Fiscal Responsibility

Given all the political talk in Washington these days of fiscal cliffs, deficits, and debt ceilings I wonder how many people, even how many of those doing all the talking, have much of an idea of what government's spending and taxing looks like of late?  I have to pay attention to some of this because of the courses I teach, and I have my course Economics of the Public Sector coming soon.  So, I thought I would spend some time, once again, with the numbers in the President's Budget Proposal for FY2013.  I don't like looking at numbers that are only estimates, so I'm only paying attention to actual numbers for outlays and revenues.

Here is what the total picture looked like with respect to spending, revenues, and borrowing for the US Government, and for the last two fiscal years for which there is actual information.  The numbers presented are in billions of dollars.  In FY 2010 the US Government had revenue of  $2,163 billions of dollars,  while it spent $3,456 billions of dollars.  In FY 2010 the US Government chose to borrow $1,293 billions of dollars.  This means that for FY 2010 Congress and the President chose to borrow 37 cents of every dollar they spent.

The story is pretty similar for FY 2011.  In that year the revenue was $2,303 billions of dollars while spending was $3,602 billions of dollars.  In FY 2011 the US Government chose to borrow $1,300 billions of dollars.   That means that for FY 2011 Congress and the President borrowed 36 cents of every dollar they spent.

The political talk these days often has one side of the political isle saying government has a spending problem and the other side counters by saying government has a revenue problem.  It seems to me better to say the US Government has a borrowing problem.  Can there be any justification, outside of events like WWI and WWII, for borrowing around 40 cents of every dollar spent?  I doubt it, but the question does suggest we might wonder what the government spends $3.5 trillion dollars on, and what aspects of this spending justify borrowing around a trillion dollars annually.

It seems a rather challenging task to get deeply into the budget numbers for the entire US Government.  So, I'm not going to get very detailed.  Still, I think we can probably draw some conclusions by looking at what sorts of things Congress and the President have been spending the most money on of late.  Consider the percentage of the entire budget spent by the largest four agencies of the US Government:

• Department of Health & Human Services . . . . . . . . . 24.7%
• Social Security Administration . . . . . . . . . . . . . . . . . 21.8%
• Department of Defense . . . . . . . . . . . . . . . . . . . . . . . 18.8%
• Department of the Treasury  . . . . . . . . . . . . . . . . . . . 14.9%

It is notable, I think, that these four agencies spent 80.2% of the entire amount of money spent by the US Government in FY 2011.  The next largest agency in terms of spending was the Department of Agriculture which spent 3.9% of the total spending for the US Government.  After taking the spending of these 4 agencies out of the budget, there are 24 remaining agencies which together spend the remaining 20% of total federal spending.

Take a look now at the amount spent by these 4 agencies in FY 2011:

• Department of Health & Human Services . . . . . . . . . $891,247 million
• Social Security Administration . . . . . . . . . . . . . . . . . $784,194 million
• Department of Defense . . . . . . . . . . . . . . . . . . . . . . . $678,074 million
• Department of the Treasury. . . . . . . . . . . . . . . . . . . . $536,740 million

Just the largest 3 agencies together spent $2,353,515 million, or $2,354 billion, in FY 2011.  In other words, the spending of just three agencies exceeded the government's revenue of $2,303 billion in FY 2011.  In a sense, then, in FY 2011 members of Congress and the President decided to borrow 40 cents of every dollar they spent in order to operate the rest of the 25 agencies of government.  Wow!

Take a look now at 3 of the programs the 2 largest agencies spent money on:

• Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $599,372 million
• Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $565,340 million
• Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,571 million  

Add these 3 programs together to get $1,296,282 million, or $1,296 billion, in FY 2011.  Members of Congress and the President borrowed $1,300 billion in FY 2011.  Thus, another way of trying to put the fiscal actions of the US Government into perspective is to say that in FY 2011 the money that was borrowed was borrowed in order to pay for just three programs: Social Security, Medicare, and Disability.

It seems to me we should conclude that something has gone seriously wrong with the recent fiscal actions of Congress and the President.  I don't think it is possible to justify borrowing the money necessary to operate 25 out of the 28 agencies of government.  Nor do I think it is possible to justify borrowing the money needed to fund Social Security, Medicare, and Disability.

Or think about this. Social Security and Medicare combined account for almost the amount borrowed, and these two programs are for only one group of people, those who have reached "retirement age."  I don't think it is possible to justify borrowing money to support programs for this group of people.

I'm sure some will complain that this way of thinking about government borrowing isn't sensible because Social Security isn't an entitlement program since people are just getting back their money from payments over the course of their working lives.  But, Social Security has never worked this way in fact.  It has always been a transfer program from those who are working to those who are retired.  In addition, the numbers I'm using here combine all sources of revenue and types of outlays into the total budget numbers.

In any case, I suggest it is important to think about all the budget talk by the President and members of Congress these days in some conceptual way that allows us to emphasize what our political representatives are choosing to do when they borrow money on our behalf.  It seems to me these two perspectives help in this regard.  Also, please don't forget that when our representatives decide to borrow money on our behalf that we adults won't be the only people paying the money back.  People who can't yet vote, our children, will also have to pay back money "we" borrowed for government today.

Perhaps there is another way to put the budget actions of Congress and the President into perspective.  Even if our representatives in Washington wanted to balance the government budget, it is possible to over estimate the revenue and thus to be required to borrow to cover the difference between predicted revenue and actual revenue.  But, if this reason explained the deficits then once in a while there would be a surplus, and the need to borrow would be just a few cents for every dollar spent annually, not almost 40 cents for every dollar spent.  Borrowing as much money as they have recently suggests it is unreasonable to assume the borrowing is needed because of inaccurate revenue estimates.  It seems better to assume other justifications are needed.  Thus, another way of putting the budget actions of Congress and the President into perspective is to see any new spending as requiring new borrowing.  As such, Congress and the President should be discussing why they want to borrow money for the new spending.  For example, just yesterday the House considered spending, or should we say borrowing, an additional $50 billion for hurricane Sandy "relief."  What reasons can justify borrowing money at this time for personal losses due to a hurricane?  Perhaps there are in fact good reasons.  But, if so, there is also the larger context that government has already found that it needs to borrow sufficient money to operate 90% of the government agencies.

It seems to me something has gone wrong with the US Government.  It also seems to me that what has gone wrong is related to the easy way by which members of Congress and the President have come to accept borrowing more and more money to fund government.  Perhaps the answer to what has gone wrong is to return to what Buchanan and Wagner (Democracy in Deficit) called the "Smithian principle of fiscal responsibility:"

Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.

In other words, government should generally seek to operate without running a deficit.

Fiscal Cliff or Deficit Scissors?

All the political talk about a "fiscal cliff," and a post by Peter Boettke, has led me to begin reading Democracy in Deficit by Buchanan and Wagner.  I think the opening paragraph in the first chapter of Democracy in Deficit suggests a very simple way of thinking about the fiscal issues front and center in the news today:

In the year (1776) of the American Declaration of Independence, Adam Smith observed that "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom."  Until the advent of the "Keynesian revolution" in the middle years of this century, the fiscal conduct of the American Republic was informed by this Smithian principle of fiscal responsibility: Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.

In other words, government should generally operate without running a deficit.  Government should generally pay for its activities each year with annual tax revenues.

If you agree this is a reasonable idea, then perhaps you will wonder about the so-called fiscal cliff that the President and members of Congress are bickering over these days.  The idea of the fiscal cliff is that Congress and the President have "bound" themselves by past actions in ways that will, on January 1, result in (1) an increase in income tax rates (for every taxpayer), and in (2) automatic across the board cuts in government spending.  If you haven't been paying attention to politics lately you might wonder why the President and Congress would take action in the past that would bind them to (1) and (2) today.  The answer seems to have something to do with the fact that the President and Congress have been borrowing quite a lot of money to finance their activities of late.  I will show you how much borrowing in two charts below.  It seems that the President and members of Congress recognized in the past that they really aren't very good with budgets and fiscal responsibilities, and thus they concluded that if they wanted to start borrowing less money they would have to bind themselves to (1) and (2).  There must be some truth to the idea that they aren't very good with budgets because we are now less than a month away from (1) and (2) happening, and what are the President and members of Congress bickering about?  Yep, unbinding themselves from (1) and (2) so that they can borrow more money.

How is it that we are now facing a "fiscal cliff?"  Maybe our political leaders see this as a cliff because they can't face up to the idea that they should be more responsible than they are with the budget of the United States.  Or it may be that our political leaders and others see a cliff because they believe that more tax revenue and less spending will mean a new period of recession for the country.  Or, it may be that our fearless leaders are hoping to deflect our attention from the mountain of loans they have been taking out lately by telling us to pay attention instead to the cliff that is (1) and (2).

Given all the public bickering and finger pointing, I'm thinking the last alternative makes a lot of sense.  After all, if the President and Congress have been borrowing too much money in the past few years, then it seems that the quote from Democracy in Deficit would suggest they need to get out a pair of deficit scissors and cut the size of their borrowing.  What would deficit scissors be?  Well, pretty much something like (1) and (2).  One blade of the deficit scissors would be more tax revenue while the second blade would be cutting what they spend each year.

Should the President and Congress get the deficit scissors out?  You'll have to decide for yourself, of course.  But, after showing you some numbers that I found in the FY 2013 Budget Proposal of President Obama, I'll tell you my answer.  These numbers come only as close to the present fiscal year as FY 2011 because that is the last year for which actual information is available.  I do not present estimates.  The first chart shows the historical record of U.S. Government receipts and outlays as percentages of GDP.  Outlays are shown in red, and thus for any year that the red trend line is above the blue trend line the U.S. Government ran a deficit, i.e., Congress and the President borrowed money.  It looks like the President and Congress began to borrow more each year, compared to the past experience, from around 1970 on.  There is an exception which is shown by the

four years of surplus around the end of the Clinton presidency.  In most of the years after those four years of budget surplus the President and Congress borrowed pretty heavily.  The last three years in the chart show very heavy borrowing. 

I don't think it is really easy to understand the meaning of a government deficit when expressed as a  percentage of GDP.  The next chart shows the deficit in terms of the cents borrowed out of every dollar spent by government in each year.  For any year in which government's budget was in surplus 

the cents borrowed is shown as zero.  The information in this chart begins in 1900 and ends with the 2011 FY.  Notice that outside the years that involve either a world war or the Great Depression, the US Government seldom borrowed more than 20 cents of every dollar it spent.  It also appears that over the period of years since WWII the US Government's reliance on borrowing increased early in the decade of the 1970s.  The US Government's willingness to borrow seems also to have increased recently.  In the 2009 FY it borrowed 40 cents of every dollar it spent, in 2010 FY it borrowed 37 cents of every dollar spent, and in 2011 it borrowed 36 cents of every dollar spent.

I suggest that the President and Congress have borrowed far too much money in recent years.  Borrowing thirty to forty cents of every dollar spent is far too much.  I also suggest that if you look again at the first chart, it is reasonable to conclude that the last three years in the chart display a significant increase in the spending habits of the President and Congress.  Yes, there was also a decrease in tax revenues during the last three budget years, which is of course what happens with recession.  Given the proclivity of the red spending trend line to be above blue revenue line since around 1970, it seems to me the borrowing problem of the President and Congress results from their proclivity to spend too much.  

In any case, except for relatively unusual circumstances (e.g. a world war), it seems to me that the President and Congress should be budgeting for a surplus, or for a very small deficit (perhaps five or ten cents for every dollar spent).  The fiscal cliff looks to me like deficit scissors that are really needed at this point to begin to get the President and Congress to be fiscally responsible with our money and the money of future generations.  My preference is for the President and Congress to spend less rather than raise tax rates on any of us, but I suggest ending the unjustified borrowing is the greater priority at this time.

What do you think?  Should we fear the fiscal cliff, or should we get out the deficit scissors?

Presidents & Budgets

Recently President Obama drew attention to Presidents and their budgets with the following comments:

"I'm running to pay down our debt in a way that's balanced and responsible.  After inheriting a $1 trillion deficit, I signed $2 trillion of spending cuts into law," he told a crowd of donors at the Hyatt Regency. . . . "I just point out it always goes up least under Democratic presidents.  This other side, I don't know how they've been bamboozling folks into thinking that they are the responsible, fiscally-disciplined party. They run up these wild debts and then when we take over, we've got to clean it up."

The President was apparently relying on an analysis by Rex Nutting to support his comments.

I decided to take a look at the US budget for myself.  I suggest we can get a reasonably good idea about the President's assertions without all the detailed assumptions and calculations of Mr. Nutting.  I think the charts presented above and below are most useful in this regard.

Let me start by noting that the President only proposes a budget.  Congress is not required to pass the President's budget.  Congress could create and pass it's own budget.  However, Congress has not passed a budget at all since, I believe, fiscal year 2008.

President Obama's budget proposal for the 2013 fiscal year was made public on February 13, 2012.  The 2013 fiscal year begins in October 2012, and Congress is statutorily required to pass a budget by April 15 prior to the start of the new fiscal year.  Of course, budget or not, Congress and the President still spend money.

Since the President proposes and Congress chooses, subject of course to the President's veto pen, I think it is interesting to compare the President's annual proposal for spending with the amount actually spent.  I am interested in making comparisons between proposed and actual spending across as many Presidents as I can by using data available online.  Unfortunately, the information I was able to find online only went back as far as President Clinton's last six budgets.  What I found is presented in the charts above and below. Click on either chart to get a larger version to look at.  The information in these charts comes from Table 1-3 in the Historical Tables for each budget year.  Note that the number for actual FY 2012 spending is still an estimate in the Historical Tables.

Notice that the President's proposed outlays are never the same as the actual outlays, and that for most years proposed and actual do not seem very far apart.  It also seems that actual outlays were roughly flat for the first four years of the Clinton presidency presented in this chart, and that for the last two years of Clinton's presidency, and certainly by the Bush presidency, Congress and the President were choosing to spend at a quicker pace over time.

Notice also that for FY 2009 the actual outlays are significantly greater than the spending proposed in February 2008 by President Bush.  In addition, note that President Obama's first two budget spending proposals were significantly greater than the actual spending in FY 2010 and FY 2011.  Perhaps President Obama has signed $2 trillion of budget cuts into law, but given the size of his proposed budgets for FY 2010 and FY 2011 it seems to me likely that these budget cuts were chosen by Congress and not by the President.

FY 2009 seems unique among the fiscal year comparisons in the chart.  For FY 2009 there was a significant increase in spending beyond the amount requested by President Bush.  I think it is important to recognize that President Bush made his request for FY 2009 in February of 2008.  President Obama was elected in November of 2008, one month after FY 2009 began.  President Obama took office in January 2009, three months after the beginning of the fiscal year.  Although President Obama did not present his first budget, which was for FY 2010, until February 26, 2009 the President asked Congress to spend quite a bit of money for FY 2009.  For example, President Obama's first "stimulus package" was signed by him in February 2009, and this would have been part of the actual spending number for FY 2009, and not part of President Bush's budget request.  Perhaps President Obama did "inherit," so to speak, a $1 trillion deficit for FY 2009, but it seems fair to say that a significant part of this deficit resulted from proposals made to Congress by President Obama himself.

Consider the chart presented below which shows each President's proposed budget deficit versus the actual budget deficit.  The first thing I notice is that there are four years of actual deficits that are above the zero line which means there are four years of actual budget surplus shown in the chart.  Each of these budget surpluses happened during the Clinton Presidency.

Of course the most obvious aspect of the proposed versus actual deficits chart is that from FY 2009 on the size of the government's deficit has been very large compared with any of the earlier years.  President Obama asserted: "They run up these wild debts and then when we take over, we've got to clean it up."  There are some "wild" deficits shown in the chart, but they are found within the Obama years, and it seems to me that as late as February of this year, there has been no budget proposal that fits with the idea of cleaning any of it up.