Cutting deficits

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James Politi and Stephanie Kirchgaessner should not be writing for the front page of a financial newspaper.

In this morning's Financial Times, they write

In a speech on Wednesday, the US president proposed cutting $4,000bn from deficits in the next 12 years, shrinking discretionary spending and the defence budget, and reducing government outlays to Medicare and Medicaid, the largest federal healthcare programmes.

The target is roughly in line with the $4,400bn in deficit reduction over a decade that Republicans in House of Representatives proposed last week and the $3,900 in cuts by 2020 recommended by the bipartisan fiscal commission in December. [emphasis mine]

First, the Republican plan cuts deficits by cutting spending, Bowles-Simpson with big spending cuts and tax reform that increases tax by a modest sum, but Obama relies on more medical price controls and tax hikes – not spending cuts.

The bigger problem is the sheer ineptitude with numbers in claiming that two plans are similar when one cuts 10% less and takes 20% longer to do it. So a salary of $40,000 earned after working 12 months is roughly equivalent to earning $44,000 after 10 months and taking the next two months off? If the 10-month salary was in even payments, you could earn $52,800 over the full year – a 32 percent increase compared to $40,000. Since deficit reductions build over time, the difference would be even larger.

After further thought, Politi and Kirchgaessner perfectly exemplify the problems with financial journalism for years – a failure to understand what the numbers mean.

Joseph Coletti / Senior Fellow, Fiscal Studies

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues. He previously headed the North Carolina Government Efficiency and Reform initiativ...