THE BLOG
07/29/2011 09:10 am ET Updated Sep 28, 2011

It's the Defense Spending, Stupid

It hurts to watch the mainstream media's coverage of the debt ceiling debate. Articles like this one in the Washington Post mistakenly lead you to believe that two of the biggest expense problems are Social Security and Medicare so to balance the budget, these programs must be cut back dramatically.

What they forget to tell you is these two programs were initially funded separately from the general operations of the government with contributions from employers and employees. Social Security is in surplus currently and on a combined basis, they have approximately $3 to $4 trillion in Treasury securities that they hold in their trusts to fund any shortfalls down the road. Yes, we have to do something about rising healthcare costs to make sure Medicare is solvent forty and fifty years from now, but it and Social Security have little to do with the budget shortfall the government is facing this year. The whole idea behind the trusts was to save money early on and invest it because everyone knew deficits would occur later.

When you look at government revenues and expenditures, excluding Social Security and Medicare, the resulting story is quite alarming, but also very educational.

The government in 2011 will spend $1,140 billion more than it takes in. This is the number that needs to be covered with a combination of spending cuts and/or tax increases, not just this year, but every year going forward, especially if we continue to struggle through this recession. And because the interest expense of the government is predetermined and can't be lowered, that means the $1,140 billion of cuts has to come from the government's $2,140 billion of spending (not including interest expense, Social Security or Medicare). So, see if you can wring $1.1 trillion of savings out of this list of government expenses without cutting defense or raising taxes.

2011 Budget

Defense(1) $1,002 billion

Food and Nutrition Programs $90 billion

Education and Student Grants $82 billion

Energy $31 billion

Health and Human Services $121 billion

Medicaid $290 billion

HUD $48 billion

Unemployment Insurance $104 billion

State Department $57 billion

Transportation - Highways and FAA $75 billion

EPA $9 billion

Other (2) $231 billion

Total Budgeted Spending(3) $2,140 billion

1. Includes veterans and homeland security and estimate for intelligence services.

2. Includes Labor, Treasury, National Science Foundation, NASA, Justice, Parks, etc.

3. Excludes interest expense and Social Security and Medicare.

The politicians are talking about $1 to $2 trillion in cuts, but this is over a ten-year time frame, which is only $100 billion to $200 billion a year, and they can't even agree on that because the Republicans have taken tax increases and defense cuts off the table. During the next ten years, the federal government is projected to spend $36.2 trillion so a cut of $1 or $2 trillion isn't much.

Be wary of anyone who tries to tell you that the United States does not have a very serious funding problem going forward. We are not going to bounce back to the bubble days of 4% to 5% growth. Our homes are not going to magically inflate back to their peak values. Many of our jobs are permanently gone to low wage countries. And this is in an environment where people are willing to lend to the U.S. at 3% per year interest rates. If this rate jumps to 5% or 6% reflecting greater default or inflation fears, then we will need to find an additional $200 billion in annual cuts or tax increases.

John R. Talbott is a best selling author and consultant. His new book is mandatory reading for anyone interested in learning the real reasons for this crisis and how to protect yourself going forward. You can read more about John and the new book at www.stopthelying.com or at amazon.com. Information for media contacts is also available at www.stopthelying.com.