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The Federal Budget Deficit

November 3, 2013

Contrary to popular belief, at least since the Korean War US Federal Government spending [including welfare and Social Security], like budget deficits and the national debt, generally increased during Republican Administrations [except during the Eisenhower Administration] and usually fell during Democratic ones. The reasons for this vary and are often highly political. For example, during their periods in power Republicans generally lower certain taxes [most often on the wealthy and for rent seeking activities], while increasing governmental expenditures [usually by large increases in defense spending or in expanding direct transfers of federal revenue to states]. This produces a temporary appearance of prosperity, but over the long run the lowering of revenue and the maintenance or increase in expenditures leads inevitably to larger deficits and debts especially during those periods of prosperity when debts and deficits should be reduced.

Democrats, however, inheriting these increased deficits and debts, as well as criticism from the Party that created them that the promised expenditures upon which the Democrats ran for office would further increase those debt obligations, generally begin their administrations attempting to increase revenue [usually from those who benefitted from the other Party’s largess] or by cutting programs, usually those favored by the other Party [like Defense]. Proving once again that Democrats are wusses.

In any event, that’s not the problem. There is plenty of tax money received by the federal government to pay for the ever shrinking share of governmental revenues dedicated to things like defense and other discretionary expenses that the politicians like to fight over. It is the growth of transfer payments and not the shrinking share of revenue dedicated to general federal government operations, that appears at first to be a potentially serious problem.

Three of the largest components of the transfer payment or non-discretionary portion of the federal budget are, Social Security disbursements, transfers to state and local governments and various costs associated with health care.

Since 1970, US real GDP has grown a little more than three times more than it was then. Social Security payments, perhaps the largest component of transfer payments during this same time have increased more or less by the same amount [meaning its percentage of GDP has remained relatively stable].

Transfers to state and local governments on the other hand have exploded from almost nothing in 1965 to become, next to SS and Defense, the largest component of federal spending not included in the discretionary portion of the budget [The red, blue and green lines].

A major source of this huge growth occurred when the Nixon and Reagan Administration packaged many existing federal programs [such as housing and many welfare programs] into automatic transfers of tax revenues back to the states and local governments [this is partially why the poorly run State governments, primarily in the South, receive so much more federal revenue than they contribute in taxes]. This effectively put that money outside of the budget cutting debate, because no elected official likes to cut money received by his state; entitlements, if you will, that allow the state to balance its budget without raising taxes. [That Democrats went along with this dodge to fund state governments from federal revenue, further cements their reputation as the wuss party.]

The last major component of the non-discretionary spending that has grown significantly has been in health care. Independent of the issue of who is covered to receive health care and who is not, it is to try to control these costs that comprise a major goal of Obamacare. It is these cost control provisions and not the coverage provisions that those who can afford to directly oppose the program really most object to. Recall that the medicare drug program passed by the Bush administration was a direct redistribution of taxpayer funds to the drug industry without any cost controls. Obamacare thanks to the efforts of both Republican and Democratic legislators ended some of the most egregious aspects of that legislation.

Republicans are especially hesitant to curtail or eliminate transfer payments to their states [after all this was a tremendous victory for political expediency over policy]. Democrats feel the same way about Social Security. They both, until Obamacare came along, have been reluctant to take on the Health Services industry.

 

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