Tuesday, February 9, 2016

Spending Spending Spending

Last week I spouted profusely about Federal government deficits and debt. I likened the government to the pepperoni pizza addict who ate the whole thing last week and this week not only ate his own large pie but also finished his wife’s left over clams with linguine (with a hint of hot red peppers).

It makes no sense to me that a government that goes into debt during a national and world emergency should plan to go even further into debt after the threat is well over. This is exactly how a nation flirts with becoming the next Greece or Venezuela. I show below how it might be possible do better than we are presently doing. It won’t be easy but it is possible. Waiting will only make it much harder.

For example, the results below show that with the spending and tax revenue projected for the next 10 years we could begin to chip away at the problem of deficits and debts. But it would take a decline in benefits of major mandatory spending programs of around 20% of the 2025 estimate. Of course spreading the pain among tax revenues and other spending would reduce that amount somewhat but it gives you a feel for what already must be done to get us back to anything approximating normal. If we add even more to debt in 2016 the difficulty explodes.

One of my alert readers who awakened from a thirty year slumber asked me off line to go a little deeper into the details behind the debt numbers. So for the sake of my huge (did I say huge?) and growing cadre of faithful followers I decided to strain my eyes and crane my neck over the reams of data published by the Congressional Budget Office. The most pertinent of those data are found neatly packaged by me below.

Before boring into the numbers, let’s do a little review of government budgeting. The government loves us and therefore deems it possible and legal to take money from the mouths of our children and distribute it over Iowa from helicopters. No I am just kidding. The government has the power to tax. In America the biggest federal taxes are imposed on income of persons and corporations. They also collect something confusingly called the payroll tax when in reality it should be called the let’s be nice to old folks tax. But naming these things is not my quibble today. The government also levies about 10 million other little taxes that are often collectively named “other”. Many of you are familiar with the gasoline tax that you happily pay each time you go to the pump and then buy a lottery ticket and a Twinkie.

The sum of these annoying federal taxes is labelled as Total Revenue below. You also pay taxes to your state and local governments but we will ignore those today. The table tells you that these Total Revenues amounted to almost $2.2 trillion in 2005. And no, Donald Trump did not pay your taxes or mine that year. Below those government revenues in the table are found the expenditures or outlays which are the ways the government gives us our money back. Yes, they take with one hand and give back with the other. Well – they actually give us back more than we pay in and that is the rub because when that happens and it usually does, the government goes deeper into debt. But I get ahead of myself.

Government spending is often divided into three main categories – mandatory, discretionary, and net interest. Mandatory spending means that these categories of spending are very difficult to change because if you change them Jimmy Hoffa will get you. Discretionary spending refers to items that are usually negotiated each year by Congress, while mandatory spending is set out in laws that extend payments into the future. You might say the future amounts are contractual. Notable mandatory items in the US budget include Social Security, Medicaid, Medicare, disability insurance, and more.  Surprisingly defense and many poverty programs are included in discretionary spending. Notice that since much of mandatory spending relates to people of my age – young people have a keen interest in how these spending totals are shaping up.

Last week I wailed about alarming increases in future government deficits and debt. This week I look into how spending and tax revenues generate those scary statistics. My comments come from the table directly below. The table divides and compares budget information for ten years into the past (2005 to 2015) and ten years into the future (2015 to 2025). The first three columns give you the budget numbers for 2005, 2015, and 2025. The next four columns focus on the 10 year changes (in dollars and in percents).

The time period from 2005 to 2015 starts with a strong economy, endures a recession in 2008 and 2009, and then recovers slowly from the recession. The future from 2015 to 2025 is unknown but the CBO estimates these future numbers based on relatively slow growth but without a recession.

First, debt is rising despite large increases in tax revenues. Tax revenues will rise by $1.5 trillion in the future after rising by a little more than a trillion in the past. Revenues will increase by 48% after rising by 51%. I am sure folks in the middle class would love to experience that kind of growth in their personal incomes.  Tax revenues will reach almost $5 trillion in 2025.

Second, the big generator of total revenue is income taxes. The future will see a rise of $988 billion or about 64%. Total income taxes will rise from $1.5 trillion to $2.5 trillion from 2015 to 2025.

Third, despite huge increases in government revenue – we are planning to increase spending even more – from $3.7 trillion in 2015 to $6 trillion in 2025. Wowee – that's an increase of 64%. That increase of $2.4 trillion in the future doubles the past increase of $1.2 trillion. DOUBLES!

Fourth, in 2005 federal spending on mandatory categories at $968 billion was less than discretionary spending of $1.3 trillion. But that was about to change. Mandatory spending is the big spending hog. Notice that while spending on mandatory items will rise in the future by $1.6 trillion (69%), spending on discretionary items will increase by $232 billion or by about 20%. Notice also that these discretionary future increases come after a decade of decline (-$154 billion or -12%). As of 2025 mandatory spending will be $3.9 trillion compared to discretionary spending of $1.4 trillion.

Fifth, notice that net interest spending increased by only $39 billion in the past but is expected to rise by $545 billion in the future. This is no surprise given how long the 
Fed has kept interest rates so low. This shows you the importance of the national debt. If the debt was to return to normal we might save a lot of money on interest. 

Finally, notice the last line of the chart. This shows you that we have gone from an excess of past spending over revenues of $319 to $438 billion to a future amount equal to $1.2 trillion. If we knocked the $1.2 trillion down to something more normal like $400 billion we would reduce the excess by $800 billion. $800 billion amounts to 21% of mandatory spending in 2025. But even this change does not stop debt from rising. 

2005 2015 2025 Chg Chg % Chg %Chg
Revenues Past Future Past Future
Income tax 927 1541 2529 614 988 66 64
Payroll tax 794 1065 1531 271 466 34 44
Corp. Inc tax 278 344 421 66 77 24 22
Other tax 154 299 337 145 38 94 13
Total Revenues 2153 3249 4818 1096 1569 51 48
Mandatory 968 2299 3875 1331 1576 138 69
Discretionary  1319 1165 1397 -154 232 -12 20
Net Interest 184 223 772 39 549 21 246
Total Spending 2472 3687 6044 1215 2357 49 64
Spending minus  319 438 1226 119 788 37 180


  1. If I ran my company that way we would be out of business.

    1. Yes...and Bernie says it is Wall Street that is corrupt. Hmmm

  2. Wall Street corruption and government incompentency are not mutually exclusive. More like cojoined twins.

    1. Welcome back Robert! I disagree! And the mother of both is power! Power Corrupts.

  3. I dont think we disagree. "Power tends to corrupt, and absolute power corrupts absolutely." Who has the power in the US? Certainly the top of the list includes Wall Street and government. Ok public employee unions too. :)

  4. Btw. I think a burger with kimchi marinated with JD would really be tasty.

  5. I just sold my business. Have a few $MM. How long will that last?

    1. A few seconds if you are the federal government of the USA

  6. Dear LSD. Congrats on preparing a financial analysis deserving an A++. It clearly confirms that govomit spending has and will outpace income resulting in ever-growing debt and would get a PhD candidate an “approval” on his/her dissertation. While its analysis is comprehensive its elegance is simplicity: Suitable for Econ 501 yet applicable for “Checkbook 101”—don’t spend more than you earn—analogous to stuff you heard in the 60s to the effect of not writing checks your body can’t cash.

    Without stating it explicitly you imply the solution is to reduce govomit spending. So, who in the D.C. Beltway Ballpark is gunna be the first at bat to offer such a draconian solution?

  7. Dear Tuna, Thanks for your Tunarific comments and praise. Same back at ya.

    As for your question I would submit a first wild guess that Bernie is not the correct answer. After that I don't know. Kasich talks a big game about debt but I am not sure that he has the guns to get it done. As for me -- while my post was all about spending, I did allude to the fact that it would take a multifaceted approach. You can't cure a drunk with a couple of Ibuprofen and you can't cure this debt problem by attacking Social Security. Spending needs to be slowed. No way they will ever stop it or reduce it. Just slow it. Then restructure taxes so they are more conducive for growth. Finally change some regulations that impede growth. Note -- you can't grow your way out of it. It would take a ton of growth. But growth, tax reform, and a slowdown in spending could work miracles. Unfortunately I know of no politicians who will pursue these avenues with real commitment. argh