1969 Was a Good Year

I wanted to compare some data and found a nice series for government spending going back to 1969. Not sure why they started the data in 1969, but they did. So I started thinking about what things were like about 50 years ago.

I started with my favorite subject, me. I finished my BS in Industrial Management at Georgia Tech in June of 1968 and to escape the draft, I started an MS program there. Strangely enough, the draft was not impressed by my love of Industrial Management, so they sent me a draft notice in late 1968. They let me finish two quarters of my new program and asked me to report for basic training in March of 1969. So in 1969 I was about 23 years old and was spending time training in Texas and Colorado. I finally settled into an Air Force base in Tucson, Arizona. I was an Airman First Class. I had one stripe. I think I made less than $100 per month.

On that salary I was lucky that a stamp cost 6 cents and a gallon of gas was about 35 cents, which made it economical to drive down to Nogales, Mexico to buy rum. A dozen eggs was 62 cents. For real people who could think about such things because they had a median income of about $8,300, a car cost about $2,000 and a decent house ran $30,000.

I was fully employed in the USAF in 1969. The national unemployment rate was 3.5%. A recession started in December 1969 so the unemployment rate started rising in 1970. The inflation rate was 4.5% in 1969. I could remind you of more – but that’s probably enough for the purposes today.

My main purpose is to look at how we spend the government’s money today compared to 1969. The table below shows 1969 spending in billions of dollars and as a percent of total government spending. 

                                          BIL$      %ofTotal

       Total Government      183.6          100

       Total Mandatory          53.6            29

       Social Security            26.7            15

       Medicare                       6.3              3

       Medicaid                       2.3              1

Our beginning situation finds government spending of about $184 billion in 1969. What we refer to as Mandatory Spending comprised a little more than a quarter of that total spending. Social Security spending was responsible for most of that – and amounted to 15% of total government spending. Medicare and Medicaid were toddlers in monetary terms – accounting for about 4% of all government spending in 1969.

A lot of water has passed under the bridge since then. For example, my forehead has grown several thousand percent since I was 23, and my time in a 10K race might have tripled. In basic training we had to run a mile in less than 6 minutes with combat boots on. I am not kidding. Anyway, let’s look at our government in 2016.

                                          BIL$     %ofTotal

      Total Government       3,853          100

      Total Mandatory         2,428            63

      Social Security              910            24

      Medicare                       693            18

      Medicaid                       368            10

As you might expect, if all the things we buy went up in price then government spending would do the same, and it did. Government spending went from $184 billion to $3,853 billion. That’s an increase of 21 times. Notice that if median income had gone up 21 times, it would now be about $174,000. So let’s give a big cheer for government growth. Way to go, government.

The above table shows that total Mandatory Spending went from being 29% of total government spending to 63% in 2016. That means – tada – that Mandatory Spending went up a lot faster than overall government. Mandatory Spending went up 45 times in 47 years! If median income had gone up that much, the median person today would be making $374,000 per year. You guys all make that amount, right?

You smarty-pants are starting to get my drift. Now let’s look at Social Security, Medicare, and Medicaid. To cut to the chase, Social Security went up 34 times; Medicare by 110 times; Medicaid by 160 times. These three programs have gone from being 19% of all government spending to 52% of it. Or put another way, all the other things the government spends on went from being 81% of the budget to 48%.

I know I harp on this point a lot. But the baby boom generation is just getting started. We were born from 1946 to 1964. Those born in 1964 are mere babies in their fifties. If we don’t focus more on how we spend money on the old folks, then the rest of you are going to have to live on a lot less. Maybe you should think about it a little more. In case you are interested, if median income had gone up by the same number of times as Medicaid (160 times) we'd each be making about $1.3 million a year. Sweet. 

The Holy Grail and Mis-Trust Funds for Social Security and Medicare

I was recently part of an interesting discussion about government debt and current debates about how to control it. One side says that we cannot touch Social Security and Medicare spending. Those programs are too politically sensitive. Another side says that it is nearly impossible to control US federal debt without cutting these two important social programs. There are, of course, many other debates about the debt but I thought I would focus on this one today: Can or should we cut future spending on Social Security or Medicare?

First a little story. Then I will get to some data.

Nolan gets a part-time job and finds it impossible to spend all the money he earns each month so he lends the residual to Jason who promises to pay him back in 14 years. Jason spends the money each month. Fourteen years later, when Nolan asks for the money back and shows Jason his spreadsheet of past contributions, Jason agrees that the spreadsheet is impressive and that in fact he now owes Nolan enough money to go to college at Georgia Tech. Unfortunately, since Jason did not invest the money or any other money, he explains to Nolan that he is out of luck. Judge Judy saw otherwise and ordered Jason to find a second job so as to pay Nolan back what he owes him.

You might expect by now that Jason is going to shoot me. But this is not about Jason or Nolan – it is about the United States of America. Despite receiving very large sums of dollars for about 80 years from people paying into the Social Security system and other so-called trust funds, the US has nothing to show for it. Our government has done nothing but spend more each year than it receives in Social Security taxes and all other taxes. As such, instead of a shovel-ready-saving account the government now has a gigantic debt. Worse yet, all the annual balances of the major trust funds are either already in the red or are headed that way (see table below). Despite some funny accounting that shows trust funds with positive balances, there is no lock box and there is no money. It's like Nolan's spreadsheet.  

The USA now has to get a second job – or find a clever way to raise our taxes to keep the parade going.

Now to the data. Source is the Congressional Budget Office

https://www.cbo.gov/about/products/budget-economic-data#3

The bottom of the table below shows projections of annual flows into and out of major US government trust funds. These projections are based on existing legislation. Notice that in four short years (2021) they will begin spending more than they take in each year. In 10 years, they will have combined deficits of almost half a trillion dollars each year hence. Notice that Social Security and Medicare explain all of the problem with trust funds -- with Social Security going into deficit by 2019. Medicare is already showing annual deficits. And yes, these deficits must be paid out of the general budget each year. That means more debt.  

The table also shows that the national debt held by the public (the gross debt is even larger) is going to increase by $3.5 trillion or 25% in the next five years. The annual rate of federal government spending will also increase by 25% or by close to $1 trillion per year in those five years. 

Notice that if spending control is to be used to slow or reduce the nation's debt, the choices are limited to make a noticeable impact. Nine of the 10 spending categories listed below will increase between 2016 and 2021. But the expenditure increases are small for all of those except for three. The increase in defense spending is expected to be $58 billion; for income security the rise is $19 billion. Compare those amounts to the much bigger increases for Social Security ($281 billion), Medicare ($220 billion), and Net Interest ($194 billion). Since the latter is unavoidable, we are left with only two real opportunities to make a dent in spending and the debt. 

No one wants to push old people over cliffs. But if one is sincere about managing the country's debt load, the choices are pretty limited. And notice again, we are not talking about cuts in any program. The annual amounts of spending for Social Security and Medicare combined will increase by half a trillion dollars per year by 2021. That's a whopping per year 31% increase in Social Security spending and 32% per year for Medicare. Don't tell me there isn't room to cut before it starts to hurt grandpa. 

10 Year Budget Projections
(in billions of dollars)	2016	2021	Change	% of Total
Social Security	910	1191	281	30
Medicare	692	912	220	23
Medicaid	368	474	106	11
Healthcare Subsidies	42	85	43	5
CHIP*	14	6	-8	-1
Income Security	304	323	19	2
Defense	584	642	58	6
Net Interest	241	435	194	20
NonDefense Discretionary	600	641	41	4
Total	3755	4709	954	100
Government Debt	14.2	17.7	3.5
Held by the Public
(in trillions of dollars)
Trust Fund Annual
Deficits and Surpluses
In billions of dollars
	2016	2019	2021	2027
Social Security	30	-23	-96	-366
Medicare	-6	3	-8	-90
Mass Transit	57	-16	-18	-25
All Trust Funds	314	72	-20	-454

*Children's Health Insurance Program

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
Spending
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
Revenue
CBO.gov