Halve the U.S. deficit? Say what?

I have to admit, I was intrigued. I'm a Canadian, and I was intrigued.

Obama's going to cut the U.S. deficit in half. In half! 50%!

But I have to ask: How?

Before we look at the specifics, we should clarify one thing: the difference between the deficit and the debt. I can't tell you how many people use these terms interchangeably, but they mean distinctly different things.

Simply put, a deficit is an annual loss, and alternatively, a surplus is an annual profit. The debt is made up of all the past surpluses and deficits. Currently, the U.S. debt is around $10 trillion, but the U.S. deficit in 2008 was about $1.3 trillion.

This has important implications because even if Obama manages to halve the U.S. deficit, the U.S. will still be adding a ridiculous amount to their total debt each year. If the U.S. were able to halve the deficit tomorrow, they would still add $2.6 trillion to their total debt over the next four years.

But progress is progress and you can't argue with that. But, I've still got this burning question: How is Obama going to create $650 billion dollars a year? He just authorized a bailout plan worth over $800 billion, and this is after Bush gave out $700 billion to the banks. So, what gives?

Well, just my luck, he told us exactly how he's going to do it: tax the rich, spend less in Iraq, and streamline the government. Not a bad plan. It's simple but it hits three big sources/destinations of cash.

Taxing the Rich

First we'll look at the plan to tax the rich. Bush implemented tax cuts for taxpayers with taxable income above $250,000. These cuts are set to expire in 2010, and as part of his plan, Obama will not renew them. The original plan called for, on average, $160 billion in total tax cuts per year. The tax cuts for the rich were only a part of this entire plan, so the additional tax from the rich will be some portion of $160 billion. As well this estimate assumes that as many people in 2009-2012 will make more than $250,000 as did in 2001. This is probably unrealistic given the recent ‘financial trouble' the U.S. has found itself in. But, lets be optimists.

Savings: $160 billion

Just a side note. Raising taxes during a recession?… That's how they made the Great Depression worse. I know... I know... it's not on everyone, but still.

Spend Less in Iraq

Now this is a popular one. Obama can kill two birds with one stone here; get out of Iraq and save money while doing it. The Congressional Research Service estimates that the U.S. spends about $2 billion dollars a week in Iraq. Using a nice round number, this amounts to about $100 billion a year that could be saved by completely leaving Iraq. Again, this assumes the U.S. completely leaves Iraq within four years, probably unrealistic, but like I said, we're optimists.

Savings: $100 billion

Streamline the Government

Ok… this is kinda broad. How exactly? Shrink Congress? Meet less? Tele-commute? Ok, I'm being sarcastic, but I honestly can't think of a way to put a price tag on this one.  Put it this way, the target was $650 billion and we've already found $160 billion and $100 billion in savings from taxing the rich and leaving Iraq, which leaves about $390 billion. This amount represents about 12.5% of the total spending in the 2009 U.S. federal budget; a fair chunk and far more than you can reasonably expect to save from ‘streamlining'. So...

Savings: Not $390 billion

Other Considerations

One thing we haven't even looked at are the effects of inflation. $650 billion today is much different than $650 billion four years from now. I know the targeted rate of inflation in Canada is between two and four percent per year, and I'm pretty sure the U.S. is the same. This will only increase the amount the U.S. will have to reduce the deficit by.

This proposal also completely ignores how the U.S. is going to continue to finance their deficits. Even under the best circumstances, they are still running a huge deficit. The rest of the world is going to get tired of financing the U.S., and then there will be big problems.

Conclusion

As much as I applaud Obama for finding simple ways to reign in spending and reduce the annual U.S. deficit, I just don't see how it can be done. Halving a deficit in four years is difficult enough without having to worry about inflation, a severe recession, and angry creditors. To the U.S. I say good luck, I hope you prove me wrong.

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Keep in mind, this is a quick analysis based on estimates and Google searches.  If anyone has updated/different/better information, please put it up.