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Brooks Wilson's Economics Blog: Budget Cuts and Opportunity Costs

Monday, April 20, 2009

Budget Cuts and Opportunity Costs

When I originally read about President Obama convening his Cabinet to identify $100 million for budget cuts, I read it as $100 billion.  It is only three percent of the massive budget, but still an impressive total.  I then read Greg Mankiw's post "Fiscal Responsibility," and realized my error.  Mankiw describes the magnitude of the cuts.
Just to be clear: $100 million represents .003 percent of $3.5 trillion.

To put those numbers in perspective, imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had been cut? By $3 over the course of the year--approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.
Rather than working on reducing spending by .003%, I would rather have the administration recall that time is money, it has an opportunity cost, and focus on spending $3.5 trillion carefully. 

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