Government Budgeting and Present Value Tables

There is going to be a huge political fight over the budget. Democrats are going to rant that the Republicans are cutting too much.  Today Obama fired the first salvo by severely cutting defense budgets.  I don’t think this group of Republicans have too many sacred cows, so even though slashing a defense budget during a time of war doesn’t make a lot of sense-I think Republicans would have found things to cut too.

Most of the budget cutting won’t be actual cutting.  It will be a change in accounting.  So, say next year we budgeted for a 5% growth in spending.  But, they instead decide to cut the budget to only 3% growth.  That’s a budget cut, even thought the reality is they aren’t cutting anything.

Boehner said today they want to cut $100 Billion.  If they do that, there might be some actual cutting of programs.  That’s what America elected them to do.  Believe me, 100B is pocket change in the federal budget.  That’s close to the lunch tab for a Presidential vacation!   Just kidding, lobster isn’t that much yet.

The real problem with the budget is in entitlement spending.  All this other stuff is simply fluff.  The Gulf War that we are currently waging barely makes a dent in the spending that the Feds do.  If we ended the war tomorrow, brought all the troops home, quit spending on equipment etc-we’d still have a massive budget deficit.  Paraphrasing James Carville, “It’s entitlements stupid.”

Here is a present value table. This one allows you to take the value of some cash flow in the future and discount it back so you can see it’s value today.

Here is another, it allows you to find out the present value of a dollar in the future today

Guess what. The values never change! No matter what you do, the future value of a cash stream when discounted back is the same no matter what. All you do is argue over the interest rate used to discount back. Higher interest rate discount factor, lower present value of the cash flow. Comprende?

This is why all governments are going to go broke. They have an internal ticking time bomb. Not only are their pensions defined benefit pensions that pay a certain amount on a certain date in the future over a period of time, but entitlements like social security and medicare are the same way. As baby boomers get old and retire-they begin to take these payments. There are more of them than there are of younger workers-so it creates a deficit. It’s a great pyramid scheme that gets toppled by pure mathematics.

I thought civil servants worked for the taxpayer but it seems to be the other way around. The tables got turned in 1932 when the worst economic President in history was elected.

So, keep this in mind when politicians argue over budgets. It’s sort of like “It’s A Wonderful Life”, except we ought to title the movie, “It’s A Taxpayers Life”. “Every time you add a government employee, a private worker gets his pay cut.” No Zuzu’s petals in that movie.

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