StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

James Pethokoukis Is Completely Wrong: The Obama Budget Math Does Add Up

13 Nov 2009
Posted by Stan Collender

It started with a Wall Street Journal story from yesterday that said the White House either is considering not spending all of the TARP money that remains unspent or doesn't think it's going to need to spend the funds because the situation is improving faster than expected.  As a result, it may be able to lower the projected 2010 deficit and the amount the government will have to borrow.  Here's the money quote:

Agreeing not to spend a certain amount of TARP money will enable the White House, in its budget projections, to assume less money out the door and, therefore, less debt issued. The move would also reduce the deficit by an unknown amount since a certain level of spending and borrowing is already factored into estimated future deficits. (Italics are mine).

But over at his own blog, my good friend James Pethokoukis, says this is wrong and that the math "doesn't add up."  He even finds someone to validate his headline who is quoted saying about that unspent TARP funds ...can't be used as deficit reduction because the money has not been spent yet."


First, as the WSJ story says, the White House is talking about the current fiscal year -- 2010 -- and it has already made an estimate of the spending that will occur and the revenues that will be collected.  What the administration is saying now is that some of the spending it projected might not be needed and, if so, that it is planning not to find some other use for the funds.  As a result, the projected deficit and the amount the government was expected to borrow could be lower, in this case at least $100 billion or so lower, than was originally assumed.

Second, you might want to find a better source to validate your headlines.  You definitely can reduce the projected deficit and the debt by not spending funds that were projected to be spent.  That, in fact, is how you do it.  Spending that has occurred has already increased the deficit and the only way to reduce it in the future is not tto continue to spend the dollars again. 

Third, I thought you were in favor of spending cuts.  Isn't that what you prefer the White House do in this case if there is no other need for TARP?

Fourth, why didn't you call me to explain?

This actually is a fairly typical situation in the budgeting world.  Every budget ( your personal budget, your little league team's budget, and the federal budget, etc.)  based on certain assumptions and the bottom line usually continually changes as events happen differently from what you expected. 

It could be that you assumed your adjustable rate mortgage would increase by 2 percentage points but it actually only goes up by 1 because of lower-than-expected rates.  If you don't spend the difference your savings will increase or your debt will go down.

It could also be that the price of gasoline is more than you expected so the cost of getting the little league team to its games will be higher. 

It could also be that the war you assumed would last through the whole fiscal year was actually over 6 months before the year ended.

Or it could be that the TARP funds you has assumed would be spent are not needed because the economy is performing better than expected, Wall Street is recovering faster, and repayments from the institutions that got a bailout are happening sooner.

A question should be asked about whether the Obama administration deliberately overestimated how much TARP would cost in 2010 so that it would be able to claim savings later in the year.  This has been a favorite tactic of Office and Management and Budget directors in the past.  Indeed, everyone from David Stockman to Dick Darman to Leon Panetta liked, and it was clearly something that the G.W. Bush administration used with impugnity.

But regardless of whether it was intentional or fortuitous, not spending TARP money that had been projected to be spent will in fact lower the deficit and the amount of government borrowing compared to what otherwise would have been spent. 

Contrary to what Pethokoukis said, that means the math does in fact add up.

Wait.  There's More.  Here's what I said yesterday on Marketplace on this subject:



You Had Me Going There

Until you got to:

"Or it could be that the TARP funds you has assumed would be spent are not needed because the economy is performing better than expected, Wall Street is recovering faster, and repayments from the institutions that got a bailout are happening sooner."

Then I realized we had moved into an alternate reality.

It's all about marketing and

It's all about marketing and I can't believe you fell for it, Stan. Are you going to tell me I "saved" $10,000 because I spent $25,000 for a car instead of $35,000?

You're confusing two very

You're confusing two very different situations.

1.  If you had budgeted $35,000 for that car and then spent $25,000, you definitely would have spent $10,000 less than you had planned to spend and would either save $10,000, pay down $10,000 in debt, had $10,000 to spend on other things, or some combination of the three.  You wouldn't have as much as if you had decided not to buy the car at all, but you still would be spending less than you had projected. That's unambiguously a budget cut.

2.  If you had budgeted nothing for a car and then spent $25,000 instead of $35,000, you absolutely would have raised spending even if what you spent was less than what you could have spent.  That's unambiguously a budget increase.

TARP is the first situation.  The 2010 budget assumed that a certain amount would be spent on TARP and the deficit was estimated based on that assumption.  So...If the government now spends less than was assumed, the deficit will be lower than projected and the amount the government borrows will be less than expected. 

Your concept would only be right if TARP was a new program not previously anticipated and built-in to the projections.  

The response to Hurricanes Katrina and Rita are a great example of this.  The multi-billion dollar federal response was not anticipated when that year's budget was put together so every dollar -- even if the total was less than expected (and it wasn't) -- was an increase in spending.  

The same thing happens on the military side of the budget.  Spending for Iraq and Afghanistan is an increase if the pace of operations exceeds expectations or if we send more troops than anticipated.  But spending is reduced if the amount we spend is less than was expected this year.

I think the issue is that

I think the issue is that Obama's latest projections assumed that the remaining TARP money would not be spent, so the use of that funds for reducing the deficit is already built into their projections. That's one of the reasons why the '09 deficit was $1.4 trillion ex post rather than the $1.6 trillion projected earlier this year.

That's my understanding at least. Please tell me if I'm mistaken.

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