The Role of Spending on Deficits

There has been a great deal of discussion about the role of spending in the current and past deficits of the federal government. Since the most commonly referenced deficit, the unified deficit, is equal to federal revenues minus federal outlays, deficits are affected by all items that affect revenues and outlays. These items include tax rates, economic activity, and spending. Regarding spending, I have posted a number of graphs and tables that look at spending from 1962 to 2008 at the following URLs:

The graph at the first URL shows the total outlays and receipts since 1950. The actual numbers used to create this graph can be found at http://home.netcom.com/~rdavis2/deficits.html. As can be seen, total receipts have mostly been in the 17% to 19% of GDP range in the 50 years since 1954. They have only dipped below 17% of GDP twice, reaching a low of 16.1% of GDP in 1959 and they have risen above 19% in eight years, reaching a high of 20.8% of GDP in 2000.

Outlays have been less stable. They were likewise in the 17% to 19% of GDP range from 1954 through 1966. However, they then began to rise steadily, reaching a high of 23.5% of GDP in 1983. From there, they began a long decline, finally getting back in the 17% to 19% of GDP range in 1999 through 2001. However, they have now risen again to nearly 20% of GDP. Hence, one could argue that a major contributor to the deficit was the steady increase in spending from 1966 through 1983 with no corresponding increase in receipts. However, the deficits were also exasperated by the sharp drop in receipts from 1981 to 1983 and from 2000 to 2003 and were relieved by the growth in receipts from 1992 through 2000. In any case, the graphs at the second through the fourth URL above show the components of federal spending from 1962 to 2008.

The second URL above shows the outlays as a percentage of GDP. This is a useful measure of the stability (or lack thereof) of the growth in receipts and outlays. Because wages tend to grow at the same rate as the GDP, receipts tend to remain at the same percentage of GDP, given that tax rates and economic activity stay at the same relative level. If outlays can likewise be kept at the same percentage of GDP, then the budget can be kept at the same level of balance.

The first graph shows six major components of federal spending. As can be seen, National Defense spending has been generally decreasing, going from 9.2% of GDP in 1962 to 3.0% of GDP in 2000. There was a temporary increase of over a percent of GDP from 1979 to 1986 but the overall trend has been down. Social Security rose from 2.5% of GDP in 1962 to almost 5% of GDP in 1983 but has since stabilized between 4 and 5 percent of GDP. Medicare, on the other hand, has risen fairly steadily since its inception in 1967, reaching 2.0% of GDP in 2000 and projected to rise to 2.5% of GDP by 2008. Health (of which Medicaid grants comprised 76% in 2000) rose from 0.2% of GDP in 1962 to nearly 1% of GDP in 1979 but stabilized at that level through 1990. From there, it began to rise, reaching 1.6% of GDP in 2000 and projected to reach 2.4% of GDP by 2008. Net interest was between 1 and 2 percent of GDP through 1980, rose to about 3% of GDP from 1985 through 1997, and has now dropped back to the 1 to 2 percent level. Finally, all other spending was generally between 5 and 6 percent of GDP from 1962 through 1970, rose to between 8 and 9 percent of GDP in the late seventies, and has generally dropped back to the 5 to 6 percent level since 1987.

The second graph shows a further breakdown of the all other spending category in the first graph. The first three components make up the outlay category called Income Security. These three components are General and Federal Retirement and Disability, Unemployment Compensation, and Other Income Security. Retirement and Disability rose from about 0.5% of GDP in 1962 to about 1% of GDP in 1975 and has remained at about that level. Unemployment Compensation has generally remained under 1% of GDP, peaking in 1976, 1983, 1992, and 2002. Meanwhile, Other Income Security rose from 0.5% of GDP and has been between 1 and 2% of GDP since 1975. Undistributed Offsetting Receipts consist chiefly of the payments federal agencies make to retirement trust funds for their employees and are counted as negative outlays. They have gone from about -1% of GDP in 1962 to -0.5% of GDP now. Commerce and Housing Credit spending has been very close to zero since 1962 except in 1999 through 2001 when it rose to over 1% of GDP. This was due to an increase in Deposit Insurance spending to pay for the Savings and Loans bailout. Finally, all other spending (excluding the first five items in both graphs) can be seen to have been at about 5% of GDP from 1962 through 1983 with a slight rise in the late 70s to about 6% of GDP. It then began to drop and has been between about 3 and 3.5 percent of GDP since 1988.

Now, if revenues grow with the GDP and the budget is currently balanced, outlays can grow with the GDP and the budget will remain balanced. If the budget is running a deficit however, such a growth in spending will insure continued deficits. For that reason, it's also instructive to look at how spending is growing in constant (inflation-corrected) dollars. This is shown in the graphs and tables at the fourth URL above. One interesting thing to note from the first graph is that National Defense spending has been moving in something of a sine wave since 1962 reaching maximums in 1968 and 1989 and reaching minimums in 1976 and 1998. The average spending has been about $300 billion in 1996 dollars.

There is a major problem with trying to restrain spending to the increase in inflation. Because programs are having to support a growing population, such a restraint would represent a decrease in per capita spending. For that reason, it may be better to look at spending growth in per-capita, inflation-corrected terms than just in inflation-corrected terms. This is done in the graphs and tables at the third URL above.

The first graph at the third URL shows that National Defense has been generally decreasing in per-capita, constant dollars. However, Social Security, Medicare, and Health have all been rising steadily since 1962. Net Interest likewise grew from 1962 through 1995 but dropped sharply through 2003. All other spending grew from $895 (in per-capita, 1996 dollars) in 1962 to $1872 in 1980 and stayed between that level and $1400 through 2001. It is projected to rise to the $1900 to $2000 range through 2008.

As before, the second graph shows a further breakdown of the all other spending category in the first graph. Most of the categories have been fairly stable since 1980. An exception is Other Income Security which had a per-capita spending of under $200 billion (1996 dollars) from 1962 through 1974, between $200 and $400 from 1975 through 2001, and over $600 since then. The all other category now shows an increase from $745 in 1962 to about $1300 in 1978. Spending then dropped to the $800 to $1000 range from 1987 through 2001. It is projected to be in the $1000 to $1200 range through 2008.

In summary, the categories in which most of the real, per-capita growth in spending has occurred since 1962 are Social Security, Medicare, Health, and to a lesser extent, Net Interest and Other Income Security. Except for a temporary increase in the late seventies and the Savings and Loans bailout in 1989 through 1991, there has been little real, per-capita growth in all other spending since 1962. Such spending decreased fairly steadily throught the eighties and stayed at about the same level through the nineties. Hence, it would seem incorrect to suggest that a growth in this other category of spending (chiefly non-defense, discrestionary spending) contributed to the growth in the large deficits of the eighties, at least not as a whole. At best, one might suggest that the growth in such spending before the start of the eighties was a contributing factor.

Regarding Social Security, its total spending has remained within the bounds of the total FICA revenues that have been dedicated to it. In fact, its trust fund will hold about $1.3 trillion in government bonds by the end of 2003. However, this was only made possible by numerous hikes in the FICA tax rate through 1990.

And the trust fund is nothing more than an accounting gimmick. Any discussion of deficits that treats the trust fund seriously cannot itself be treated seriously.

I made the above statement about Social Security in anticipation of the argument that Social Security is not a problem because its trust fund contains a surplus. As I stated, the trust fund contains a surplus simply because we kept raising the FICA tax rate. In fact, the trust fund nearly went broke in 1982 but was bailed out by raising the FICA tax rate and broadening the base of contributors.

The trust fund is technically a real asset to Social Security but I agree that it is not an asset to the government. When the Boomers start to retire, Social Security will start redeeming the government bonds in its trust funds and taxpayers will likely have to pay higher taxes to cover the redemptions. It will be of little solace to those taxpayers that the money is officially owed to Social Security. For that reason, I think that the monies borrowed from the trust funds should be included in the deficit. That is why I show those deficits at http://home.netcom.com/~rdavis2/deficits.html.

The trust fund is an important topic and I am willing to continue discussing it. However, I might modify that last paragraph so as not to distract from the basic topic of the analysis - which spending has been growing the most over the past few decades. Do you have any comments on anything before the last paragraph?

You're right entirely. It should be treated as a part of the deficit. The other trust funds should be treated as a deficit, which you do also. There is no way that government obligations, such as bonds within a trust fund should be considered assets. Government future obligations are deficit financing.

There is a problem taking any figures that the government produces and using it as an honest accounting. There are so many missing funds (ie. Defense department, Interior, IRS, National parks, Agriculture,etc.) and shoddy bookeeping that it is impossible to use any method to actually come up with bona fide figures.

I have had some experience in trying to nail down the exact figures in Agriculture and Social Security that are expended in a year's time and believe me, the government does not know what it is apending.

It writes the checks and the Federal Reserve backs them up. The Federal Reserve collects the taxes and balances the government expenditures against them and the numbers are far in excess of the government figutes released for public consumption.

There is a problem taking any figures that the government produces and using it as an honest accounting. There are so many missing funds (ie. Defense department, Interior, IRS, National parks, Agriculture, etc.) and shoddy bookeeping that it is impossible to use any method to actually come up with bona fide figures.

That's one of the main reasons that I always provide sources for my numbers. It allows readers to decide how much they trust that particular source. It also allows them to verify the numbers and, if desired, recrunch them. My own theory regarding the Budget numbers is that the work done by non-political accountants is basically honest. My reason for thinking that is that accountants likely place a higher value on numerical accuracy than politicians. It's pretty much central to their jobs. Many politicians, however, seem to place more value on their powers of persuasion. In any case, I also feel that the Budget has the advantage that it's a very public document and is subjected to a fair amount of public scrutiny. In addition, much of it is in a fairly fixed format (especially, the historical tables) that cannot be easily changed for political reasons.

However, I don't know the exact process by which the source data that is given to the acccountants and actuaries is gathered. Some of it may be subject to large inaccuracies or political pressures. I have seen instances when political consideration have had some effect on how the data is presented. For instance, the Clinton administration pulled the section on Generational Accounting from its 1996 Budget (it was started in the 1993 Budget by Dick Darman, Bush I's OMB director). On the other side, the Bush II administration used the traditional 10-year projections when the future looked rosy in order to justify its 10-year tax cut plan. As soon as the future grew cloudy, however, they switched to 5-year projections, claiming that longer projections were too imprecise to be of any use.

I would be curious to hear a little bit more about the types of inaccuracies that you ran across. Have any of them been documented in any documents that have received much public scrutiny? As I said, I have a fair amount of trust in the basic number-crunching that gets done in the budget and how most of the data is presented. I've had much more trouble with the analyses put out by partisan think-tanks which have a tendency to cherry-pick and use other forms of biased analysis of their data. However, I don't have much way of judging the actual source data which forms the basis for all of the analyses in the Budget. I'd be curious to hear any information you have on that.

I was setting in the Farm Service Agency office and saw a long string of checks falling to the floor. I asked one of the girls how they kept track of all the checks that they were writing and the amount they added up to. They told me that they did not keep track of the total spent in that county but I would have to contact the state office for that information.

I contacted the state office and they did not know, I wouild have to contact the Fed in Kansas City for that information. I contacted them and I said surely you keep track of the different accounts and the different departments that write the checks.

They told me that they just honored the checks that were written and balanced them against the taxes collected. It was up to the government to keep track of the different departments expenditures. The perfect set-up so nobody has to take responsibility for anything.

After this episode, I contacted the chief financial officer of Social Security to get the total amount paid to the general fund since the Trust Fund was established in 1934. He told me that was impossible, that there was no running total kept. He said that they only kept an annual balance. I said surely that there were bonds or computer entries so that a running total was kept.

He said that Social Security's concern was only to determine how much the Trust Fund could support the General Fund for that year's budget. Since then, different stories have come out with various offices and agencies being unable to pass an audit.

I have come to the conclusion that the entire government does not keep accounts because nobody wants to be responsible. Watch the various budgets and they never come in close to the figures the government budget presents for public consumption. The balance that the Fed keeps always runs billions over what the government maintains the deficit to be.

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