A “counterfactual” is an analysis of “what would have happened if.” President Obama’s claim that “the stimulus added as many as 3.3 million jobs” is the most famous example of this genre.
Counterfactual analysis of the effects of the 2010 election on federal spending can be executed, unlike the jobs-saved analysis, on a more solid foundation with nothing more than a pocket calculator. The procedure is simple: First, we find what the Obama administration intended to spend in 2011 and 2012 on the eve of the November 2010 election (and not knowing that an electoral disaster lay in store). Second, we compare these figures with what was actually spent in 2011 and what is likely to be spent in 2012. For example, if the administration planned to spend $3 trillion in 2011 but actually spent $2.5 trillion after the Republicans gained the House, the “counterfactual saving” for 2011 is $.5 trillion.
According to my arithmetic, the unanticipated Republican November 2010 sweep of the House with victories of fiscally-conservative freshmen saved or will save taxpayers at least $300 billion dollars for the two-year period 2011 and 2012 alone – a figure that may understate the saving by another two hundred billion.
Let’s begin in 2010 as the Office of Management and Budget prepared the fiscal year 2012 budget for the President. The Congressional mid-term elections lay ahead. This budget reveals that Obama, with continued strong majorities in both houses, intended to spend $3,818 billion in 2011 and $3,728 billion in 2012.
A confusing and bitter battle over federal spending followed in the aftermath of the Republican sweep of 63 House seats. Both sides negotiated stop-gap measures, continuing resolutions, and “grand bargains” with clear goals. The Republicans wanted less spending and no substantive tax increases. The Democrats fought against spending cuts and lobbied for tax increases. They floated proposals for a “second stimulus” and, failing that, for an infrastructure bank. The melee resembled two football teams playing on a foggy field in pursuit of a loose football. After numerous turnovers, they end up in a huge pile with the referee unscrambling the players to determine who has the ball.
In this case, we have a clean measure of which team ends up with the ball. We know that the Obama administration planned to spend $3,818 billion in 2011 and $3,728 in 2012 on the eve of the election. The OMB’s March 2012 figures reveal that $3,603 billion was actually spent in 2011 and estimate 2012 spending will be $3,627.
When we compare intended with actual spending, we get a “counterfactual” saving of $294 billion for the two-year period. Without the Republican victory, Obama would have spent $294 billion or almost $.3 trillion more.
By the end of fiscal year 2012, the counterfactual saving will probably be closer to $500 billion for two reasons. First, if the Ryan Budget prevails for fiscal year 2012, it spends $98 billion less than the Obama budget would have. Second, Democrat budgets schedule spending reductions for out years. True to form, the Obama budget called for an unlikely $92 billion absolute spending cut in 2012. Past history teaches that such promised spending cuts are forgotten when the time comes around. If we add the likely Ryan budget $98 billion saving to the fake Obama hundred-billion-dollar cut in 2012, we raise the counterfactual saving to almost $500 billion. That is a saving worthy of note.
In his first year in office, President Obama increased the federal government’s share of GDP from twenty to twenty five percent! If we add in state and local spending, government approached a forty percent share of the economy. His Obama Care and proposals for more stimulus spending and massive infrastructure investments were designed to keep the federal government at a quarter or more of the economy as a new normal.
The 2012 election will be a battle by the Republicans to roll back federal spending to its historical rate of twenty percent or below. An Obama victory would enshrine the quarter-of-the-economy federal share as a new baseline. The United States would then be on its way to European welfare state spending levels and would have to find ways of raising revenues to European taxation levels.
It is this scary scenario that gave birth to the Tea Party. The mainstream press has repeatedly tried to write the Tea Party’s obituary as out-of-touch, ineffective, and having lost its steam. That the Tea Party has already saved taxpayers between $300 and $500 billion shows its striking impact on the American fiscal scene. This insight should invigorate its members for the 2012 election.
Paul R. Gregory is a Research Fellow, Hoover Institution Cullen Professor of Economics, University of Houston. Gregory has a regular blog http://blogs.forbes.com/paulroderickgregory/at Forbes.com