The Federal Budget Debates Focus on Spending Cuts. What Cuts?

I keep hearing about cuts in spending – and how various groups will be hurt by the cuts. This is strong evidence supporting the view that the government spending process never ends. Nothing is ever temporary. Nothing is ever enough. People get quickly accustomed to higher levels of government spending and feel entitled. No wonder they demonstrate in the streets when a program is challenged.

Data I present and discuss below suggest that the period from 2007 to 2010 saw huge increases in the growth rates of government. But that is only part of a story that begins with Y2K. Government spending has been growing about twice as fast as it was during the previous decade. DURING THE 2000s GOVERNMENT GREW TWICE AS FAST AS DURING THE 1990s.  The record shows that virtually every major spending category contributed to this spending bonanza. Since the two recessions of the 2000s contributed to this spending explosion, there is plenty of evidence to support the idea that what was supposed to be temporary was truly not.  When or where did Keynes say it was okay to stimulate the economy with government spending increases and then make the new spending level permanent?

Ideologues in both parties make it difficult to solve this problem. Why? Because they delight in infuriating each other with finger-pointing and guilt tripping. It’s all Reagan’s fault! Look at deficits in the 1980s. It is Bush’s fault – look at the growth of government under his rein. It is Obama’s fault – look at the last two years.

The extremes of each party act in this immature way because they want to stick up for their constituencies. They see the present crisis as a time to help out their labor union friends or stick it to the rich. Others want to gouge Planned Parenthood or get rid of healthcare reform.

But they are missing the point. Neither Planned Parenthood nor unions caused our current problem – a budgetary mess – one that is not simply an issue of the last few years. What I show below is that defense, discretionary non-defense, and mandatory programs have all grown at much faster rates in the last decade and especially in the last three years. I won’t repeat the data about the national debt – you know indebtedness is too high and rising too fast. In my last blog I wrote about jeopardy. While we might be able to sustain high national debt for a while longer – inaction means we raise the possibility of a financial crisis worse than the last one. So we need to get moving.

So why not admit that our immediate problem is not about the needs of special interests – but rather is about attacking a mountain of debt. If government spending rose by about $1 trillion in the last recession and much of that increase was to fight a recession, surely we can find ways to reduce that spending by $500 billion or more in the name of restoring normalcy and greatly reduce the chance that a financial sneeze will turn into a devastating situation with even more draconian policy choices.

I’d like to suggest that we go back to annual government spending  growth rates of about 3-4% – but that isn’t going to get rid of the debt soon enough. Even freezing spending to current 2010 levels isn’t going to provide much relief.  Taking the budget back to levels that existed in 2007 is not as hard as it seems. As the economy improves, automatic stabilizers in taxes and spending should improve the deficit by $200 to $300 billion. That’s a good start and we shouldn’t ignore that contribution. But it isn’t enough.

Automatic stabilizers accounted for $312 billion of the overall budget deficit in 2009 and $359 billion in 2010 – meaning that roughly 25% of the deficit deterioration was caused by the automatic (without legislation) responses of spending and taxes to the downturn. Or put another way – the budget deficit increased by about $964 billion in 2009. The automatic responses or non-legislated changes in spending and taxation to a downturn in the economy accounted for about $279 billion of that increase. The remainder, or $685 billion, was how much legislated policy change contributed to the higher deficit in 2009.

The upshot is that we could return to government spending of $2.7 trillion and a deficit of about $340 billion that existed in 2007 if we focus on legislated spending decreases that total about $700 billion in the coming years. The automatic stabilizer contribution will disappear on its own accord as the economy recovers. While the number $700 billion looks large if we describe it as a cut from the expected outlays in 2011 of $3.7 trillion, they look at lot more reasonable when you realize they are from what was supposed to be a very temporary and is now a very bloated (burp) level of government. If you gain 30 pounds of unwanted fat over the holidays you accomplish very little by saying that you are going to freeze your calorie intake after Christmas. What you need to do is have a plan to eat fewer Twinkies.

The following table summarizes the issue. The first and second columns show that government spending was about $1.8 trillion in 2000 and it subsequently increased to about $3.5 trillion by 2010. That’s an increase of about $1.5 trillion – or an annual compounded growth rate of 6.8% per year.  The third and fourth columns show what federal government outlays “would have been” in 2010 had government spending grown at a compounded 3.6% per year (same as the previous decade) or at 5% compounded per year. These amounts ($2.548 trillion/$2.914 trillion) are clearly less than the actual amount of spending in 2010 of nearly $3.456 trillion. The final column shows the extra or excess spending – actual in 2010 less what it might have been if growing at 3.6% or 5%. As you can see the range is from $542 to $900 billion.  Even if government had grown as fast as 5% per year we would still be able to reduce over $500 billion out of government spending. Friends – this $500 billion is not a cut – even if government had grown at 5% per year for 10 years it would have increased by $1.125 trillion during the decade. Of course if we think government should have grown at only 3.6% per year then we could reduce government spending by $908 billion and still have a government that showed considerable growth for a decade.

Total Fed. Outlays: Actual, Ideal, and Actual Less Ideal  

   (1)        (2)           (3)              (4)              (5)                   

2000     2010   2010 3.6%   2010 5%  Excess3.6/5             

1,789    3,456    2,548          2,914        908/542

Here are some further figures to ponder (All from the Congressional Budget Office http://www.cbo.gov/budget/budget.cfm )

Government Outlays        Compounded annual growth rates

2007 to 2010               8.2%

            2000 to 2007               6.2%

            1990 to 2000               3.6%

It is worth recalling that the increase in government spending after 2007 came at a time when the budget deficit was $342 billion and helped move it to $642 in 2008, $1.6 trillion in 2009, and $1.4 trillion in 2010. CBO estimates a deficit of $1.5 trillion in 2011.

This same decade-doubling pattern of spending growth shows up with respect to discretionary Domestic Non-Defense spending – with the annual rate of spending growing at twice the rate of the 1990s. Discretionary Defense spending also grew rapidly from 2007 to 2010 but it grew less fast than non-defense discretionary outlays and the decade of 2000 appears to be making up for no growth in Defense spending in the previous decade (and of course a reaction to global terrorism).  In 2010 Defense spending was $689 billion or about 20% of total government spending of $3.5 trillion. Domestic Non-Defense spending was about $614 billion or 18% of total government outlays.

Government Outlays: Discretionary Spending         
Compounded annual growth rates

Domestic Non-Defense       Defense

2007 to 2010               10.2%                           7.9%

2000 to 2007               6.4%                             9.3%

1990 to 2000               5.1 %                           -0.2%

The biggest part of the budget ($1.9 trillion in 2010 or about 55% of total spending) comes from what we call Mandatory spending. Between 2007 and 2010 total Mandatory spending increased by 9.5% per year. That compares to 6.2% between 2000 and 2007 and 5.3% in the 1990s. Consider these increases from 2007 to 2010:

            Compounded annual growth rates, 
Mandatory Spending           2007 to 2010

            Total                                     9.5%
             Social Security                    29.2%

            Medicaid                             12.6%

            Social Security                       6.5%

            Medicare                               6.0%

Mandatory spending, as the name implies, is not quickly changed. But since it is a major part of annual federal government spending and the budget deficit, it is too large to be ignored in this discussion. Since these programs are open-ended and change automatically with the economy, we can expect that spending on Social Security, Medicaid, and other programs will a decline automatically as the economy continues to recover. I discussed this above. But it is not unreasonable as we think beyond the next few years into the coming decade that restructuring of Mandatory spending be a key part of a fiscal solution. Evaluations of recent budget proposals show short-term deficit remediation followed by a period of deterioration…because of Mandatory spending increases as the baby boom generation ages.  Any plan that only addresses the next few years is going to be deemed a failure. So why waste time with solutions that are bound to fail?