Monday, December 05, 2011

Mitt Romney: Bind US Spending to Foreign Corporate Investment

Mitt Romney, who prides himself on being the candidate with ‘business’ experience, has proposed some fiscal measures which evidence a decided lack of serious economic analysis.

In advertisements that have been running non-stop here in New Hampshire, Romney presents his three-point plan to reign in federal spending. In the ads, he proposes,

“…capping federal spending as a percentage of GDP at 20% or less…”

There are any number of issues Mitt is going to have to explain with this “plan.” He can start with any of these:

1) GDP, or Gross Domestic Product, is the value of all the goods and services produced within a society. In the United States, current annual GDP is approximately $14 Trillion dollars annually. With federal spending capped at 20% of this number, that would result in an annual federal budget of 2.8 Trillion dollars. The Fiscal Year 2010 budget is 3.45 Trillion, so Romney’s plan would require cutting spending by 650 Billion dollars.

To provide a sense of this proposal, the entire amount of Social Security payments made to retirees annually is 701 Billion. The total amount of “Discretionary Spending” (spending that excludes social security, medicare, interest, defense, and other ‘mandatory’ payments) is 660 Billion. If Mitt is not proposing cutting off social security or eliminating the military, it would appear that he is proposing an elimination of all discretionary spending whatsoever: Bridge Rehabilitation on Interstates, Superfund Cleanups of Toxic Waste sites, Food & Drug Administration approvals of cutting-edge pharmaceuticals, Coast Guard operations, Community Block Grants for Economic Development, Jobs Trainings Initiatives, and hundreds of other federally-designated programs. EVERYTHING.

2) By basing spending on GDP, his proposal means that the budget will always be out-of-synch with reality. The Budget for the future fiscal year is voted on during the current year, and it will be based on figures from the past year's GDP (which would still be in revision), resulting a two year ‘mis-match’ of GDP and spending authorizations.

3) By capping spending to a percent of GDP, Romney opens up the country to sudden, unexpected budget shocks since GDP is calculated after each quarter, but then revised in subsequent quarters.

For instance, on November 22 of this year, economists in Washington revised the third-quarter (July-August-September) GDP downward to a growth of 2% from their previous report of 2.5%. While a change in .5% may not sound like much, a .5% change in a 14 Trillion dollar GDP is a difference of 70 Billion Dollars in GDP. Under Romney’s plan, such a revision would result in the sudden elimination of 14 Billion in spending from the Federal Budget. For comparison purposes, that is greater than the entire annual budgets of the Departments of the Treasury, Commerce, Interior, and Environmental Protection.

4) Lastly, and perhaps most important, is the fact that Romney’s plan would make American Government expenditures dependent on the activities of foreign companies operating in the United States.

The GDP figure is obtained by adding up the value of all goods and services created in the US. It does not matter whether the goods produced are made by American or foreign companies, as long as they create the products on US soil. Currently, 3.2 Trillion dollars of our 14 Trillion GDP is derived from foreign companies doing business on US soil.

In other words, 22% of our total GDP comes from these firms. It also means, that under Romney’s plan, 22% of the American Government’s spending would depend on continuing product development by companies from foreign nations located in the US. That amounts to 760 Billion dollars of American spending being dependent on the level of foreign investment.

Again, for comparison purposes, that amount is the equivalent of our entire Defense Budget.

A curious proposal, coming from the candidate who has so willingly rattled sabers with Iran.


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