Less to Obama's Budget Cuts Than Meets the Eye -- Thank Goodness The latest bout of brinkmanship in Washington, D.C., is over the federal budget. President Barack Obama unveiled his proposed cuts earlier this week with plenty of tough talk about fiscal responsibility, and a parade of high-profile Republicans lined up predictably to say the spending reductions fell short of making a real difference.

Thankfully for American workers and investors, the Republicans have it right.

With presidential elections approaching in 2012, the White House is revving up its PR campaign in a move to portray itself as tough on government spending. The first glimpses of the approach were unveiled during the State of the Union address, when few concrete measures were described, despite plenty of soaring rhetoric.

While taking a tough posture, the proposals outlined this week are similarly fluid.

"President Obama's Fiscal Year 2012 budget epitomizes his shift from a policymaking strategy to a public relations strategy," analysts at political risk consultancy Eurasia Group wrote in a note to clients. "The shift is intended to appeal to independent voters and preserve his current lead going into the 2012 election by taking few risks rather than proposing an ambitious agenda for congressional action."

Savings Based on Unrealistic Assumptions


Despite presidential lip service about belt-tightening, forecasts still put government deficits at $1.6 trillion, or 11% of GDP, "which makes clear that the president's spending-cut proposals do not add up to much in the near-term," the analysts note.

And while the outline over the medium term shows a substantially shrinking deficit, much of that drop is built on unrealistic gimmicks.

It assumes, for example, that the Bush tax cuts for the wealthy will be allowed to expire in 2013 and that war spending will decline sharply based on a troop withdrawal time line that Eurasia Group analysts see as unrealistic.

Several hundreds of billions in reductions are supposedly to be found in initiatives like eliminating tax breaks for oil, gas and coal companies, and capping itemized tax deductions for the wealthy. While such changes are easy to propose, attempts to accomplish all of them have hit roadblocks on Capitol Hill before, the analysts note.

But odd as it seems, investors should welcome this particular version of political maneuvering specifically because it is likely to lead to such small results. Using superficial cuts to provide political cover may be exactly what the economy needs. Major slashing of government spending could cause consumer demand to evaporate at a time when the economy is finally starting to show some self-sustaining momentum.

A Cautionary Tale From Britain

Indeed, the brutal toll that major pullbacks in government spending can take on an economy trying emerge from a recession is on full display across the Atlantic.

British Prime Minister David Cameron initially won plenty of accolades for promising to get the U.K.'s fiscal house in order. But Cameron's grand $128 billion, four-year plan of spending cuts and tax hikes is looking much shakier now. Instead of expanding as economists had forecast, Britain's economy unexpectedly contracted in the last months of 2010, and some now fear a double-dip recession may be in the cards for that nation.

In fairness to Cameron, Britain may have had far less choice about budget-cutting than the U.S. has. The British pound faced massive pressures last year after speculators hammered the euro during the heights of the European debt crisis. By contrast, despite all the hype about the dollar facing an immediate crisis, the greenback remains the world's reserve currency of choice. That gives the U.S. far more latitude than Britain could hope for.

And President Obama's strategy of deflecting more severe budget-cutting pressures through token pullbacks as the economy recovers may be just what's needed.

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slick

How can spending record amounts of our tax dollars EVER balance the budget
it doesnt work that way at my house Obama is spending money like my ex wife

February 16 2011 at 10:35 PM Report abuse rate up rate down Reply
slick

The Pres is preaching fiscal responsibility after turning in a 3.7 trillion
dollar budget!!!!! what a guy he must think we all have a public education

February 16 2011 at 10:18 PM Report abuse rate up rate down Reply
Gumby

Republicans,,, cut down your oil and natural gas and coal and firewood consumption now!!!

February 16 2011 at 5:30 PM Report abuse +1 rate up rate down Reply
lkb419

I only have one thing to say,with the way our government officials are treating the U.S.A. citizens,maybe we should take a lession from the Greek citizens

February 16 2011 at 2:00 PM Report abuse +1 rate up rate down Reply
1 reply to lkb419's comment
pacillivil1

WELL I THINK I'LL CHIME IN HERE. ONE OF THE BIGGEST WASTES IN THE BUDGET IS WASTE. NOW THINK ABOUT IT. AS PRIVATE CITIZENS WE ARE RESPONSIBLE FOR YOU FUTURE. AND WHY IS IT THAT GOVT EMPLOYEES ARE NOT. THEY GET GREAT RETITEMENT PLANS FOR WHAT , PUTTING IN 30 YEARS. I HAVE BEEN WORKING FOR ALMOST 37 YEARS ( STARTED WASHING DISHES WHEN I WAS 14.) HAVE SAVED MY WHOLE LIFE AND HAVE ,MANAGED TO OWN MY OWN BUSINESS FOR 8 YEARS. WHY IS IT THAT THE GOVT CAN OVERSPEND AAND JUST RAPE THE TAXPAYER, BUT IF I OVERSPEND I LOOSE MY ASS. GOVERNMENT ENTITLEMENTS AND FED PAY NEED TO BE PUT INTO THE SAME POOL. IF YOU FOLKS WERE PLAYING BY OUR RULES YOU WOULD BE RAISING HELL. FEDERAL GOVERNMENT STOP SPENDING MY MONEY!!!!!!!!!!!!!!!

February 16 2011 at 1:45 PM Report abuse rate up rate down Reply
1 reply to pacillivil1's comment
Dennis

Wouldn't it be great if Obama read the AOL boards so he could see for himself how dissatified and angry taxpayers are with him? I, for one, feel betrayed by all his campaign promises of change and government transparency, while what he has delivered is just the opposite. He rammed that crappy health care program down our throats even though the vast mjority of Americans didn't want it. To get it passed, he met behind closed doors with the big pharmaceutical companies so they would work with him, God knows what he promised them but it must have been a lot to get their endorsement. Where was the the trust and transparency on that one Mr President???

February 16 2011 at 1:24 PM Report abuse rate up rate down Reply
Pete

Mr Kumar is a real ******* !
We dont need deep reductions???
You gotta be kidding me !
Of course we need deep reductions!
Kumar's a fraud. Economist my ass!!

February 16 2011 at 1:06 PM Report abuse rate up rate down Reply
lakesregionguy

What economics courses did this loon study! What are the brillant left in this Country smokin'. They should all be in jail for child abuse on what they are creating for the future of our children and this Country, if we are so lucky to survive this whole nightmare. These people are sitting around in a big circle, tokin' off the same joint....probably rolled in Iran by some member of the Muslim Brotherhood.

February 16 2011 at 12:49 PM Report abuse +1 rate up rate down Reply
edjotx

I am a retired military man who has always believed the president and tax office executives would and are taking good care of the retired military. Now I have been shot in the rearend again with a tax increase of $32 per month. Thank you so much and what has happend to the statements of Obama that the middle income and lower income citizens will not have their taxes increased. My faith is deteriorating.

February 16 2011 at 12:44 PM Report abuse rate up rate down Reply
1 reply to edjotx's comment
sah5151

I have two sons that are making the military a career. And both of them know how how well off they will be when they retire after 20-30 year. They also know that they will probable start a second career and have another retirement pluss SS when they reach 66 year old. I do not understand why you are worried about $32 a month being taken from you when this was the reduction two year ago from Obamas stimulus plan and now you have to go back to your normal level.

February 16 2011 at 1:23 PM Report abuse rate up rate down Reply
angela20023

The economy does not need deep reductions??? What planet are you on--or better still what are you smoking? The debt is killing the economy. A Freshman student in economics is smart enough to recognize that we are headed into a national debt crisis. With reports like yours, no wonder China and India will pass us up in the future.

February 16 2011 at 12:30 PM Report abuse +2 rate up rate down Reply