Friday, March 29, 2013

A Thought about the federal budget

There is a good post by Nate Silver (the guru of election statistics) in his New York Times blog on the evolution of government expenditures. Since 1980, federal expenditures have varied between 20 and 25 percent of GDP. State and local government expenditures have varied between 12 and 16 percent of GDP. Having peaked during the stimulus after the 2008 crisis, total government spending is about 40 percent of GDP. He provides the following graph showing how the federal budget has evolved:

 The chart
documents the growth in federal government spending over the past hundred years as a share of gross domestic product spending is broken down into four major categories:
1. Entitlement programs, under which I classify government expenditures on health care programs; pensions and retirement programs like Social Security; and welfare or social insurance programs like food stamps and unemployment compensation.
2. Military spending
3. Interest on the national debt
4. Infrastructure and services, under which I include everything else — the pot that is often referred to as discretionary spending: education spending; fire services, police and the criminal justice system; spending on physical infrastructure including transportation; spending on science, technology, and research and development; and the category called “general government,” which largely refers to the cost of maintaining the political system (like salaries for public officials).
Compare the government expenditures with revenues:

Source of graph:
The blue is for the federal government, the red for state and the green for local government. Generally state and local government do not run deficits but rather adjust spending to revenues.

The basic problem is that the federal government has accepted more and more responsibility for health care, social security and pension and welfare programs without adding funding for them. The funds have tended to come from reductions in other budget items.

  • The interest payments have been relatively low. Foreign nations have wanted dollars and wanted to invest in the United States and so interest rates have been low. As the debt increases, and as (perhaps) the dollar loses its luster, interest payments may be expected to increase.
  • Military expenditures have decreased as a portion of GDP, in part because the Cold War is over. Still the United States spends much more on the military than do other nations, or indeed than groups of nations combined. With the end of the wars in Iraq and Afghanistan, there will be a need to rebuild their weapons base. There will also be trillions of dollars of medical and pension costs for which funds have not been set aside and saved.
  • Federal expenditures for infrastructure and services totaled only about 2.5 percent of gross domestic product in 2011; moreover they include many things that are important for the continued growth of the GDP.
Silver also provides this figure:

Remember, government expenditures can grow at the same rate as GDP without increasing government share of the total. The protection and law enforcement is a small item in the total, but one that has been allowed to grow rapidly. Education, transportation and science and technology have been losing share, and we can't afford to economize on these areas.

The real problem is entitlements. My read would be that there are some savings to be had in making health care more efficient and perhaps some in welfare by increasing employment, but that we have to increase government revenue to pay for more pensions for our aging population and more government provided health care. 

To some extent this is a shell game: if we are not to deny health care to those who can not afford it, the funds have to come from somewhere. Shifting them to government does not increase the total burden on society. But the further implication is that federal government revenues should increase in step with the increase in health care and pension expenditures.

Here is one more graph to polish off this post:

Source: Morning Sun blog
The increase in the public debt to the size of the GDP is worrisome, and it is likely to increase further in the next few years. There is not much that can be done to reduce the expenditures of government, so increasing revenues seems necessary.

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