Wednesday 28 November 2012

A Budget Primer for the Ignorant

Much of the conversation about the federal budget negotiations displays substantial ignorance of the expenditures and revenue streams that comprise it.  The most egregious vein of ignorance seems to concern appropriations versus entitlements.

An appropriation is a specific amount of money that Congress allocates to be spent on a certain agency or program.  NASA, for example, gets a lump sum of money that can go up or down each year as priorities change; it can be adjusted by Congress at will.  If Congress decides to build more highways, it has to appropriate a specific sum of money in the budget for this project.  Make sense so far?  Entitlements work differently because they are tied to eligibility for certain benefits.  For example, everyone over 65 is entitled to Medicare. Congress cannot appropriate a limited amount of money for Medicare; the amount that is spent depends upon how many eligible citizens use its services.  The same applies to Social Security.  Together, social insurance programs account for 2/3 of the federal budget.
Take a moment to let that figure sink in.  Two-fucking-thirds.  This means that when Congress and the president are dickering over the budget, they are only affecting 1/3 of it.  Actually, even less than that; they are only tinkering at the margins, as I will explain momentarily.  But back to social insurance.  There is one way that Congress can affect the amount of money that goes to these programs, but it is indirect:  Congress can change the laws that determine eligibility and benefit levels of these entitlements.  The age to receive Medicare could be raised from 65 to 70, for example.  But changes to these entitlements are always difficult politically because citizens over 65 make up the largest voting block, so Congressmen are unlikely to pass laws that will alienate senior voters.  Pissing off the people that employ you is rarely a good idea.

You also must understand that Social Security and Medicare are not funded out of general revenues.  Each has its own funding stream, a specific withholding on your paycheque.  The money withheld from current workers pays current beneficiaries.  When you are old enough to receive benefits, the money will come from younger people who are working when you are retired.  It's a closed system and—listen very carefully—has NO impact on the deficit.  You have probably heard that both these programs are going to run out of money in the next decades.  It is absolutely true that, when Social Security started, there were about 50 workers supporting each retiree, whereas now there are about 3.  People are living longer, and the birthrate has fallen.  But the various methods of solving this particular problem have absolutely NO impact on the rest of the budget.  So, do me a favour:  The next time someone comes up to you and says that we have this huge budget deficit because Social Security is going broke, tell them that they are talking out of their arse.

The next biggest piece of the federal pie is defence spending, which accounts for about 1/5 of the budget.  Back in the days of the Cold War it accounted for over half, so it has declined considerably.  Much of this segment is not negotiable either because we have prior commitments that must be honoured, such as veterans' benefits (pensions, health care, education, etc.).  It wouldn't exactly go over well for Congress to decide to cut expenses by ending health care for veterans.  Much of the military budget goes to procurement, i.e, buying new toys for killing.  Cutting contracts with private companies in the military-industrial complex means cutting jobs and pissing off powerful people, which Congress has always shown a great reluctance to do.  And, by the way, all of this egregious spending on killing machines can be seen online.  Here is the DoD's budget for 2013.  You have the right to know how every penny of your tax money is spent so every agency's budget is public.

And let's not forget interest on the national debt, which accounts for about 7% of the budget.  That isn't optional spending.

Compared to social insurance and defence, the whole rest of the budget combined—education, environmental protection, transportation, etc.—is small potatoes.  New-potatoes-in-the-spring-with-barely-any-skins-on-them small.  Congressmen can grandstand about cuts to programs like PBS or the National Science Foundation but they aren't going to make a damn bit of difference to national debt or deficit.
The truth about the deficit is that it has been largely created over the last decade by tax cuts and defence spending, and the recession sure as hell didn't help.  The only way to cut the deficit is to run a budget surplus for years to pay it off.  The federal budget is about $3.8 trillion and the debt is around $17.5 trillion.  (Yup, that's trillion with a "T".)  We cannot possibly cut spending enough to make a dent in the deficit or debt.  The only option is to raise taxes.  Before you start to whinge that lower taxes stimulate the economy, remember that taxes have been cut as the deficit has grown and we ended up with a recession and economic stagnation, not growth.  Also remember that you cannot have something for nothing.  Americans are notorious for rewarding their Congressmen with re-election when they bring home pork barrel projects and other government largess for their states and districts and punishing them when they raise taxes to pay for it.  Tax cuts are popular with voters.  Spending is popular with voters.  That doesn't add up.  And voters don't know or care about deficits unless politicians bring them to their attention.  A large deficit is held up by proponents of small government (they're not really; it's a ruse) as a reason to cut spending.  The dirty secret of supposed small government proponents is that they like and need deficits.  With a balanced budget or a surplus, they cannot as easily make the argument that programs must be gutted.

The fact is that government spending grows because the voters demand it.  Congress is responding to that demand when it appropriates money to pay for what the public demands.  But the voters are disinclined to man up and pay for their shit.

No comments:

Post a Comment