around $3,800 billion, yielding a deficit of over $1,500 billion, that is unsustainable without compensatory measures. The war effort should be seen in relation to these numbers.

While the defense establishment, in FY2010, is expected to absorb about a third of total outlays, the war itself is thought to cost about $165 billion (less than 5% of total outlays), plus any supplemental appropriations during the year (CBO, Budget & Economic Outlook, Box 1-1, page 6). Thus America’s ability to wage war is threatened not so much by the financial cost of the war itself but by the burden of its complementary costs, at the margin, in an underlying budget crisis brought about by an unsustainable growth in social entitlements, in relation to the political feasibility of raising the taxes required.

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