Understanding the Federal Budget
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We live in a country in which a large number of
people, if not the vast majority, hold a set of beliefs about the federal
budget that are demonstrably inconsistent with facts that exist in the real
world. The extent to which this is so is easily seen by considering how many
people would be surprised to discover that the size of the federal
government as a fraction of our economy—that is, as a percent of gross
domestic product (GDP)—in the 2000s was about where it was in the 1970s and
was actually slightly smaller in 2000 and 2001 (17.6%) than it was in 1961
through 1964 (17.8%-18.2%). How many people would be shocked to discover
that there were more federal government employees in 1967 (2.85 million, 6.3
million if we include the military) than there were in 2013 (2.77 million,
approximately 4.3 million with the military)? How many would also be shocked
to find that federal employees as a fraction of the civilian labor force has
fallen by more than 50% since the 1960s? And how many know that Americans
are one of the least-taxed people among the advanced countries in the world?
These are all simple and easily verifiable,
real-world facts that most people would find almost impossible to believe
given the deluge of disingenuous, antigovernment rhetoric that is designed
to encourage us to believe otherwise.
The fact that the size of the federal budget as
a fraction of our economy in the 2000s was about where it was in the 1970s
and was actually slightly smaller in 2000 and 2001 than it was in 1961
through 1964 is shown in Figure 0.1.
Office of Management and Budget (1.1
Historical Statistics of the U.S. (Ca10).
This figure, which plots Total
Federal Outlays as a Percent of GDP from 1901 through 2013, shows
that in spite of what most people seem to believe:
The most significant increases in the federal government's
role in the economy (Federal Outlays as a Percent of GDP) took
place in the 1930s, 1940s, and 1950s.
Federal Outlays relative to the size of the economy in
2013 (20.8% of GDP) was below where it was in 1980 (21.1% of GDP).
The average level of Federal Outlays relative to GDP in
the 2000s (19.40%) was essentially the same as it was in the 1970s (19.39%)
and significantly less than it was in the 1980s (21.56%).
This is what out exploding federal budget actually looks like in the real
Figure 0.2 shows the relationship
between the number of Federal Government Employees—Total, Civilian,
Military, and Postal—and the Civilian Labor Force
and Population of the United States from 1950 through 2013.
Bureau of Labor Statistics.
As is shown in this figure,
the Total number of Federal Government Employees (Civilian
plus Military) and federal Military employees fell
substantially as the Vietnam War wound down and the
Cold War came to an end. At the same time, the number of Civilian
federal employees has remained relatively constant since 1967 (hovering
around three million) in spite of the fact that the Civilian Labor
Force has doubled since 1967 and the civilian Population
increased by 90%. What's more, Figure 0.2 clearly shows that
Civilian federal employees as a fraction of the workforce has been cut
in half since the 1960s and by even more when we include Military
employees. Civilian federal employees were 4.3% of the labor force in
1967; they were only 2.0% of the labor force in 2013, and it is worth noting
that 20% of all Civilian federal employees worked for the Post Office
in 2013 and delivered our mail!
This is what our
ever-growing, out-of-control federal bureaucracy actually looks like in the
The fact that Americans are not terribly
overtaxed is shown quite clearly in Table 0.1 which is constructed
from the official statistics of the
Organization for Economic Cooperation and Development (OECD). This table
shows how the ranking of the United States among the 34 OECD countries has
changed since 1980 in terms of the percentage of gross income (GDP) that is
paid in taxes.
Organization for Economic Cooperation and Development, (Comparative
We have moved from tenth from the bottom on
this list to third from the bottom over the past thirty-one years. Among the
advanced countries of the world, only Chile and Mexico paid less in taxes as
a percent of their gross income than we did in 2011.
This is what our unbearable tax burden actually
looks like in the real world.
The ideas that the federal budget and federal
employment have grown voraciously over the past fifty years and that
Americans are terribly overtaxed are only three of the fiscal myths people
believe today. In a recent survey (February 2013), the
Pew Research Center asked 1,504 respondents: "If you were making up the
budget for the federal government this year, would you increase spending,
decrease spending or keep spending the same" for nineteen different
categories of government expenditures. The expenditure categories and
results of the survey are given in Figure 0.3.
Pew Research Center
These results suggest that the vast majority of
the American public is satisfied with the size of the federal government we
have, and, if anything, would like to see it increase rather than decrease:
For all categories of expenditures, other than the first three, a larger
proportion of the respondents would choose to increase rather than decrease
expenditures, and for all categories, even the first three, a majority of
those who had an opinion would either increase expenditures or keep them the
same. In addition, the three categories for which more respondents would
rather decrease than increase—Aid to the world's needy, State
Department, and Unemployment aid—sum to just 3% of the federal
budget while just five of the categories which more respondents would
increase rather than decrease—Social Security, Military defense,
Medicare, Health care, and Aid to needy in U.S.—sum to
over 70% of the federal budget.
These results stand
in stark contrast with those of the
Pew Research Center/USA Today survey conducted
later that same month. In this survey the respondents were asked if the
president and Congress should focus on spending cuts, tax increases, or both
in order to reduce the federal budget deficit. The results are given in
Pew Research Center/USA Today
Here we find that the overwhelming majority of
people (73%) would like to see the federal deficit problem solved through
only or mostly spending cuts rather than through only or mostly tax
increases (19%). In other words, an overwhelming majority of the American
people would like to have their cake and eat it too; they want to increase
the size of the federal government or keep it the same as they solve the
deficit problem through only or mostly spending cuts.
According to the
Office of Management and Budget, the federal deficit was
equal to 20% of total federal expenditures in 2013. As a result of
rescinding some of the provisions of the
2001-2003 tax cuts combined with the expected recovery of the economy
and some spending cuts, this deficit is estimated to
decline to 10.6% of total federal expenditures by 2019. It should be
obvious that we are not going to be able to eliminate the remaining 10.6%
deficit through mostly spending cuts—as, apparently, 73% of the American
people want to do—by cutting the 3% of the budget that goes to Aid to the
world's needy, the State Department, or Unemployment aid.
If we are to eliminate the 10.6% deficit estimated for 2019 through mostly
spending cuts we are going to have to cut the 70% of the budget where we
find Social Security, Military defense, Medicare,
Health Care, and Aid to needy in U.S. because that's where the
Figure 0.5 shows a breakdown of the
federal budget with a 10.6% hole in it.
Office of Management and Budget (3.2
Even a causal examination of this chart reveals
that it is impossible to maintain the government the vast majority of the
American people seem to want and, at the same time, reduce the deficit by as
much as 10.6% through mostly spending cuts:
Maintaining our current levels of expenditures on Social Security and
Medicare—as over 80% of the respondents in the Pew poll say they would chose
to do—leaves only 58% of the budget to cut after deducting the 6% of the
budget that goes to interest on the national debt. It would require a 18%
cut in the rest of the budget to cut the total budget by 10.6% if we were to
exempt Social Security and Medicare from cuts.
Maintaining our current levels of expenditures on aid to the needy in
addition to those on Social Security and Medicare—as over 80% of the
respondents in the Pew poll also say they would chose to do—leaves only 41%
of the budget to cut after deducting interest on the national debt. A 10.6%
cut in the total budget would require a 26% cut in this 41% of the budget.
And if we were to include maintaining our current levels of defense
expenditures as well—as over 70% of the respondents in the Pew poll say they
would chose to do—it would leave only 24% of the budget to cut. A 10.6% cut
in the total budget would require a 44% cut in this 24% of the budget.
Where are these cuts supposed to come from?
The purpose of this eBook is to explain the
federal budget—both the actual numbers in the budget and the history of the
budget—in order to clarify the actual, real-world choice faced by the
American people in dealing with our fiscal problems.
Chapter 1: History of the National Debt begins with an explanation of
the relationship between federal expenditures, revenues, deficits, and the
national debt and why it is important to view these entities relative to the
size of the economy. Particular attention is paid to the definitions and
concepts that are needed to understand these relationships. The history of
the national debt from 1916 to the present is then examined in detail. The
appendix at the end of this chapter gives a brief explanation of some the
ways we measure aggregate economic variables such as total output, the
average price level, and productivity.
Chapter 2: History of the Federal Budget examines the history of the
federal budget. All of the major expenditure and revenue components of the
budget are plotted from 1940 through 2013.
These plots show that even though the size of the federal budget relative to
the economy has been fairly stable since World War II, the nature of the
federal budget has changed dramatically: In the 1950s the budget was
dominated by defense expenditures; today it is dominated by expenditures on
social-insurance programs. These plots also show how the funding of the
federal budget has changed as the importance of payroll taxes increased and
that of corporate taxes decreased. The appendix at
the end of this chapter lists all of the expenditures in the federal budget
in 2013, broken down by function and subfunction, along with the percent of
GDP and of the federal budget that each expenditure represented in that
Chapter 3: Human Resources and Social Insurance examines the growth of
our federal social-insurance system since 1940. Federal
expenditures on all of the major
social-insurance programs are plotted from
1940 through 2013. These plots show how the retirement and medical
social-insurance programs have come to
dominate our federal social-insurance system. They also show that 1) federal
retirement programs are dominated by Social Security, 2) federal medical
programs are dominated by Medicare and Medicaid, and 3) only the medical
portion of the federal social-insurance system has increased relative to the
economy since the mid 1970s.
Chapter 4: Welfare, Tax Expenditures, and Redistribution examines the
welfare component of our federal social-insurance system. Federal
expenditures on each of the major welfare programs are plotted from 1940
through 2013, and the expenditures on each federal
welfare program in 2013 are given along with the percent of GDP and of the
federal budget that each program represented in that year. The
increases in welfare expenditures that have occurred since the 1960s are
seen to have been dominated by the increases in Medicaid and in the
refundable tax credits that were instituted to encourage welfare recipients
The nature of federal entitlement programs is
also explained, and it is shown how we spend twice as much on our two
largest entitlement programs—Social Security and Medicare—than on all of our
welfare entitlement programs combined. Federal welfare expenditures in 2007
are then compared to the benefits from the federal
tax-expenditure entitlement programs in that year. It is shown that the
federal tax-expenditure entitlement programs (commonly referred to as tax
breaks or loopholes) in 2007 had a much larger effect in redistributing
income from the general taxpayer to the top of the income distribution than
federal welfare programs had in redistributing income from the general
taxpayer to the bottom, and it is argued that the
special treatment of dividends and capital gains in the tax code is a far
more lucrative entitlement program for the wealthy than any government
program available to the poor.
Chapter 5: Summary and Conclusion
explains why eliminating waste, fraud, and abuse in the federal budget
cannot solve our deficit and debt problems. It is argued that if we are to
solve these problems we must either a) raise taxes
or b) make substantial cuts in defense and our federal retirement and
medical programs, specifically, in Social Security and Medicare. The only
alternative is to cut the rest of the budget which has already been cut by
more than 50% since 1980. Attempting to solve our fiscal problems by cutting
the rest of the budget will decimate our social safety net and make it
impossible for the government to provide the
essential services and benefits that
only government can provide: a fair and just
criminal justice system; quality
public education; effective
public health programs; an effective and efficient
personal healthcare system; efficient
streets, roads, highways, and other forms of
public transportation; a clean and safe
foods, drugs, and other
consumer products; safe
working conditions; and a stable, growing economy.
These are the kinds of actual,
real-world choices we must make if we are to solve the fiscal problems with
which we are faced today.