Tag: budget deficit

President Obama Plays While the Federal Budget Burns

The U.S. is bankrupt. Of course, Uncle Sam has the power to tax. But at some point even Washington might not be able to squeeze enough cash out of the American people to pay its bills.

President Barack Obama would have everyone believe that he has placed federal finances on sound footing. The deficit did drop from over a trillion dollars during his first years in office to “only” $439 billion last year. But the early peak was a result of emergency spending in the aftermath of the financial crisis and the new “normal” is just short of the pre-financial crisis record set by President George W. Bush. The reduction is not much of an achievement.

Worse, the fiscal “good times” are over. The Congressional Budget Office expects the deficit to jump this year, to $544 billion.

The deficit is not caused by too little money collected by Uncle Sam. Revenues are rising four percent this year, and will account for 18.3 percent of GDP, well above the last 50-year average of 17.4 percent. But outlays are projected to rise six percent, leaving expenditures at 21.2 percent of GDP, greater the 20.2 percent average of the last half century.

Presidential Spending

President Obama has issued his final federal budget, which includes his proposed spending for 2017. With this data, we can compare spending growth over eight years under Obama to spending growth under past presidents.

Figures 1 and 2 show annual average real (inflation-adjusted) spending growth during presidential terms back to Eisenhower. The data comes from Table 6.1 here, but I made two adjustments, as discussed below.

Figure 1 shows total federal outlays. Ike is negative because defense spending fell at the end of the Korean War. LBJ is the big-spending champ. He increased spending enormously on both guns and butter, as did fellow Texan George W. Bush. Bush II was the biggest spender since LBJ. As for Obama, he comes out as the most frugal president since Ike, based on this metric.

Figure 2 shows total outlays other than defense. Recent presidents have presided over lower spending growth than past presidents. Nixon still stands as the biggest spender since FDR, and the mid-20th century was a horror show of big spenders in general. The Bush II and Obama years have been awful for limited government, but the LBJ-Nixon tag team was a nightmare—not just for rapid spending during their tenures, but also for the creation of many spending and regulatory programs that still haunt us today.

Military Spending and the Budget Deal

The budget deal announced last night offers two sets of potential cuts in military spending.

The first set of potential cuts, created by the budget caps, target “security” spending. That includes the Pentagon, State, foreign aid, the Department of Homeland Security and Veterans (the discretionary portion of Veterans spending, to be precise). The deal caps “security” spending at $684 billion for this fiscal year and $686 for the next. That requires little pain; the 2012 security cap is only $5 billion below what we’ll spend on those categories in fiscal 2011. The White House claims that the caps will generate $350 billion in savings from base defense spending for ten years. They get there, dubiously, by projecting security spending at the capped level across the decade, even after the caps expire, and counting as savings the difference between that spending trajectory and what CBO now projects. They are also assuming that all the savings go to defense, even though Republicans will try to make the other security categories absorb the pain.

The second set of potential cuts, which occur automatically if the Joint Committee fails to reach its spending cut goals, target defense spending directly. This could add $500 billion in defense cuts over ten years, the White House says.

Assuming that is true, the maximum amount of defense cuts possible here is $850 billion. That is a cut of roughly 15 percent compared to planned spending based on the president’s February 2011 budget submission — not including the wars. It is roughly on par with the cuts proposed by the Bowles-Simpson Commission. The total savings are much lower, roughly half, if you compare the cuts to what we actually spend now, rather than the increases we were planning on in past planning documents.

And remember, that $850 billion is a maximum; it may not materialize. It will be lower, if, as hawks hope, the cuts fall on the non-defense elements of the security category. It will be lower if the Joint Committee finds other accounts to cut, avoiding the triggers.

Still, that possible amount is enough to make hawks apoplectic. We are sure to hear more complaints about “gutting or “hollowing out” the force. But let’s keep some facts about military spending in mind:

The Pentagon’s budget has more than doubled over the past decade, and current projections call for the Pentagon to receive more than $6 trillion from U.S. taxpayers through 2021. If its budget got cut by 15 percent, that would return us to roughly 2007 levels. That hardly seems like “gutting”. After such cuts, we would still account for more than 40 percent of global military spending, and our margin of military superiority over any combination of rivals would remain unrivaled.

The focus should now shift to strategy. The White House says the Pentagon’s ongoing roles and missions review will guide the first round of security cuts. The aim is to eliminate military capabilities that are unnecessary or provided by multiple services. We should go deeper, looking to what missions, allies, and possible wars, we can jettison.  The recommendations should guide not only the first set of cuts, but also the second. That means making recommendations for the Joint Committee on additional defense cuts and preparing for automatic cuts should they occur. There is nothing preventing those cuts from being achieved by retiring force structure required by needless missions—such as defending rich allies that can defend themselves.

We should also keep in mind that this deal hardly solves our deficit problem and does not exhaust the possible savings we should seek. Deeper military cuts are possible and could even enhance security given the right strategy.

Bailout Coming for the Postal Service?

The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.

While the Europeans continue to shift away from government-run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.

Self-interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”)  Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.

Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.

At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector-general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector-general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.

Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:

Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.

Sounds like a bailout to me.

See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.

As If Gov’t Spending Had Nothing to Do with It

This is how a front-page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:

Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillion

The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.

Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit.  Yet the Post blames the deficit only on inadequate tax revenue.  Federal spending isn’t too high, the Post implies, tax revenue is too low.

This may not be an example of media bias.  But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government.  At a minimum, the Post has some explaining to do.

Robert Kagan for the Defense

The calls for cutting the federal budget continue to build in Congress as the new GOP members try to make good on their promise to rein in the deficit.  And, right on time, the latest issue of the Weekly Standard features an article by Robert Kagan critiquing the chorus of calls for cuts to military spending. 

I think Kagan’s critique is reasonably fair, certainly more so than others of the recent past.  But his basic premise, that national security spending is unrelated to the national debt, simply is not true.  At the The Skeptics, I address this:

It is of course true that entitlements and mandatory spending pose the greatest threat to the nation’s fiscal health, but $700+ billion [in defense spending] isn’t chump change. The question of what we should spend on the military ought to take into account the trade-offs, an argument that Dwight Eisenhower advanced in his farewell address just over 50 years ago, and that Charles Zakaib and I highlighted last week. (See also James Ledbetter’s discussion on this point.)

Actually, it is a question of fairness, but not the one that [Kagan] proposed. Because security is a core function of government (I think one of the only core functions of government), it would be a mistake to treat military spending as synonymous with spending on, say, farm subsidies. But Kagan’s writings presume that other countries’ governments do not – and should not – see their responsibilities in the same way. Kagan contends that American taxpayers should be responsible for the security of people living in Europe or East Asia or the Middle East. Or anywhere in the world, really… It simply isn’t fair to ask Americans to pay for something that other people should pay for themselves. For reference, the average American—every man, woman and child—spends two and a half times more on national security than the French or the British, five times more than citizens living in other NATO countries, and seven and a half times as much as the average Japanese.

Justin Logan is in the process of authoring a lengthier response for publication, but in the mean time click here to read the full post at The National Interest.

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