A Budget Discussion Thats Not Stoopid

As of last week, your income taxes are all filed. Congrats! Or, like me, you got an extension. Boo!

federal_spendingIn either case, it’s a good week to think about what our tax money bought this year. And since we’ve all been promised federal tax reform this spring or summer from a unified legislative and executive branch it’s also good to reflect on how the federal government spends our tax dollars now, and how it might spend them in the future.

A simple way to understand federal government spending is to compare it to a household. I don’t mean governments should be run like households – they shouldn’t – I just mean that we taxpayers can understand numbers that resemble the size of our expenditures in our own life. Otherwise you know, a billion here and a trillion there, it can get confusing.

The median household income in 2015, according to the US Census, was $55,775. With simplicity as my goal I prefer an easier, rounder number. So let’s just say instead of the median, we have $100,000 to spend each year as a household.

Looking at the federal government as a household with $100,000 in annual income, here’s where all the money goes, rounded to the nearest hundred dollars.

  1. Our federal government household paid $33,300 for a combination of Social Security, unemployment payments, food assistance, housing assistance, welfare, and labor costs. All of these are considered “mandatory” in the sense that they are promised payments, and not voted on in a budgetary process each year by Congress.
  2. We paid $27,400 on Medicare and other federal health-care costs. This is also “mandatory” and outside of the annual budgeting and decision-making process. The bill just comes in the mail and we pay it, no questions asked.
  3. Our household paid $15,800 for military expenditures. This is considered “discretionary” spending, so Congress must approve an annual budget for setting this amount.
  4. We spent $6,000 on debt interest, our household credit card. This is not discretionary if we ever want to be able to borrow again.
  5. Lastly, everything else cost $17,500 in 2015, also part of the “discretionary” part of the budget approved by Congress. That includes everything from veteran’s benefits to transportation, and from energy and the environment to education and international affairs.

 

So…what do we think of that? If you were in Congress looking to rein in spending as the majority party, what would you cut?

On the real political spectrum there are numerous (I won’t say there are fifty) shades of grey on the topic of federal spending. But to oversimplify into black and white shades, we could say that a prototypical left-of-center voter will say “hands off Social Security and Medicare,” while a prototypical right-of-center voter will say “hands off the military.”

sacred_cowsAnd I mean, ok, sure, we all want security from foreign threats, security from catastrophic medical expenses, and security from eating cat food in our old age. So again I’m simplifying people into these two Left and Right buckets.

But since entitlement reform (Social Security, Medicare, food, unemployment and housing subsidies) and Defense budgets then become sacred cows to the Left and Right, all budgetary discussion becomes really stoopid, really fast. Elected officials don’t want to turn off half the electorate by promising to actually get serious about spending cuts, so they talk about stoopid stuff.

It’s stoopid to focus on some bad art you don’t agree with funded by the National Endowment for the Arts. It’s stoopid to complain about pointy-headed liberals getting PBS funding. It’s stoopid to focus on “waste, fraud and abuse” as a real source of cost savings in the federal government. These are mere pimples on the butt of the federal government’s spending.

We need to get more like Willie Sutton and his bank robbery strategy. Why do we need to talk about cutting entitlements and defense, Mr. Sutton? “Because that’s where the money is!”

where_the_money_isIf you’re not willing to discuss cutting both entitlements spending AND defense spending then I don’t know what to tell you except you’re not invited to my birthday party and your ideas about fiscal responsibility are stoopid too.

Having gotten that off my chest, let me say one or two sentences about why each of the three biggest sacred cows – Social Security, Medicare, and Defense – should be targets for cost-cutting at the federal level. I honestly don’t know the best way to do it. I’m just saying we could spend less on all three.

Social Security – when this program was first enacted in 1935, the average lifespan in the United States was just under 62 years. Maybe logically, people became eligible for Social Security at age 62. Would a newly-designed Social Security program set 80 as the right starting age for benefits? Maybe. Furthermore, in 1935 a 65 year-old beneficiary could expect to live until age 74, on average. Now, a 65 year-old could expect to live until age 82, on average. While that’s good news, it also means the program is far more generous, far longer, than originally intended. Sorry folks, we need to raise the eligibility age further.

Medicare – We spend 30% more than the 2nd highest-spending country-per-capita (Switzerland), and typically about double what rich countries like Canada, France, Japan spend on healthcare overall. Strangely, we have notably worse outcomes in terms of life expectancy, infant mortality and other major chronic problems such as heart disease and diabetes I don’t personally pretend to know how to cut spending and raise outcomes. And anyway, who knew health care policy could be so complicated, right? But surely we could learn a thing or two from other countries about how to bring costs down while improving health outcomes? (But please don’t call me Shirley.)

Defense – We not only pay more for defense than any other country – and three times more than #2 spender China – we pay more than the next 8 countries combined.

defense_spendingPaying too much for one’s military – to enforce global peace – is how empires always fall. Ask the Romans, the Spanish, and the English.

No more sacred cows. No more avoiding. Do the real cost cutting if you want to be taken seriously, and face the political consequences. Everything else you say about federal government cost-cutting is a joke and we’re not stoopid.

 

 

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Life After Debt, Part I – Bizarro World Debt Crisis

Join me, if you will, in examining a time capsule from November 2000.  A junior economist, burrowed deep in the cubicles of the US Treasury Department, wrote a never-published memo to his bosses about a major problem facing the financial markets titled, ‘Life After Debt.’  How would markets react to the imminent pay down of all our Treasury debt?  Projections at the time showed the stock of US Treasury bonds would be completely paid off by 2012.[1]

Meaning, no more government debt.  Federal government debt, totally paid off.

Produced in the final weeks of the Clinton administration, the paper never got published.  No problem a little more than a decade later, as we know, since this alternative reality never came true.  Not even close.

National Public Radio’s Planet Money Program made the unpublished memo available a while ago, but it deserves further study.  To read it today opens up the Bizarro World of US national debt, a world a decade ago when our biggest problem seemed to be the issue of disappearing federal deficits and the problem of parking future federal surpluses.  Our US Treasury officials lay awake wondering at night – how will we ever invest our untold billions of surplus future tax receipts?  How can we avoid dismantling Wall Street’s bond market infrastructure?  How can we not crowd out private investments with excess government surpluses?

This is Bizarro World indeed, given the downgrade of United States sovereign debt risk by S&P, the seeming impossibility of producing an annual balanced budget, and the ever-increasing load of national debt.

If September 11, 2001 marked a new era in the United States’ relationship with national security and existential threats, the end of 2000 marked a turning point in our relationship with fiscal responsibility.  Concerns before then strike us now as oddly naïve, as if from a different generation from our own, despite their proximity to today.  Reading this memo with our present day lens is funny, but not in the ‘ha-ha’ way.  More like the laugh-instead-of-crying kind of way.

The Treasury department author worried about three negative consequences of buying back all US Treasuries, specifically the elimination of

a) A risk-free benchmark for pricing risky assets,

b) A fully articulated yield curve for market signaling, and

c) A key instrument of the Federal Reserve for conducting Monetary Policy

As a bond guy by training I will acknowledge that US Treasuries fulfill these roles very nicely, and the author conscientiously consids how to address changes over time in these three key areas.  Markets would indeed have to adjust to a new regime if US Treasuries slowly disappeared.  I can’t fault the economist for considering the important consequences of such a big changes in US markets.

In addition, as you read the memo carefully and the side notes by the author and editor, you see that they understood that overall reducing or eliminating the Federal Debt was a good thing, but that the risks and costs of doing so should be anticipated, understood, and debated.  This understanding works fine as a theoretical exercise deep in the heart of the Treasury Department cubicles.  But one does get the decidedly uncomfortable feeling that concern for structurally important institutions such as US Treasury dealers and bond investors would take precedence over the general welfare improvement inherent in paying down indebtedness.  This preference isn’t spelled out, but it is implicit.

I do not mean to imply the author is complicit in defending Wall Street bond dealers and their investors, per se.  But I do read the memo and want to violently reach back in time and throttle anyone who gave up our best, once-in-a-generation opportunity, at national solvency.  We seem so far from it now that the detached consideration of the ‘pros and cons’ of paying off the national debt reads as cruel historic irony.

As a country we’re the Megaball Multi-State winner from 2000 who, ten years later, declared bankruptcy.  We took the lump sum lottery that we won and blew it on a speculative Las Vegas condo investment, flashy speedboats, and a few too many wars of choice in the Middle East.

Instead of building national wealth, we now we have deficits as far as the eye can see, to pay off the wars, as well as social safety net programs that are, demographically speaking, unsustainable.

But I digress.  It’s worth reading the memo to check out the choices under consideration in 2000 for parking our impending windfall of federal surpluses.  The details are funny, but again, not in the ha-ha way.

 

Up Next…Part II – Weapons of Financial Mass Destruction



[1] Back in 2000, I fully expected to be writing this blog in 2012 from my hovercraft.  Life is cruel sometimes.

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