SOLVING THE DEFICIT ~ PART II
Author’s Note: For source information, see Note 1
A. THE SPENDING COMPONENT OF THE 2009 DEFICIT
In January 2009, when George W. Bush saddled up and headed back to Texas, the national debt was $5,803 billion and the deficit in his final year came in at $642 billion.[1]. When Barak Obama took over the reins, he inherited the largest national debt in the history of the Republic and the worst recession since the Great Depression 80 years earlier. Welcome to the Whitehouse Mr. Obama.
A recession delivers an economic double whammy. Tax revenues drop sharply at the same time spending increases for programs that people traditionally turn to in hard economic times. Millions of people sign up for unemployment benefits and Medicaid enrollment expands along with the demand for food stamps and other so-called safety net programs. Even Social Security and Medicare expenditures rise as older workers who lose their jobs retire sooner than planned. And the resulting expenditures are mandatory, meaning that they are required by law and kick in automatically when people meet the statutory eligibility requirements (see Note 2 for details).
Table II-1 shows what happened to revenues and spending between 2008 and 2009.
TABLE II-1
Table
II-1 On-budget Changes in Revenue, Outlays, and Deficit - 2008
to 2009 (Current $ billions)
|
|||||||||
Unified
Budget
|
On-Budget
|
Off-Budget
|
|||||||
Rev
|
Outlays
|
Surplus
(Deficit)
|
Rev
|
Outlays
|
Surplus
(Deficit)
|
Rev
|
Outlays
|
Surplus
(Deficit)
|
|
| 2008 |
$2,524
|
$2,983
|
($459)
|
$1,866
|
$2,508
|
($642)
|
$658
|
$475
|
$183
|
| 2009 |
$2,105
|
$3,518
|
($1,413)
|
$1,451
|
$3,001
|
($1,550)
|
$654
|
$517
|
$137
|
| Change |
($419.0)
|
$535.1
|
($954.1)
|
($415.0)
|
$492.9
|
($907.8)
|
($4.0)
|
$42.3
|
-$46.30
|
Source: See Note 3
While Conservatives would have us believe that the ballooning deficit is the result of reckless spending by Obama and his fellow Democrats, a cursory examination of Figure II -1 should dispel that little bit of mythology. Figure II-1 shows that the dramatic rise in the deficit was due almost entirely to increases in mandatory spending and decreases in tax revenues, neither of which was under the direct control of the President or the Democrats in Congress.
Mandatory spending accounted for $409 billion (45.0%) of the increase and the drop in tax revenues accounted for another $415 billion (45.7%). Discretionary spending contributed a paltry $84 billion (9.3%) to the increase, and half of that was for Defense. A good chunk of the increase in mandatory spending was for the bailouts of Ginnie Mae, Freddie Mac, the banking industry, AIG, and the auto industry. Whatever you may think about the bailouts, it hardly seems fair to blame Obama for them since both were signed into law by George W. Bush [2].
FIGURE II - 1
Source: See Note 4.
FIGURE II - 1
Source: See Note 4.
-----------------------------------------------
[2] The
bailout of Ginnie Mae and Freddie Mac (both Government Sponsored Enterprises or
GSEs) was authorized by The Housing and Economic Recovery Act of 2008 which was
signed into law by President Bush in July, 2008 and the bailouts of Wall
Street, AIG, and the auto industry (commonly referred to as TARP) were
authorized by The Emergency Economic Stabilization Act of 2008, signed into law
by President Bush on October 3, 2008.
Obama was responsible for the American Recovery and Reinvestment (ARRA),
which was enacted in the first year of
his presidency. It included a
combination of tax cuts and spending measures intended to stimulate the
economy. The spending measures
included expansion of unemployment benefits and other social welfare
provisions, as well as additional
spending in education, health care, and infrastructure, including the
energy sector. It added $787 billion to
the deficit over the next several years.
----------------------------------------------------------------------
Figure I-1 shows the details of just the $908 billion increase in the deficit between 2008 and 2009. Table II-2 breaks down the entire $1550 billion 2009 deficit into its components. Obama inherited a $642 billion deficit from Bush (of which $277 billion of that was result of the tax cuts pushed through by Bush in 2001 and 2003). And since, Federal Fiscal Year 2009 ran from 10/1/2008 through 9/30/2009, the FFY 2009 budget was a Bush budget - produced by his administration and inherited by Obama. So President Bush gave President Obama a nice little going away present - a deficit of $642 billion. On top of that, the recession (need I point out that it occurred on Bush’s watch?) contributed an additional $824 billion in lost tax revenues and increased mandatory spending. As I explained in Part I, mandatory spending is made up primarily of “safety net” programs like Medicare, Medicaid, food stamps, and unemployment insurance, all of which become more costly when the economy is bad. The other feature of mandatory spending is that it is required by law unless Congress acts to repeal the authorizing legislation. Only $84 billion (5%) of the $1,550 deficit was actually due to discretionary spending - spending over which the Whitehouse has direct control.
TABLE II - 2
Bush Tax Cuts
|
($277)
|
Other contributors to 2008 deficit
|
($365)
|
(A) 2008 Deficit Inherited from
Bush
|
($642)
|
Recession Effects
|
|
Lost Tax Revenues
|
($415)
|
Increased Mandatory Spending
|
($409)
|
(B) Subtotal: Recession Effects
|
($824)
|
(C) Increased Discretionary
Spending
|
($84)
|
TOTAL ADDITIONS TO 2008 DEFICIT
|
($908)
|
2009 DEFICIT
|
($1,550)
|
Source: See Note 5
B. CAN WE CUT OUR WAY OUT OF THE DEFICIT?
(1) The Debt Ceiling
I write this section in mid-July as the great debate over raising the debt ceiling rages and the August 2nd deadline grows alarmingly close. Most Americans do not seem to understand that increasing the debt ceiling does not open the way for more government spending but instead simply allows government to pay for goods and services it has already purchased. The analogy would be Joe Blow, a good-time guy who is earning $40,000 a year and spending about $50,000. Joe has outstanding debts of $270,000 - $20,000 in credit card debt and a $250,000 home equity loan. The only way he can make his monthly bill payments is to borrow more money and, fortunately, he has enough equity left in his house that his bank is willing to lend him up to an additional $50,000. However, Joe has decided he is philosophically opposed to debt (notwithstanding the fact that he has embraced it rather enthusiastically to date) and enough is enough. Instead of obtaining another loan, he takes out an ad in the local paper announcing that Joe Blow has established a limit of $270,000 on the amount of debt he is willing to take on. He informs his creditors that because of his negative cash flow and his newly declared debt limit, he will not be able to pay all his bills and he hopes that his creditors will be understanding and not give him a hard time about it.
Liberals, along with most other Americans, are concerned about the deficit and the size of the national debt. However, the tactics being employed by the Republican leadership at present are a disgrace. Creating a package of spending cuts and tax changes to eliminate a structural deficit of one trillion dollars is a monumental task that requires analysis and careful deliberation. It is irresponsible to use the debt ceiling to create an artificial deadline in order to prevent thoughtful discussion and push through drastic funding cuts whose impact will come as a rude surprise to most Americans. . Rushing the process by setting arbitrary deadlines will almost certainly set the stage for a lot of wrong-headed, emotionally based decisions and counter-productive actions.
We need to reduce the deficit, but to do this right we must take the time needed for a thoughtful discussion and analysis. Above all, Americans need honest, unbiased information about the consequences of each proposed cut in spending and each proposed change in tax policies. Unfortunately, most Americans the information sources that most Americans are turning to are driven by ideological agendas and facts and accuracy are not on their list of priorities. Tea Party members think they are attacking the government. In reality, they are attacking themselves and their families. This does not bode well for their future or ours.
Rally for Sanity October, 2010
(2) Tools for Trimming the Budget
All of the data presented in the tables can be found in the documents I have posted in Google Docs. Those who prefer original sources can find them in the Budget of the United States at:
The details of the 2008 budget are actually taken from the 2010 budget which contains more recent information about 2008 spending than the actual 2008 budget. The details in Tables A2 through A8 are from Table 32-1, “Policy Budget Authority and Outlays by Function, Category, and Program “. To find this table, click on fiscal year 2010 and then on Analytical Perspectives, you can find a copy of the table in Budget 2008 - 2012.xls[2008 Outlays Detail] at Google.doc .
I have appended notes that provide additional information about certain individual line items so that the reader will better understand what they represent.
(1) Table A1 contains an overview of the entire on-budget spending side of the Federal budget. Many of the line items will be self-explanatory. For line items that may be less familiar to the reader, I have included supplementary tables that break out the details for individual line items.
(2) Detailed breakouts are been provided for the following functional categories:
· Table A2 - Agriculture
· Table A4 - Transportation
· Table A5 - Community and Regional Development
· Table A6 - Income Security
· Table A7 - Education, Training, Employment, and Social Services
· Table A8 - Health
(3) Detailed breakouts have not been provided for the remaining categories either because their functions are well known:
· National Defense
· Medicare
· Veterans Benefits and Services
· Administration of Justice
or because they are relatively small:
· Energy
· Natural Resources
· General Government
· Allowances
So get out your scissors, (or scalpel, or meat axe) and have at it!
TABLE A1
On-Budget Federal Spending 2008
| |||
Discretionary Outlays
|
Mandatory Outlays
|
Total Outlays
| |
050 National defense:
|
$612.4
|
$3.7
|
$616.1
|
150 International affairs:
|
$37.5
|
($8.6)
|
$28.9
|
250 General science, space, and technology:
|
$27.7
|
$0.1
|
$27.8
|
270 Energy:
|
$3.9
|
($3.2)
|
$0.6
|
300 Natural resources and environment:
|
$32.8
|
($0.9)
|
$31.9
|
350 Agriculture:
|
$8.4
|
$10.0
|
$18.4
|
370 Commerce and housing credit:
|
$2.8
|
$22.6
|
$25.5
|
400 Transportation:
|
$76.0
|
$1.6
|
$77.6
|
450 Community and regional development:
|
$24.1
|
($0.2)
|
$24.0
|
500 Education, training, employment, and social services:
|
$82.0
|
$9.3
|
$91.3
|
550 Health:
|
$54.0
|
$226.6
|
$280.6
|
570 Medicare:
|
$4.9
|
$385.8
|
$390.8
|
600 Income security:
|
$58.3
|
$373.0
|
$431.3
|
700 Veterans benefits and services:
|
$41.2
|
$43.5
|
$84.7
|
750 Administration of justice:
|
$46.7
|
$0.4
|
$47.1
|
800 General government:
|
$16.9
|
$3.5
|
$20.3
|
900 Net interest:
|
$0.0
|
$366.5
|
$366.5
|
920 Allowances:
|
$0.0
|
$0.0
|
$0.0
|
950 Undistributed offsetting receipts:
|
$0.0
|
($82.1)
|
($82.1)
|
$1,129.6
|
$1,351.6
|
$2,481.3
| |
TABLE A2
350 Agriculture:
| ||
Farm Subsidies
|
$4.0
|
$9.7
|
Agricultural research and services
|
$4.4
|
$0.2
|
Other
|
$0.0
|
$0.0
|
Subtotal
|
$8.4
|
$10.0
|
COMBINED MANDATORY & DISCRETIONARY
|
$18.4
| |
TABLE A3
400 Transportation:
|
Disc
|
Mand
|
Highways
|
$36,325
| |
Mass transit
|
$10.0
| |
Railroads
|
$1.5
| |
Air Transportation
|
$19.8
| |
Other
|
$9.9
|
$1.6
|
Subtotal
|
$76.0
|
$1.6
|
COMBINED MANDATORY & DISCRETIONARY
|
$77.6
|
TABLE A4
500 Education, training, employment, and social services:
|
Disc
|
Mand
|
Education for the disadvantaged
|
$14.9
| |
School improvement
|
$5.4
| |
Special education
|
$12.3
| |
Student financial for Higher Education
|
$16.5
|
$3.9
|
Training and employment:
|
$6.8
| |
Children and families services programs
|
$9.0
| |
Social services block grant
|
$1.8
| |
Rehabilitation services - Department of Education
|
$2.8
| |
Other
|
$17.1
|
$0.8
|
Subtotal
|
$82.0
|
$9.3
|
COMBINED MANDATORY & DISCRETIONARY
|
$91.3
|
TABLE A5
550 Health:
|
Disc
|
Mand
|
Substance abuse and mental health services
|
$3.1
| |
Indian health Services
|
$3.1
| |
Health Resources and Services Administration (1)
|
$6.3
| |
Disease control, research, and training
|
$5.6
| |
Public health and social services emergency fund
|
$1.9
| |
National Institutes of Health
|
$29.9
| |
Food and Drug Safety
|
$3.0
| |
Grants to states for Medicaid (2)
|
$201.4
| |
Children's health insurance program (CHIP)
|
$6.9
| |
Federal employees' and retired employees' health benefits
|
$9.0
| |
Military Medicare-eligible retiree health care fund
|
$7.9
| |
Other
|
$1.2
|
$1.4
|
Subtotal
|
$54.0
|
$226.6
|
COMBINED MANDATORY & DISCRETIONARY
|
$280.6
|
(1) Health Resources and Services Administration - Provides subsidies to outpatient health centers in underserved areas.
(2) Grants to States for Medicaid - Medicaid is administered primarily by the States and jointly funded by the States and the Federal government. States receive Federal dollars in the form of a block grant (called the Federal Medical Assistance Percentage or FMAP) that is calculated using a formula based on each State’s average per capita income. On average, the Federal government pays 56% of the tab, but wealthier States like Minnesota, Maryland, Massachusetts, Connecticut, New York, and California receive 50% while poorer States receive more (Texas 61%, South Carolina 61%, Louisiana (64%), Tennessee (66%), Idaho (68%), Alabama (69%), Arkansas (71%), Utah (71%), Mississippi (75%) and West Virginia (73%). (Notice a pattern here?) Medicaid serves over sixty million Americans. The sub-populations served and the amounts spent in 2008 (the most recent year for which complete data are available) are shown in Table A5b.
Table A5b
2008 Federal Medicaid Expenditures
| ||||
Number of Eligibles
|
% of Enrollees
|
Federal Expenditures (billions)
|
% of Expenditures
| |
Aged
|
5,346,910
|
8.9%
|
$32.2
|
16.0%
|
Blind or Disabled
|
9,714,884
|
16.1%
|
$68.1
|
33.8%
|
Children
|
29982760
|
49.7%
|
$100.4
|
49.8%
|
Parents of covered children
|
15,059,041
|
25.0%
|
$0.2
|
0.1%
|
Women w. Breast or Cervical Cancer
|
46,797
|
0.1%
|
$0.3
|
0.1%
|
Unemployed adult
|
177,173
|
0.3%
|
$0.2
|
0.1%
|
60,327,565
|
100%
|
$201.4
|
100%
| |
TABLE B5
600 Income security:
|
Disc
|
Mand
|
Unemployment insurance program admin Expenses
|
$2.6
| |
Section 8 rental assistance
|
$24.5
| |
Public Housing
|
$2.9
| |
Home Investment Partnership Program
|
$2.0
| |
Homeless assistance
|
$1.4
| |
Special supplemental food program for women, infants, and children (WIC)
|
$6.7
| |
Low income home energy assistance
|
$2.7
| |
Child care and development block grant
|
$2.1
| |
Supplemental security income (SSI) administrative expenses
|
$2.7
| |
Railroad retirement
|
$6.0
| |
Federal civilian employee retirement and disability
|
$64.2
| |
Military retirement
|
$45.8
| |
Unemployment insurance (UI) programs
|
$42.7
| |
Recovery Act grants in lieu of low-income housing tax credits
|
$2.5
| |
Food stamps
|
$39.3
| |
State child nutrition programs
|
$13.9
| |
Supplemental security income (SSI) (3)
|
$41.2
| |
Child support and family support programs
|
$4.3
| |
Temporary assistance for needy families (TANF) and related programs
|
$17.9
| |
Child care entitlement to states
|
$2.9
| |
Foster care and adoption assistance
|
$6.8
| |
Earned income tax credit (EITC) (4)
|
$40.6
| |
Child tax credit
|
$34.0
| |
Making Work Pay Tax Credit
|
$15.3
| |
Other
|
$10.7
|
($4.3)
|
TOTALS
|
$58.3
|
$373.0
|
COMBINED MANDATORY & DISCRETIONARY
|
$431.3
|
(3) Supplemental Security Income (SSI) SSI is a program of cash assistance for disabled, blind and aged individuals who are not otherwise eligible for social security. A little over 8 million Americans qualify for SSI payments of $674 a month for individuals and $1011 for couples. Beneficiaries who qualify for regular social security benefits can receive an SSI supplemental payment if their social security benefit is less than the SSI payment levels just mentioned.
(4) Earned Income Tax Credit The EITC provides tax credits to low-income individuals - mostly families with children. To qualify, individuals or families must have a social security number, earned income (from salaries, tips, or self-employment) and file a Federal tax return. Qualifying individuals receive a check from the IRS after filing their tax return. For tax year 2010, the maximum EITC for a person or couple without qualifying children was $457 annually. With one qualifying child it was $3,050 per year, with two qualifying children it was $5,036, and with three or more qualifying children it was $5,666. The payment increases with the amount of income reported but cannot exceed a maximum amount that varies with family size. The maximum payment of $5,666 would be for a family with three or more children and earned income of $16,500. The maximum credit for an individual is $457.
F. CONCLUSION
I hope that those of you who have been conscientious enough to actually study the foregoing budget material have been persuaded that spending cuts alone will not solve our deficit problems unless we are prepared to make truly draconian cuts in programs that serve our most vulnerable populations - children in low-income families, the elderly, the blind, and the disabled. The elderly, in particular, have an awful lot riding on the approach we take to cutting the deficit. The vast majority of elderly Americans literally could not survive without Medicare and Social Security. In the last few years of life, millions more will come to depend on Medicaid to cover nursing home care or community based supportive care. Very few of us will be financially prepared to cover the cost of care in a nursing home which now averages over $40,000 a year. So unless we are willing to really abandon the people who are most in need government services, we will need to include tax increases as part of the solution to the deficit problem. We are a wealthy nation. We can afford it. How can we not?
==============================================
NOTE 1 - Wherever possible I have provided original source citations for data cited in this series. In addition to these citations, I have posted Excel workbooks containing the underlying data for Tables, Figures, and my calculations for derived numbers.
Workbook 1 - Budget 2008 to 2012.xls
Workbook 2 - Budget Historical Data.xls
Workbook 3 - CBO Projections Jan 2011.xls
The workbooks can be found at Google Docs at:
Each workbook contains an index with clickable hyperlinks to the data sources for specified Tables and Figures. The hyperlinks do not work in Google.docs but will work if you download the document to your computer.
NOTE 2 - In Federal budget jargon, mandatory expenditures are those that have permanent authorization from Congress. They generally involve long-term programs that are expected to remain in place for many years to come. The authorizing legislation remains in effect until it is repealed or modified by Congress. If Congress does nothing, the legislation remains in place. Most of the so-called “entitlements” such as Social Security, Medicare, Medicaid, and unemployment benefits, are mandatory expenditures. Discretionary expenditures, on the other hand, are authorized through appropriations that must be renewed annually and this requires Congress to make a decision each year about whether to renew, reduce, or eliminate each of these expenditures. The largest discretionary expenditure by far is for Defense.
Mandatory programs tend to be the really big programs that millions of people depend and in which reductions will produce real and immediate distress in large numbers of voters. While cuts in discretionary programs such as Defense will also produce distress in industries that depend heavily on Defense related contracts, fewer people are involved, the effects are less immediate, and the people affected are less vulnerable and in a better position to cope. In short, the political cost of cutting mandatory programs is much higher than the cost of cutting discretionary programs and it is natural then that when budgetary problems arise, Congress prefers to go after discretionary rather than mandatory spending. The problem is that discretionary spending makes up only 38% of the Federal budget. And if you do exclude Defense, discretionary spending amounts to only 17% of the Federal budget.
NOTE 3 - 2012, Historical Tables, Table 1.1. Workbook 1[2012 1-1 Cur$]
NOTE 4 - I have consolidated and summarized the detailed spending data from the US Budgets from 2008 through 2012 in Workbook1 [Summary]. The table on which Figure II-1 is based begins at cell A151. the 2008 spending data are from the Budget of the United States for 2010, Analytical Perspectives, Table 26-1 and the 2010 figures are from the Budget of the United States for 2012, Analytical Perspectives, Table 32-1.
NOTE 4 - The data comes the CBO report “Long Term Budget Outlook” Table1-7 1.3 and 1.4, published in January, 2011. http://www.cbo.gov/doc.cfm?index=12039. I consolidated the information and created Table II-2 in Workbook 3[Solution].
[1] Again, these are on-budget numbers. Off-budget surpluses of $187 billion in 2008 and $137 in 2009 reduced the Unified budget deficit in each year by corresponding amounts. However the reduction was $46 billion less in 2009 than in 2008 which is why the change in the Unified budget deficit is $46 greater than in the change in the on-budget deficit. This is a good example of how social security surpluses, as explained earlier, serve to understate the deficit when they are folded into the Unified budget and muddy the waters when one looks at year to year changes in Unified budget deficits.
[2] The bailout of Ginnie Mae and Freddie Mac was authorized by The Housing and Economic Recovery Act of 2008 which was signed into law by President Bush in July, 2008 and the bailouts of Wall Street, AIG, and the auto industry (commonly referred to as TARP) were authorized by The Emergency Economic Stabilization Act of 2008, signed into law by President. Bush on October 3, 2008.
No comments:
Post a Comment