Don’t be fooled . . .

Filed Under (Finance, U.S. Fiscal Policy) by Don Fullerton on Apr 15, 2011

 . . .  by proposals to cut taxes.  Fiscally, such proposals are dangerously irresponsible.  The U.S. debt is huge, and the annual deficit is adding to it daily.  Increasing proportions of our debt are owned by China and other countries.  We need to reduce the annual deficit, just to reduce the huge current interest payments on the debt, which crowd out other beneficial forms of government spending. 

As much as the taxpayers might wish for tax cuts, those tax cuts would only add to the nation’s future fiscal woes.  The claim that a tax cut might raise revenue is counterintuitive, pandering, and certainly not supported by any recent economic history.  President Reagan enacted the biggest tax cut in history at the time, and the deficit ballooned.  He also had to backtrack several times with tax increases to fix the problem.  President Clinton raised taxes, which was followed by one of the strongest sustained recoveries in our nation’s history (and years of U.S. budget surplus).  President Bush cut taxes again, which was followed by deficits that exceeded those of the Reagan Administration.   It’s only logical, face it, that tax cuts lead to deficits!

Given the current huge U.S. deficit, the only responsible course is some combination of spending cuts, continued borrowing during a period of deficit reduction, and selected tax increases.  We have choices to face, about who should suffer from those spending cuts and who should face the  tax increases, but none of THAT debate can deny the fundamental reality that somebody has to suffer from spending cuts, and somebody has to face tax increases.

Many gas taxes, but falling over time

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Apr 1, 2011

Per gallon of gasoline, are we paying more in taxes over the years, or less?   In my last post, I examined the Federal gas tax and inflation adjustments.  As it turns out, the overall price of gasoline adjusted for inflation just hasn’t changed that much over the past fifty years!  Regarding the Federal tax of 18.4 cents per gallon as a tool to collect revenue, however, the impact is significantly weakened by inflation.  It is a “unit tax” (fixed over time per unit of gasoline), and so it becomes a smaller fraction of price as the gas price rises.  In contrast, any “ad valorem” tax would be a fixed percentage of price (like an 8% sales tax).  When inflation increases the price, an ad valorem tax rises with it.

State and local gas taxes in Illinois are a bit more complicated. In 1990, the State of Illinois raised the gas tax from 16 cents to the current 19 cents per gallon – another “unit” tax.  The flat blue line in the figure below looks at that same fixed 19 cents per gallon since 1990.  The orange line shows its “real” value, adjusted for inflation, all in current 2011 dollars.  It shows that the 19 cents today is really the equivalent of 33 cents back in 1990.  So the real value of the state’s unit tax on gasoline has fallen from 33 cents to 19 cents per gallon.

In addition to the 19 cent per gallon state gas tax, we also pay 2 cents per gallon to the city of Urbana.  Furthermore, gasoline is subject to the general sales tax, which in Urbana is 8.75%.  (It is composed of 5% to the state, 2.25% to the city, 0.5% to the county, and another 1% to the school district). 

Here is how it all works.  Suppose the net-of-tax price of gas kept by the service station is exactly 3 dollars.  Then the combined state and local ad valorem sales tax (8.75%) applies to that $3.00 per gallon.  That tax would be $0.2625 (in other words, 26.25 cents).  Then the federal unit tax is 18.4 cents, the state unit gas tax is 19 cents, and the city unit gas tax is 2 cents.  The total of all those taxes is 75.65 cents per gallon.  These four major taxes per gallon are shown in the table.

Level of Tax

Tax in Cents per gallon

Federal unit tax

18.40

Illinois unit tax

19.00
Urbana unit tax

2.00

Combined sales tax

26.25

TOTAL TAX

75.65

 

That total 76-cent tax adds to the $3 per gallon price, and you pay $3.76 per gallon.   (And actually, a few other minor taxes are ignored here, such as the “Underground Storage Tank” fee and other environmental fees!)

 Yet only the ad valorem sales tax can keep up with inflation.  With every year that a unit tax on gasoline is not updated, the tax loses its value and fails to collect as much real revenue.   The State of Illinois revenue from the 19 cent gas tax is falling in real terms with inflation, as all the necessary expenditures by the State are rising.

Gas prices are back in the news

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Mar 11, 2011

Gas prices are back in the news, simply because gas prices are rising.  Reporters like to discuss WHY gas prices are rising, but who knows?  The price of gasoline or crude oil can vary with any change, either in supply or demand.  We can always point to shifts in demand (like the growing economies of China and India), and we can always point to shifts in supply (like the shutdown of production due to unrest in countries of the Middle East and North Africa).  But it’s very difficult to sort out the net impact of each such factor, since the price is affected daily by so many different changes.

Instead of trying to answer that question here and now, let’s take a step back and look at whether any of the current changes are really that unusual.  Is the price of gas really high by historical standards?  And how much of that gas price is driven by energy policy, taxes, and factors under the control of policymakers?  In other words, let’s just look at the facts for now, and then try to analyze them later!

Here are the facts, for the fifty years since 1960.  The first figure below is from the U.S. Energy Information Administration (EIA).  Look first at the BLUE line, where we see what you already know:  the nominal price of gasoline has risen from $0.31/gallon to what’s now $3.56/gallon.  It’s driving us broke, right?

Well, not so fast.  The RED line corrects for inflation, showing all years’ prices in 2011 dollars.  So both series stand at $3.56/gallon in 2011, but the red line shows that the “real” (inflation-corrected) price of gasoline back in 1960 was $2.33/gallon.  In fact, compare the red line from 1960 to 2009: over those fifty years, the real price of gasoline only changed from $2.33 to $2.42 per gallon – virtually no change in the real price at all! 

From 2009 to 2011 the real price increased beyond $2.42, rising to $3.56/gallon, but that may be temporary.  You can see that the red line bounces around for the whole fifty year period.   In 1980, the real price was $3.35/gallon, so the current price is not much different from previous upward blips in the real price of gas.

Now look at the U.S. Federal Gasoline Tax Rate, in the next figure.  The red line in the next figure shows that the nominal statutory tax rate was four cents per gallon for years, and then it was increased in various increments to 18 cents per gallon today.  But of course, inflation has changed the real value of that tax rate as well.  Using 2011 dollars again, both real and nominal tax rates are 18 cents per gallon today.  But in 2011 dollars, the 4 cents per gallon back in 1960 was really equivalent to 29 cents today.  In other words, the real gas tax in the green line has fallen from 29 cents per gallon fifty years ago to only 18 cents today.

The gas price may be rising, but not due to any increase in the Federal gas tax.  That Federal gas tax is falling in real terms.  In the next entry, we’ll take a look at the various State gas tax rates, and we’ll look at how many of those taxes are fixed per gallon – so that they fall in real terms as inflation reduces the real value of those State tax rates.

Here we go again, …

Filed Under (Environmental Policy, Health Care, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 25, 2011

Yes, I’ve written about the budget before, and perhaps I’m getting repetitive.  But it’s important, and surprising, so I’ll give it another go.  But nevermind President Obama’s recent release of a proposed budget for next year.  That document is already irrelevant!  Let’s start with the current budget. 

Current federal spending now is over  $3 trillion per year.  The deficit is $1.6 trillion.  The U.S. House of Representatives approved a plan to cut spending by $60 billion.  The Republicans chose not to change spending on defense and homeland security, nor entitlement programs like Social Security, Medicare, and Medicaid.  The problem is that then other discretionary spending must be cut for some government agencies by as much as 40%.  And yet that total $60 billion cut is only a drop in the bucket.  It cuts the annual deficit only from $1.6 trillion to 1.54 trillion!

My point is that you can’t get there from here.  First of all, it’s not wise to cast such a wide net, without thinking, making cuts of 40% or more to discretionary programs simply because they are called discretionary.  It means cuts to national parks, environmental programs, and federal employees who provide many public services people want.

Second, who says we need to leave defense and entitlements untouched?   Within just a few years, Medicaid will cost about $300 billion per year, Medicare will cost $500 billion, and Social Security will cost $800 billion, and defense $800 billion.  ALL of domestic discretionary spending will be only $400 billion.  By those round numbers, $60 billion from that last category is a 15% cut.   The same $60 billion cut proportionally from all of those categories would be only a 2% cut.  That’s what I mean by a drop in the bucket.

Anyway, that plan would still cut the deficit only from $1.6 trillion to $1.54 trillion.  The ONLY way to make any sizeable dent in the huge $1.6 trillion deficit is to look at all the current spending, not just at $400 billion of domestic discretionary spending, but at the $800 billion of defense spending, $800 billion of social  security, $500 billion of Medicare, and/or $300 billion of Medicaid.

And who says taxes are sacrosanct?  A $1.6 trillion deficit means we are spending more than our income, so one just MIGHT think that problem can be approached from both ends.

How Much Should Congress Leave to the Regulators?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Feb 11, 2011

The very existence of the Environmental Protection Agency (EPA) has long been a point of contention between the two political parties.  What is, and what ought to be the role of the EPA with regard to policy making?  Congress cannot possibly enact laws that contain every detail about subsequent implementation, monitoring, and enforcement.  And they should not put everything in the law anyway, in order to allow enough flexibility to deal with future contingencies.  Besides, those in Congress don’t have the science background necessary to decide all of the details of some technological aspects of pollution prevention.

The law does not say that every electric power plant must reduce emissions of each pollutant to no more than some number, like 37 micrograms per cubic meter.  Instead, the law from Congress just says that EPA should protect human health to an adequate margin of safety.

Yet some would prefer that the EPA disappear, along with every agency having any regulatory power.  This agency, which was conceived in 1970 under Richard Nixon, has analyzed and supported some of the most important pieces of legislation of the last forty years, ranging from the Endangered Species Act to – more recently – the new emissions standards going into effect this year. 

In 2007, the United States Supreme Court ruled in a 5-4 decision called “Massachusetts vs. EPA”, that the EPA could in fact regulate greenhouse gases under the Clean Air Act, on the grounds that such emissions do affect human health.  When combined with the new Republican-dominated Congress, we have set the stage for yet another ideological battle. 

Throughout the past decade, much of the discussion about controlling carbon dioxide emissions has largely centered around the idea of Cap and Trade.  That system would effectively put a price on each unit of pollution emissions.  It would create a market where the need for emissions and the cost of emissions are balanced in a way that can achieve economic efficiency.  However, the most viable attempt at this in recent years, the Waxman-Markey bill of 2009 (H.R.5454), passed the House and not the Senate.  It would not even get past the House in this term.  

The question then becomes, what exactly are the cards that the EPA retains in their deck? 

A recent article is titled “Greenhouse Gas Regulation Under the Clean Air Act” by researchers at Resources for the Future (RFF, by Burtraw, Fraas, and Richardson).  It seeks to explore the options available to the EPA, in-depth.  What they find is that the EPA can implement measures that will reduce greenhouse gas emissions significantly in a measured and cost-effective manner.  For this to happen, however, they argue that the EPA must become bold and decisive in their actions. 

Bold action may be taken as an example of government overreach, and so the EPA must be careful.

Republicans are currently in discussion to introduce the Energy Tax Prevention Act of 2011 .  They recognize that the EPA holds some powerful cards after the Supreme Court ruling in 2007, and they want to take that power away.  This Act would shift the EPA’s ability to regulate from the Agency to the legislative branch.  Yet such an action could take any decision-making ability from the scientists and put it in the hands of the politicians.  As EPA leader Lisa Jackson said, “Politicians overruling scientists on a scientific question – that would become part of this committee’s legacy.’”  Herein lies a problem with democracy.  The people in charge of making the decisions that affect us all, often have little knowledge of the actual issues at hand.  After all, Republicans from oil-rich states like Oklahoma still claim global warming is nothing but a hoax.

The State of the Union may be strong, but the state of America’s energy policy is less clear

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 28, 2011

On Tuesday night, President Obama gave the State of the Union (SOTU) Address (transcript) before a joint session of Congress.  The speech drew upon imagery from the Cold War past in order to spur action regarding America’s energy policy.  “This is our generation’s Sputnik moment,” the President declared, and thus he will send a budget to Congress that invests “especially [in] clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”  To deal with this “Sputnik moment”, the President set forth two goals: (1) become the first country to have a million electric vehicles on the road by 2015; and (2) get 80% of America’s energy from clean sources by 2035. 

(Not quite as inspiring as President Kennedy’s urging on May 21, 1961 that “this nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon and returning him safely to the earth.”  On July 20, 1969, Apollo 11 landed on the Moon and Neil Armstrong took his first step on the lunar surface.)

I have three issues with the President’s approach.  First, the wording of the goals in the SOTU Address needs to be parsed carefully in order to understand their meaning or lack of meaning.  For instance, does “electric vehicles” mean all-electric vehicles or do hybrids count towards that goal?  Similarly, what is the definition of “clean sources”?  Fortunately, in this case we have an answer later in the Address.  As the President admits, “Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all.”  However, ambiguity still exists because clean coal and natural gas technologies can be deployed with or without carbon capture and sequestration technologies.

Second, the President did not offer details about HOW to achieve these goals.  The Address includes references to investments in clean energy technology, but it specifies neither investment level nor investment horizon required to meet the stated goals.  He did not say, for example, $10 billion annually for 10 years.  If clean energy is really a priority for the President, and given concerns about the fiscal deficit, then clarity about the needed investment level would be helpful so that other programs can be identified for cuts in order to balance the budget.  Also, the President said that “clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”  I agree.  However, an efficient, well functioning market requires a price signal.  This brings me to my last point.

Third, the President did not directly address environmental policy when setting his goals.  If the President really means “low-carbon” or “no carbon” when he says “clean”, then the absence of a carbon policy in the Address becomes conspicuous.  Specifically, the President did not indicate if he would again push for a cap-and-trade bill.  Given the composition of the new Congress, a cap-and-trade bill or any other piece of legislation that puts either an explicit or implicit price on carbon emission seems politically infeasible.  To have a market for these clean energy technologies, where is the price signal going to come from?  

In their forthcoming book called “Accelerating Energy Innovation: Insights from Multiple Sectors”, Rebecca Henderson and Richard G. Newell look at lessons from the histories of innovation in other industries and implications for the energy industry.   The introduction says: “Taken together the histories point to three key factors as critical to accelerating innovation: (1) well funded, carefully managed public research that is tightly linked to the private sector; (2) rapidly growing demand; and (3) antitrust, intellectual property and standards policies that together promote vigorous competition and the entry of new firms.”

How many people would ‘demand’ electric vehicles at a high price, just out of the goodness of their hearts?  Or would that demand depend on the existence of a policy that raises the price of burning fossil fuels?

The President noted that when Sputnik was launched, NASA did not exist.  Yet, the Department of Energy has existed for many years, and America’s energy policy is still unclear and uncertain.

This just in: Both Sides of Health Reform Debate Twist Facts to Support Own View. Public Shocked!

Filed Under (Health Care, U.S. Fiscal Policy) by Nolan Miller on Jan 25, 2011

Of course, we all knew this.  But, the Washington Post had a couple of interesting op-ed pieces last week that really drove home the point.  The fun part was that the two pieces, written by Charles Krauthammer and Eugene Robinson, appeared next to each other on my computer screen and exposed the disingenuousness of both the Democratic and Republican positions on the financial aspects of the Patient Protection and Affordable Care Act, aka “ObamaCare,” or, more neutrally, PPACA.

Let’s begin with Robinson, who takes aim at the Republican’s self-serving and somewhat hypocritical approach to the numbers in promoting their repeal of PPACA through the ominously-named “Repealing the Job-Killing Health Care Law Act.”  Now, the Republicans painted themselves into a bit of a corner on this one from the get-go.  Swept into the House majority on a promise to decrease the deficit, they were faced with the fact that PPACA, at least on paper, lowers the deficit over the next 10 years.  The fist bit of Republican tap dancing around this point came earlier this month when the new majority enacted new rules in the House specifying that every new law had to explain how any new spending it proposed would be offset by an equivalent cost reduction.  Deficits, after all, are bad.  This “cut-as-you-go” rule, however, specifically exempted PPACA repeal from this requirement.  So, I guess deficits aren’t all that bad after all.

According to Mr. Robinson, the Republicans, faced with the CBO’s projection that repealing PPACA would increase the deficit by $143 Billion over the next decade, took the position that the CBO “score” for the bill was disconnected from reality.  According to House Budget Committee Chairman Paul Ryan, “CBO scores what is put in front of them – and what Democrats put in front of them last year was legislation packed with smoke and mirrors to hide the impact of trillions of dollars in new spending.”  On the other hand, Republicans are putting a lot of faith in the CBO when they declare PPACA to be “job-killing,” saying it would eliminate 650,000 jobs.  But, according to Robinson:

“One problem, though: The CBO analysis contains no such figure. It’s an extrapolation of a rough estimate of an anticipated effect that no reasonable person would describe as “job-killing.” What the budget office actually said is that there are people who would like to withdraw from the workforce – sometimes because of a chronic medical condition – but who feel compelled to continue working so they can keep their health insurance. Once the reforms take effect, these individuals will have new options. That’s where the “lost” jobs supposedly come from.”

So, Republicans are not above picking and choosing which numbers to ignore and which to exaggerate to make their point.  On to the Democrats.

Krauthammer takes on the Democrats’ cooking the numbers in the original PPACA bill in order to make it look like it reduced the deficit when it will actually add to the deficit (i.e., new expenditures will be greater than new revenues in the long run).  Now, cooking the CBO’s score is a time-honored practice in Washington.  The key is this.  The CBO is the most gullible body in the government.  By law, they are required to take whatever Congress puts into a bill and score it as if it is actually going to happen.  So, if Congress tells them that they are going to spend $50 billion on a bridge to Hawaii and pay for it by taking all of Bill Gates’ money, CBO will come back and say “awesome.  That will reduce the deficit by $4 billion.”  As I said, this is nothing new.  Remember how the Bush Tax Cuts were scheduled to expire at the end of last year?  Same deal.

So, to cook the books on PPACA, the Democrats did the following.  The new taxes and revenue sources for health care were scheduled to start coming online almost immediately, while the new expenditures were scheduled to start much later.  So, according to Mr. Krauthammer, “the entitlement [PPACA]  creates – government-subsidized health insurance for 32 million Americans – doesn’t kick in until 2014. That was deliberately designed so any projection for this decade would cover only six years of expenditures – while that same 10-year projection would capture 10 years of revenue. With 10 years of money inflow vs. six years of outflow, the result is a positive – i.e., deficit-reducing – number. Surprise.”  And, Krauthammer argues, PPACA does the same with its new long-term care insurance program, where it starts collecting premiums immediately but doesn’t pay anything out for 10 years, resulting in a surplus, at least on paper, according to the rules.

Krauthammer also makes the additional point that although PPACA is supposed to decrease the budget by $230 billion (the numbers differ between the two articles), the way it does it is through offsetting $540 billion in new spending by $770 billion in new taxes.  This “radical increase in spending, topped by an even more radical increase in taxes” is probably not what most people had in mind when they heard that the bill reduced the deficit by $230 billion, and certainly much different than simply cutting $230 billion in government spending.  But, that’s perhaps a topic for a different day.

So, both sides are twisting the numbers and sloganeering.  Am I shocked like Claude Rains in Casablanca?  Well, I guess I am, which is to say, not shocked at all.  Am I frustrated?  Definitely, because there are real problems in health care that have to be addressed.  Even if you are a fan of PPACA, you have to admit that it was at most a first step toward reforming health care in this country.  Real progress is going to require cooperation on coming up with solutions.  As long as both sides are deliberately twisting the facts to score political points, we aren’t going to make progress.

Despite the Republican’s grandstanding on the issue of repealing PPACA, it’s not going to happen.  There is a glimmer of hope.  Along with the political theater, Republican leaders in the House are instructing committees to get to work on legislation to replace PPACA.  Without Democratic support, such legislation will never become law. But, maybe, just maybe, if the two work together, they can come up with something that actually improves on PPACA and begins to work on the excessive growth rate of health care costs in this country, which is what I and many others have said is the real ticking fiscal time bomb facing this country.

If It’s Difficult, Then Let’s Just Not Do It?

Filed Under (U.S. Fiscal Policy) by Don Fullerton on Dec 17, 2010

Last week, when President Obama announced his compromise with Republicans over the Bush era tax cuts, the general perception throughout the media left one feeling like the Democrats just had their milk money stolen.  All the talk of being taken hostage by the Republicans did little to ease that feeling.  After working through all the talking points, politicking, and pandering, however, this much is clear: the debate has no obvious winners and losers.  Both sides are getting watered down versions of what they really wanted. The basic premise of the deal is as follows:

  1. The Bush era tax cuts are extended for everyone for the next two years. 
  2. Unemployment benefits are extended for 13 months. 
  3. The estate tax is back, in modified form. 
  4. Social Security taxes are cut for one year.

 The tax cut at the top may help the rich more than desired by Democrats, but then the extra Social  Security tax cut will help low-income families, and ALL those cuts will help stimulate the moribund economy.

The crux of the Republicans argument is that we are in danger of a double dip recession if the tax cuts expire, a talking point the White House has not been shy about echoing in recent days.  Interesting to note is a perceived contradiction by Republicans whereby they refuse to approve anything that might add to the national debt, such as the 9/11 Emergency Responders bill.  Yet, extending the tax cuts implies 3.9 trillion dollars in lost revenue over the next ten years.  The GOP counters that since the cuts are currently in effect, it’s not technically adding to the deficit. 

 What is missing from the equation here is any viable long term plan agreed upon by both parties.  Yes, we get to do it all again, in just two years!   The long term deficit can still be cut, but any meaningful cuts will have to include Medicaid, Social Security, and the military.  God speed the politician brave enough to raise those issues.  Our elected officials are really doing little more than pushing these problems off for the next 24 months, as one party attempts to out-politic the other.  It’s a Ponzi Scheme, as pointed out in my earlier blog!

 If the American Congress could tackle as many issues every month as they are through the month of December, American politics would look a lot different.  We have seen critical votes attempting to resolve critical issues ranging from the 9/11 Responders health care, Don’t Ask, Don’t Tell, and now the Bush era tax cuts, the estate tax, unemployment benefits extension, and more, all rolled into one.  If only Congress could exist as a permanent lame duck!

Cut the Federal Debt via Purely Symbolic Gesture?

Filed Under (Finance, U.S. Fiscal Policy) by Don Fullerton on Dec 3, 2010

On Monday, President Obama announced a plan to freeze the pay for most Federal employees for the next two years.  By most, I mean all those Federal employees not working for the Post Office, the military, or the politicians themselves.  According to the Financial Times, this proposal would trim the 14 trillion dollar total outstanding debt by a whopping 5 billion dollars, or approximately .03%.  It would require an act of Congress, and will probably not be formally submitted until the new session begins in January.  In his systems theory approach to evaluating an issue, Peter Senge would describe it as an example of “shifting the burden”.  In other words, politicians have been afraid to address the fundamental problems affecting the economy, instead choosing to treat a cancer as if it were the common cold.

In my post “Let’s Eliminate Waste, Fraud and Abuse”, I suggested that cutting the huge budget deficit would require more than just going through the budget with a scalpel.  If money could be saved wisely and easily, then it likely would already have been done!  That’s not to say the government has no remaining waste, fraud, and abuse.  But the remaining programs that are still wasteful may be too hard to eliminate.  The only choices remaining are real cuts in real programs.  The largest programs with the most government spending are Social Security, Medicare, and defense.  We can no longer afford to dance around the edges of our economic woes without tackling these real programs that in total comprise over 50% of our nation’s annual budget.

It’s easy to make a symbolic political statement such as freezing federal paychecks.  But would Obama’s olive branch to the GOP have more impact if our elected officials froze their own pay?  Politico reported on Wednesday that over half of the current Congress has assets above one million dollars.

The main effect of freezing Federal civilian salaries is to irritate those government workers, and send them each out to look for a new job.  The government would lose many of its best employees, those who CAN get jobs elsewhere, and retain the rest.  That doesn’t save money at all!

I suppose it’s easier to pander to public perception by nickel and diming a broad set of federal workers, instead of actually making some serious targeted cuts to programs that have vocal supporters.

Let’s Eliminate Waste, Fraud, and Abuse

Filed Under (Environmental Policy, Finance, Health Care, Other Topics, Retirement Policy, U.S. Fiscal Policy) by Don Fullerton on Nov 5, 2010

For the U.S. Federal Government, estimated receipts for the fiscal year 2010 are $2.381 trillion.  President Obama’s budget for 2010 adds up to $3.55 trillion; a difference in spending of $1.17 trillion.  That annual deficit is 49.2% of receipts!  Now that’s scary.  We’ve got to do something.  What we hear of course, is that we need to cut waste, fraud, and abuse.  No doubt about it; nobody in their right mind LIKES waste, fraud, and abuse.

So I went to find out how much of U.S. Federal government spending is on waste, fraud, and abuse.  For that purpose, of course, I turn to the best source for information that is accurate, unbiased, and objective.  I mean Wikipedia, of course.   On the Wikipedia entry for “2010 United States federal budget”, I see a breakdown for $2.184 trillion worth of “Mandatory Spending”:

  • $677.95 billion – Social Security
  • $571 billion – Other mandatory programs
  • $453 billion – Medicare
  • $290 billion – Medicaid
  • $164 billion – Interest on National Debt
  • $11 billion – Potential disaster costs

That $2.184 trillion of mandatory spending is 61.5% of the total $3.55 trillion of spending!   That MUST be spent, by law.  We can’t just renege on promised social security benefits or interest payments on the national debt.   And if it’s mandatory, it can’t include any waste, fraud and abuse.  So let’s keep looking for where to cut that waste, fraud, and abuse.  Here are some of the top categories for the remaining $1.368 trillion of spending, called “discretionary spending.”

  • $663.7 billion – Department of Defense (including Overseas Contingency Operations)
  • $78.7 billion – Department of Health and Human Services
  • $72.5 billion – Department of Transportation
  • $52.5 billion – Department of Veterans Affairs
  • $51.7 billion – Department of State and Other International Programs
  • $47.5 billion – Department of Housing and Urban Development
  • $46.7 billion – Department of Education
  • $42.7 billion – Department of Homeland Security
  • $26.3 billion – Department of Energy
  • $26.0 billion – Department of Agriculture
  • $23.9 billion – Department of Justice
  • $18.7 billion – National Aeronautics and Space Administration
  • $13.8 billion – Department of Commerce
  • $13.3 billion – Department of Labor
  • $13.3 billion – Department of the Treasury
  • $12.0 billion – Department of the Interior
  • $10.5 billion – Environmental Protection Agency

The biggest item ($663.7 billion) is defense spending, and we certainly can’t cut that during a war.  And that is 48.5% of all discretionary spending.  All of the rest of discretionary spending adds up to $704 billion, which is only 60.2% of the total $1.17 trillion of deficit.  In other words, even if we completely eliminated ALL discretionary spending other than defense, we’d still be stuck with 40% of the current deficit ($466 billion, or half a trillion dollars per year).  And that would mean zero spending on health and human services, zero on transportation, zero on veterans affairs, etc.

Still, however, it seems like we ought to be able to eliminate SOME of that spending, at least the spending on waste, fraud, and abuse.   So let’s look for that category.  Hmmm.  As I look down that entire list, I don’t SEE a category for waste, fraud, and abuse!

Okay, I’ll stop being sarcastic, but this does have a point.  Some very careful analysts might in fact be able to find some waste, fraud and abuse.  But that is much easier said than done, and it will be a tiny fraction of the deficit.  Any plan to get serious about cutting federal spending must make serious cuts in programs that are important to people, like welfare and transportation.  To eliminate the deficit will require changes in entitlements like Social Security and Medicare.

Moreover, we can’t substantially cut the deficit with only cuts in spending.  The categories listed above just cannot be cut enough to dent the deficit.  To eliminate the deficit, the only alternative is a combination of spending cuts and tax increases.  The new Congressional leaders do not want to increase taxes, of course, and I’m not saying they must.  Maybe we won’t close the deficit.  But just don’t tell me you’ll eliminate the federal deficit by cutting waste, fraud, and abuse.