Your Taxes Are High Because the Old, the Poor, and the Military Are Expensive
President Bill Clinton famously ran three consecutive budget surpluses at the end of his presidency. Those days are long gone; in contrast, each year of President Barack Obama's five years in office has recorded a record budget deficit in the sense that all five of them have been higher than any previously recorded in American history. If you think budget deficits and the size of government are important and if you are interested in addressing the problem, it helps if you understand what has caused the problems in our federal government's finances. The answers may surprise you.
First, the problem is not all due to policies passed under or advocated by President Obama. In reality much of the problem with our deficit originated under President George W. Bush. For that reason, and because we ran a surplus under President Clinton, all the numbers in this column will compare fiscal year 2001 federal spending (Clinton's last budget year) to the nearly final estimates for fiscal year 2013 spending. Thus anything you see below is due to changes that occurred under Presidents Bush and Obama. They can share the blame.
Second, the problem is not on the revenue side. Yes, President Bush cut taxes and President Obama agreed to permanently extend those tax cuts on all except the top one to two percent of income earners, whose taxes he raised to higher than they were before the Bush tax cuts. However, revenue is at record highs. Even adjusting for inflation and population growth, revenue is six percent higher than in 2001. In other words, we are getting more revenue in dollar terms, more revenue in inflation-adjusted (or real) dollar terms, and more revenue in inflation-adjusted per person terms. The federal government is collecting plenty of revenue. Revenue is not the problem.
Spending, therefore, must have gone up faster than revenues in order to have gone from a surplus to enormous deficits. In fact, it has. Federal spending is up 36 percent on an inflation and population-adjusted basis. So we are spending over one-third more per person after accounting for inflation. Given that we are talking about a period of only twelve years that means spending growth of nearly three percent per year above what was needed to keep up with inflation and population growth, adding up to a little over $1 trillion in additional spending.
To make matters worse, much of federal spending has no reason to increase with population growth. Some types of social costs can be expected to increase with the number of people to be served, but many agencies have missions unaffected by the size of our population. For example, defending the nation is not more expensive because more Americans are alive. Similarly, the cost of international affairs and diplomacy should not rise with population growth. Taking this fact into consideration, spending growth is even more out of control than it first appears (which was already pretty out of control).
Knowing that government is spending much more than it used to is not particularly informative as to a solution. We need to know which government programs are causing the spending problem in order to know where to cut. The obvious suspects are defense, social safety net programs, and retirement benefit programs (Social Security and Medicare).
In fact, these obvious suspects are the correct ones. If veterans' benefits are added to the above list as a minor player, all the remaining federal spending only accounts for about six percent of the increase in spending. In other words, international affairs, scientific research, agricultural subsidies, transportation, education, justice, general government, and net interest on the national debt all bundled together do not merit our attention here.
Now, some of these programs have grown considerably in percentage terms and all but a few have grown above the rate of inflation plus population growth. I am sure plenty of waste and items to cut can be found in all of them. However, for the purposes of balancing the budget, or even reducing the deficit to a more "sustainable" level, these programs are all small potatoes. We need to go where the big money is.
The spending growth in veteran's benefits accounts for about seven percent of the total increase. Given the increase in veterans we have seen thanks to two long wars, this also seems like a place not worth our time at the moment. Let's focus on the big three: defense, social safety net programs, and retirement benefit programs (Social Security and Medicare).
Defense spending is up by $232 billion above inflation and population growth, representing about 22 percent of the inflation and population-adjusted spending increase. Obviously, we have the wars in Iraq and Afghanistan to thank for some of this, but those wars are winding down now. Secretary Hagel is proposing spending cuts to stay within the sequester-proposed spending limits. If Republicans are serious about reducing government spending, they probably need to find some defense cuts that they can live with.
Spending on social safety net programs-Medicaid, unemployment benefits, housing subsidies, food assistance, and another seventy-plus programs the federal government runs-has increased a total of $294 billion beyond inflation and population growth, accounting for 28 percent of the extra spending growth. Certainly some of this is related to the 2007-2009 recession and to the increased cost of health care, but the recession ended 56 months ago so it seems somewhat specious to blame these costs on economic conditions five and one-half years ago. Rather, it seems likely that the Obama administrations persistent and extremely active efforts to sign more people up for all these government benefits is a significant contributing factor to the explosion in this spending category.
Finally, we get to the government benefit programs for the elderly. Spending on Social Security and Medicare has risen by $415 billion above and beyond if it had grown at the rate of inflation plus population growth. Partly this is due, to the number of elderly growing at a faster percentage than the overall population and partly it is due to President Bush's Medicare Part D prescription drug coverage program. Regardless of the causes, spending to benefit the elderly accounts for 39 percent of our above-inflation-and-population-growth spending increase.
Thus, we see the root of our federal government's budget problems. The cause is spending, not revenue (which is at an all time high), so spending would seem to be where the imbalance should be corrected. However, 89 percent of the spending growth above the rates of inflation and population growth comes from the three categories of spending that are the politically most difficult to cut.
Defense spending is the favorite of most Republicans and is spread across virtually every Congressional District so that few in Congress wish to cut too deeply into programs that bring dollars to their local communities, especially in an election year (which is half the time). Social safety net spending is the favorite of most Democrats because they see it as correcting the market's propensity to produce income inequality. Cutting such programs is feared by many who know that the liberal media will make them look cold and heartless for even starting a discussion on the topic. Social Security and Medicare are considered the "third rail" of politics, with almost no politician willing to risk the wrath of seniors due to their high voter turnout rate.
All the rest of the federal government can surely use some budget cutting, but unless spending is reduced to levels unseen in over a decade, the amount that can be saved in those programs is not enough to significantly close the gap between revenue and expenditures. The budget reality is that to address our deficit and rein in our out of control spending, one has to make major cuts in the three areas of federal spending that are the hardest to cut.
Unless and until we see major changes in either the politicians or the political climate in Washington, cuts to defense, social safety net programs, Social Security, and Medicare seem a low probability event. If you are one who worries about the federal deficit, the ever-rising national debt, or simply the elevated level of government spending relative to its historical share of our economy, realizing the source of the overwhelming majority of all the spending growth suggests that our future prospects are dim.
Bringing spending back to historical norms would mean large cuts in defense, the social safety net, Social Security, or Medicare (or all four). History suggests, therefore, that the current enormous budget deficits are here to stay.