Obama wants domestic spending cuts in next budget

In the November 14, 2009 article "Obama wants domestic spending cuts in next budget" Associated Press writers Tom Raum and Andrew Taylor outline the challenges of managing the current U.S. economy that needs short-term stimulus to fight the recession, but subsequently needs reduced budget deficits to minimize the burdensome effect of public debt on long-term economic growth.

WASHINGTON – The Obama administration, mindful of public anxiety over the government's mushrooming debt, is shifting emphasis from big-spending policies to deficit reduction. Domestic agencies have been told to brace for a spending freeze or cuts of up to 5 percent as part of a midterm election-year push to rein in record budget shortfalls.

Yet with the economy still in distress and unemployment pushing past 10 percent, prospects for making a dent in a trillion-dollar-plus annual deficit seem slight. And since the Pentagon and Department of Veterans Affairs would likely be shielded from such cuts, overtures toward trimming the deficit may hold more symbolic value than substance.

President Barack Obama is expected to make post-recession spending restraint a key theme of his State of the Union address in January and an important element of the budget he submits to Congress a few weeks later. He is under increasing pressure, including from moderate and conservative members of his own party, to show he is serious about tackling a deficit that has become both an economic and political liability.

Not since billionaire Ross Perot made budget-balancing the centerpiece of his 1992 third-party presidential bid has so much public concern been voiced over the gulf between what the government spends and what it takes in.

White House budget director Peter Orszag on Friday told The Associated Press it is imperative to start curbing the flow of red ink. But he called it a balancing act and said acting too fast could undercut what appears to be a fledgling economic recovery.

Orszag has said the spending blueprint, for the budget year that begins Oct. 1, 2010, would put the nation "back on a fiscally sustainable path" and suggested it would include a mix of spending cuts and new revenue-producing measures.

Democratic officials in the White House and on Capitol Hill say options for locking in budget savings include caps on the amount of money Congress gets to distribute each year for agency operating budgets. They spoke on condition of anonymity to frankly discuss internal deliberations.

The White House told agencies to submit spending plans that would, at the very least, freeze their budgets, and to prepare for cuts as high as 5 percent. That edict is but one round in internal administration deliberations on the budget. Cabinet heads are sure to seek exemptions, and Orszag warned that firm budget decisions haven't been made.

The administration also is weighing committing to debt reduction any unspent funds from the $700 billion bank bailout program. However, such a move would be largely a bookkeeping shift and not likely to yield much in the way of deficit reduction.

The new emphasis at the White House on deficit-reduction follows last month's report showing the economy surged at a 3.5 percent annual pace in the July-September quarter after contracting for four consecutive quarters. That suggested the recession is likely over — even though job losses are expected to continue for some time.

Congress will soon vote on legislation to raise the debt ceiling — the limit on how much the government can borrow — above the present $12.1 trillion. On Friday, the nation's overall debt stood at $11.99 trillion. Some fiscally conservative lawmakers have said they would not vote for further increases in the debt ceiling until the administration took deficit-cutting steps.

The national debt is the accumulation of annual budget deficits. The deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in dollar terms at $1.42 trillion.

The flow of red ink has been increased by war spending for Iraq and Afghanistan, recession-fighting stimulus and bank bailout spending and by reduced tax revenues from high unemployment and reduced personal and business income.

Polls show rising public concern over deficits. Exit polls from elections earlier this month showed clear majorities of Virginia and New Jersey voters said they were worried about the direction of the nation's economy. In both states, Republicans won gubernatorial seats that had been held by Democrats.

Republicans are seeking to capitalize on this month's Democratic election setbacks and rising voter concerns over the burst in federal spending. House Minority Leader John Boehner, R-Ohio, said the Democrats' "so-called `war on deficits' comes about a year late and more than a trillion dollars short."

"Spending in Washington has been out of control for years, and instead of changing it as they promised they would, Speaker Nancy Pelosi and President Obama have stepped on the accelerator," Boehner said in a statement.

Pollster Andrew Kohut, director of the Pew Research Center, said increasingly "the percentage of people naming the deficit as a problem is pretty substantial."

"It may be approaching the level of concern we had in the early 1990s when Ross Perot rode that horse for quite some time politically," Kohut said.

Still, politicians have typically avoided politically painful deficit-cutting steps in election years.

Stanley Collender, a budget expert at Qorvis Communications and a former staff aide to House and Senate budget committees, said if the administration could actually accomplish cuts in discretionary spending on the order of 5 percent — a big "if" — it would be a notable step toward bringing down deficits.

Despite today's hard times, putting such measures in play sooner rather than later makes sense since they wouldn't take effect until next Oct. 1, when jobs hopefully will be coming back and the economy humming again, Collender said. "It's sort of like an outfielder trying to catch a fly ball. You try to get to where the ball's going to be rather than where it is at that particular moment."

The deficit-cutting drive comes as Obama traveled to Asia where several nations, especially China, have expressed concerns about the size of U.S. deficits. China is the largest foreign holder of U.S. debt and policymakers worry that alarm over deficits could push foreigners into cutting back on their purchases of Treasury securities.

Contrary to Popular Opinion, Democrats made Government Smaller, Republicans made it Bigger

Click on the table above to enlarge it.

Contrary to its claims and popular perception, the modern Republican Party has been the true practitioner of big government in recent decades. Democrats reduced the relative size of the U.S. federal government in the 1990s and Republicans expanded it in the 2000s. Under President Bill Clinton's leadership, Congress reduced the size of U.S. federal government expenditures from 22.1% of gross domestic product in 1992 to 18.4% of GDP in 2000. Under President George W. Bush, public expenditures increased to 20.5% of GDP in 2008.

Calif. violence shelters closing amid budget cuts

In the September 8, 2009 story "Calif. violence shelters closing amid budget cuts," Associated Press writer Juliet Williams reports that California's restriction of tax revenues is resulting in cuts to government services, such as domestic violence shelters. When people argue for tax cuts, should they also specify which government services they would like to reduce or eliminate?

SACRAMENTO, Calif. – Six domestic violence shelters in California have been forced to close while dozens more are scaling back services after Gov. Arnold Schwarzenegger eliminated all state funding for the program that supports them.

Shelters in the Central Valley town of Madera, the Sierra foothill town of Grass Valley and in Ventura County in Southern California have closed. Others in the San Francisco Bay area, Los Angeles and Bakersfield are on the verge of closing.

Many centers are laying off staff and closing satellite offices that serve remote areas of the state as they cope with the budget cuts. A national domestic violence group describes California's as the deepest cuts to such programs nationwide, even as other states have reduced funding.

In Madera County, officials have turned away six domestic violence victims and eight children since the county's only shelter closed Aug. 7, said Tina Figueroa, the shelter's director. The Martha Diaz Shelter served about 100 victims a year, many of them low-income and with no place else to turn, she said.

"Their only option is the local rescue mission, but they're reluctant to go there because it's a majority of men (who stay there)," Figueroa said. "Also, it's not protected. Anybody could walk in there."

Three families — mothers and their children — who were staying at the secret location also were forced to leave quickly when it was shuttered, she said.

The California Department of Public Health's Domestic Violence Program provided funding to 94 agencies statewide, some of which operate multiple shelters. Most also assist victims with restraining orders, legal aid, child services, money management and other life skills. Nearly all the agencies say they are cutting back on such assistance programs in the wake of the budget cuts.

Schwarzenegger eliminated the program's $20.4 million budget when he used his line-item authority to veto nearly $500 million in the revised budget passed by the Legislature. Lawmakers had voted to maintain the program but cut its budget by 20 percent, to $16.3 million.

"We were appalled by the governor's reckless action, in shock," said Sue Else, president of the National Network to End Domestic Violence.

She said a handful of other states, including Iowa, Illinois and New Jersey, have reduced funding for domestic violence programs this year, "but nothing like the devastating cuts completely eliminating the domestic violence budget in California."

California's program was created 15 years ago to fund local agencies for abuse victims after the high-profile death of Nicole Brown Simpson, O.J. Simpson's former wife. The agencies also rely on grants from foundations, the federal government and private donors.

The state's 2009-10 budget still includes $5 million for other programs related to sexual assault and domestic violence, including prevention programs, crisis hotlines, shelters and funding for law enforcement.

"The governor understands how difficult these cuts are and sees the real Californians and the real consequences behind them, but had no other choice because the Legislature failed to pass a budget that closed the entire deficit," said Rachel Cameron, a spokeswoman for Schwarzenegger.

Advocates, however, say the decision was shortsighted.

According to the state attorney general's office, 113 people died in 2008 in cases related to domestic violence, a number that had dropped from a decade-high of 187 deaths in 2003. In 83 percent of the 2008 deaths, the perpetrator was the victim's husband or boyfriend. In 10 percent, the perpetrator was a wife or girlfriend.

"It's the cheapest form of safety the state can have. It's homicide prevention," said Eve Sheedy, director of domestic violence policy at the Los Angeles city attorney's office. "If you take the cost of arresting, trying, incarcerating someone for a serious physical crime or homicide and you compare that to what these shelters were getting, it's an unbelievable cost benefit."

She said domestic violence reports make up the majority of 911 calls, although many victims never reach out for help from police.

The national network, which conducts an annual survey of domestic-violence programs across the country, reported that 3,872 California victims were served during its 24-hour survey period in September 2008, more than half of them for emergency or temporary housing.

Nearly 700 were denied services, often because of short-staffing. About 310 were denied access to temporary shelter because none was available, according to the Washington, D.C.-based group.

A bill by state Sen. Leland Yee, D-San Francisco, would restore $16.3 million for the program by taking money from a California fund designed to compensate injured crime victims or their survivors.

The legislation needs approval from Speaker Karen Bass, D-Los Angeles, to move out of a committee and to the Assembly floor. Bass has not taken a position on the bill, said her spokeswoman, Shannon Murphy.

Because it's an urgency bill, it must pass the Senate and Assembly with a two-thirds vote by the end of the regular legislative session on Friday. Otherwise, it will die.

Failure to restore funding would "result in increased health care, law enforcement and other costs to the state," Yee said in a statement. "But more critically, it puts victims of domestic violence and their children in grave danger."

The governor also has not taken a position on the bill, Cameron said.

The group Crime Victims United of California opposes transferring money from the fund. Chairwoman Harriet Salarno said in a letter to Yee that raiding the fund would put a financial strain on the program for "one subset of victims in California."

She said some domestic violence victims might already be entitled to compensation, putting an added financial burden on the fund, which receives money from restitution fines, penalties against people convicted of crimes and traffic offenses, and the federal government.

Tara Shabazz, executive director of the California Partnership to End Domestic Violence, said domestic violence victims also are crime victims, so it was logical to look to the fund for help in an emergency.

"These budget cuts have made domestic violence victims extremely vulnerable, and we hope that our allies advocating for crime victims will join us in exploring all means of keeping California's shelters open," she said.

The final goods approach to measuring gross domestic product (GDP)

Jay Kaplan explains the final goods approach to measuring gross domestic product (GDP) on the Colorado University website:

Unit 6 - Components of GDP - Final Goods Approach

Consumption (C)

The consumption of goods and services falls under one of the following categories:

Durable goods - The consumption of durable goods is considered similar to a consumer investment. Durable goods are purchased with the intention of keeping them for a sustained duration of time. Examples of durable consumer purchases include washing machines, refrigerators, automobiles, and toaster ovens.

Nondurable goods - In contrast to durable goods, nondurable items have a shorter life span. An example of a nondurable consumer purchase is groceries. The life span of the typical food is short, especially compared with the refrigerator (durable item) in which perishable foods are kept. Other examples of purchases that are considered nondurables include newspapers, magazines, clothing, and hats (which are always flying off with the wind).

Services - Since the 1960s the fastest growing component of consumer purchases has been the area of services. Services include medical treatment, lawyers, and dry cleaners.

Investment (I)

Businesses and corporations undertake investment activity that involves the purchase of goods which themselves assist in the production process. The categories of investment are:

Business Investment - This includes the actual purchases of goods used in the production process. Business investment includes the construction of new offices and factories, and the purchase of machinery, computers, and any other equipment used to assist labor in the production of goods and services.

Business investment counts as gross investment, which includes purchases of machinery to replace worn-out equipment. If a firm replaces one machine with another that does not increase output, then nothing is added to the nation's economy. To correct for this, net investment can be used, which subtracts out depreciation of existing capital from the gross (total) business investment made by firms.

Residential Construction - This part of overall investment tracks the actual construction of housing, not the sale of homes. A new home that is built during a given year is counted in that year's GDP, while the purchase of a previously owned house has already been counted in the GDP of the year it was constructed. In this way, only those residences that add to the overall housing stock count towards GDP.

Changes in inventories - Firms invest in inventories, which are produced goods held in storage in anticipation of later sales. Firms also stockpile raw materials and intermediate goods used in the production process. Goods held in inventories are counted for the year produced, not the year sold.

Although inventories are a relatively small portion of the overall investment sector, inventories are a critical component of changes in GDP over the business cycle. If the economy is slowing down, possibly entering a recession, the bearer of the bad news will often be an undesired accumulation of inventories. As consumers reduce their purchases, sales of goods and services slow, inventories build up, and firms slash production (laying off employees) to reduce unwanted (and costly) inventories.
This last point is worth emphasizing because of its relationship to the business cycle which will be discussed in Topic 4. Inventories can be considered a part of a group of leading indicators of business cycles. By leading indicator, we mean that changes in a variable such as business inventories can lead to changes in the future condition of the economy. To explain the linkage between changes in the level of business inventories in many economic sectors and economic growth, let us consider two cases: an undesired accumulation of inventory, and an undesired decrease in business inventories. We will look at the economy as a whole.

The economic impact of an undesired accumulation or increase in business inventories. Businesses plan ahead and forecast future sales. Based on their expectations, they stockpile inventories of goods the expect to sell in the near future. The reason is simple. Businesses want the goods available to meet customer demands or else they will lose the sale, and most likely lose it to a competitor. If there is a slowdown in consumption in many economic sectors, then many businesses will not sell as many goods as they had planned to. As a result, businesses will not sell off their inventories of goods as they had planned and inventories will accumulate.

When inventories accumulate due to a decrease in consumption, businesses respond by reducing orders of goods from producers. In turn, as producers face a cutback in demand for their goods, they will decrease output. When inventories are accumulating in many sectors of the economy, reductions in the production of goods becomes widespread, and as firms reduce their output, many workers are laid off. As payrolls are reduced, the number of unemployed swells and the unemployment rate rises. With the reduction in output, GDP growth falls and if the drop in production is sharp enough, the economy goes into a recession.

The opposite occurs with an undesired or unanticipated decrease in inventories. If demand for goods are greater than businesses had forecast, inventories will be rapidly depleted. As firms restock their inventories and adjust for a higher level of sales, they increase their production. Increases in output requires firms to employ more workers. If this is occurring throughout the economy, the unemployment rate will fall as more individuals find jobs and economic output will increase. This leads to a jump in economic growth as measured by GDP.

The surge in demand for goods and services as well as the responding hike in production and employment comes at a possible cost. As more jobs are created, incomes rise, further contributing to an increase in the demand for goods and services. The potential result is a rise in the inflation rate due to demand-pull effects. Demand-pull inflation results from price pressures caused by rising demand for a good. In addition, cost-push pressures may also lead to greater inflation. As firms increase their output and demand for labor, wages may rise, especially if the economy was already near or at full-employment. Higher wages increase production costs that may be passed on to the consumer in the form of higher prices for goods.
The important point made here is that although inventories are a relatively minor component of GDP, rapid changes from their desired levels can have important economic consequences. When inventories accumulate beyond desired levels, an economic slowdown may be on the horizon as producers reduce their output. Or if inventories are rapidly being depleted, then economic growth and possibly inflation may soon rise as wage and price pressures build. Economic analysts monitor the divergence of inventories from desired levels as a leading indicator of potential changes in future economic growth rates.

Government Spending (G)

The government sector tracks what the government actually spends money on. Government purchases of goods and services include stealth bombers, government-funded research, space shuttles, salaries, and toasters. Many of these items are seldom sold in markets; as a result, they are valued at the price the government pays for them. The calculation of government spending for GDP purposes excludes several tremendous categories of actual spending: transfer payments, which redistribute income primarily to individuals who are potential consumers, and interest payments on the debt.

Last updated January 15, 1999

How Monetary Policy Affects the Economy

How Monetary Policy Affects the Economy

Monetary policy is conducted in the United States by the Federal Reserve System (the Fed), which is the U.S. central bank. A central bank is an institution that oversees the banking system and regulates the quantity of money in an economy. The Fed influences the economy by changing the money supply and interest rates to either increase or decrease aggregate demand (AD), which is overall spending on newly produced goods and services. When the Federal Reserve conducts monetary policy, it may increase or decrease the money supply depending on the condition of the economy.

Expansionary monetary policy occurs when the Federal Reserve System induces commercial banks to increase the amount of money they create through loans. Thus, expansionary monetary policy increases the money supply. If the economy needs stimulation (e.g., to fight unemployment), then the Fed usually conducts expansionary monetary policy to increase the money supply, reduce interest rates, and encourage more consumption and investment spending. Low interest rates encourage households and businesses to borrow money. If they use this borrowed money to increase spending on consumer products (C) and investment (I) in capital equipment, inventories, and structures, then aggregate demand increases. Aggregate demand is composed of consumption spending (C), investment spending (I), government purchases (G), and net exports (X-M).


AD = C + I + G + X - M


Contractionary monetary policy occurs when the Federal Reserve System induces commercial banks to decrease the amount of money they create through loans. Thus, contractionary monetary policy decreases the money supply. If the economy needs dampening (e.g., to fight inflation), then the Fed usually conducts contractionary monetary policy to decrease the money supply, increase interest rates, and discourage consumption and investment spending. High interest rates discourage households and businesses from borrowing money. If higher interest costs reduce spending on consumer products (C) and investment (I) in capital equipment, inventories, and structures, then aggregate demand decreases.

Strategies for Controlling Inflation

Strategies for Controlling Inflation

1. Break the cycle of expectations. This helps to control cost-push inflation.
2. Reduce the costs of production. This helps reduce cost-push inflation.
3. Reduce aggregate demand. This helps to control demand-pull inflation.

AD = C + I + G + X – M
where:
AD = aggregate demand
C = consumption
I = investment
G = government purchases
X – M = exports – imports = net exports = NE


Objective to help achieve low inflation
Fiscal policy
to achieve this objective
Monetary policy
to achieve this objective
Break the cycle of inflationary expectations.
Anything that convinces the public that the government is committed to reducing inflation.
Anything that convinces the public that the Federal Reserve System is committed to reducing inflation.
Decrease the costs of production.
Anything that reduces costs of production. Increasing the world supply of oil, for example, would reduce production costs for many industries.

Reduce aggregate demand.
Decrease government purchases or increase taxes. Since government purchases are a component of aggregate demand (and GDP), reduced government spending will reduce aggregate demand directly. Higher taxes leave workers and businesses with less disposable income. This leads to a reduction in consumption and investment spending, which are two of the components of aggregate demand.
Decrease the money supply to increase interest rates. Higher interest rates discourage borrowing. This causes a decrease in consumption and investment spending, which are two of the components of aggregate demand
Table 3. Using fiscal and monetary policies to achieve low inflation.

GDP data: C + I + G + X - M

Gross domestic product is the total value of final goods and services produces in the economy in a given time period (usually a year).

Gross Domestic Product = Consumption + Investment + Government Purchases + Exports - Imports

GDP = C + I + G + X - M

The Economic Report of the President provides U.S GDP data since 1959.

Table B-1 (Gross domestic product) provides nominal GDP data. They are not adjusted for inflation.
Table B-2 (Real gross domestic product) provides GDP data adjusted for inflation.

In both tables, consumption (C) and investment (I) data appear on the first page of the Excel spreadsheet. The data for government purchases (G), exports (X), and imports (M) are provided on page 2 of each spreadsheet.