Examining how government spending works

In our Collaborative Democracy, would the people be the best rulers to make fiscal decisions or would political parties and politicians be the best to do so? To compare the two, we must look at the current spending process and its results. Then we can consider whether a Collaborative Democracy could do better or would more likely do worse and put our economy in further danger.

Three types of federal spending exist, mandatory spending, discretionary spending, and interest on the national debt (considered to be a type of mandatory spending also). Mandatory spending is determined by existing laws rather than through the annual federal budgeting process. If Congress passes a law establishing the ongoing funding of a program, the funding continues indefinitely unless changed by Congress (or until it expires if an expiration date was included). Discretionary spending is that which is not required by law. Only expenses included in discretionary spending are budgeted annually by the government. Including interest on the national debt, mandatory spending was over three-fourths of all the money spent by the government in 2021 as shown in Figure 15-1. [1]

Figure 15-1

The federal budgeting process

Here's a quick and dirty view of how the federal budgeting process actually works now for discretionary spending. [2]

1. Each federal department and agency determines its budget for the coming fiscal year. The Office of Management and Budget combines the individual budgets into one, adding in any new programs or expenditures according to the agenda of the President's party. The President submits the budget to Congress.

2. The Senate and the House redundantly create separate budget resolutions to set spending limits for the year and hammer out the differences.

3. Both chambers redundantly create appropriations (funding) bills, each lumping all planned discretionary spending plus any special projects into one humongous omnibus bill. The majority party in each chamber (if different from that of the President) adds in their political spending agenda consisting of new program additions or program defunding that they feel are important. Both parties include payback to those who funded their elections and to special interests who lobby them by tacking rider bills onto the omnibus appropriations bill, as it must be passed to fund government operations.

4. Both chambers debate and vote on their omnibus appropriations bills until both chambers pass their bills. A mutual conference committee resolves any differences between the two bills and each chamber votes on their bill again. Sometimes the bills aren't even read by some members of Congress before they vote as some omnibus bills contain thousands of pages. Sometimes there is disagreement over a few new items added by the majority party. Both sides put on a long show of fighting, giving them as much screen time with the press as they can get. Occasionally an ideological project is removed. However, in the end the omnibus bill always passes as pressure mounts to pay government bills.

The cost of all government expenses in 2021

In fiscal year 2021, according to the Financial Statements of the United States Government from the Treasury Department, the total operating cost of the federal government was $7.4 trillion. About $4.3 trillion was received in taxes and other revenues. That left a shortfall of $3.1 trillion. After adjustments from reconciling items due to accrual accounting, the remaining budget shortfall (referred to as the "deficit") was $2.8 trillion as shown in Figure 15-2.

Figure 15-2 [3]

Much of the $2.8 trillion deficit in 2021 and the $3.1 trillion deficit in 2020 were due to a total of $4.8 trillion in spending between Mar 2020 and Sep 2021 for the Covid-19 Pandemic. [4]

Budget deficits occur in most years

Over the last 90 years, the government has produced a deficit in 77 of those years regardless of the political party in control. [5] Figure 15-3 shows the annual deficit and the annual amount borrowed to cover the deficit over the last 30 years. As you can see, annual deficits were on a downward trend through the 1990's as the country prospered. There was a bump after the 2001 Recession and a big bump after the Great Recession in 2008 as the government spent huge amounts to boost the economy to avoid a depression. However, both of those periods pale compared to the money spent in 2020 and 2021 on the Covid-19 pandemic, which was only exceeded by WWII deficits.

Figure 15-3 [6]

The annual deficit and the national debt increase

Every year that a deficit occurs, the government must borrow money to pay its obligations. The Federal Reserve borrows money by issuing securities that pay interest such as bonds. [7] The various types of securities issued either pay back a larger amount later or pay periodic interest for the money received. Some are sold at auction to large companies, some to other countries, and some to individuals.

There is no collateral for the securities. They are equivalent to a personal loan from a bank based on credit worthiness and reputation only. Fortunately, the US has a very high credit rating and has always paid the interest. Only 9 countries have higher credit ratings than the US. [8]

The government also borrows the money from the Social Security trust fund and over 25 others, reducing the number of bonds and other securities that must be borrowed from outside the government to pay its bills. The government exchanges the payroll and other tax collections that go into the funds with special interest securities called "Intra-governmental Debt Holdings" in its financial reports. [9] These special interest securities allow the government to put the money borrowed from the funds into the general fund to pay its bills without increasing the annual deficit.

However, even though the annual deficit looks better because it is lower, the special interest securities are debt so they increase the national debt. This is one reason that the amount added to the national debt each year is often more than the deficit shown for the year. As you can see in the chart in Figure 15-3, fiscal years 1998 through 2001 had a negative deficit; more money was received than was spent. However, all of those years still contributed to the national debt because some of the money received was borrowed from our trust funds.

Dire warning on national debt level by the GAO

The US Government Accountability Office (GAO) is now raising an alarm about the national debt. A nice video by the GAO explaining the national debt issue can be found on YouTube. [10] The GAO's 2021 report contained the following warning. [11]

The federal government faces an unsustainable fiscal future. At the end of fiscal year 2021, debt held by the public [the national government] was about 100 percent of gross domestic product (GDP), a 33 percent increase from fiscal year 2019. Projections from the Office of Management and Budget and the Department of the Treasury, the Congressional Budget Office, and GAO all show that current fiscal policy is unsustainable over the long term. …

The underlying conditions driving this unsustainable fiscal outlook existed well before the COVID-19 pandemic and continue to pose serious challenges if not addressed. …

Increasingly Large Deficits Drive Unsustainable Debt Levels

In GAO’s simulation, starting in 2024, debt held by the public grows faster than GDP in every year. In most years, debt held by the public grows more than twice as fast as the economy, in real terms. The growing debt is a consequence of borrowing to finance increasingly large annual budget deficits.

Not everyone agrees that the debt level is a problem

Apparently, the amount of debt may not be a big concern to the Federal Reserve. David Andolfatto, a Senior Vice President at the Federal Reserve Bank of St. Louis wrote an article titled, Does the National Debt Matter? [12] The article proposes that we cannot look at the national debt as we would our personal household debt. Personal debt must eventually be paid back or bankruptcy would occur. However, the government can continue to roll over its debt indefinitely. Any debt that matures can simply be financed by further debt. It is acceptable that the debt increases as long as its growth is proportional to increases in the population or the gross domestic product (GDP). (However, the GAO projections show it increasing well beyond the GDP and population levels.) Andolfatto states the following.

When the interest comes due, it can be paid in legal tender—that is, by printing additional U.S. or Federal Reserve Notes. It follows that a technical default can only occur if the government permits it. The situation here is similar to that of a corporation financing itself with debt convertible to equity at the issuer’s discretion. Involuntary default is essentially impossible. [Yet countries do default and when they print more money to pay their debts, they produce inflation.] [Bold emphasis added.]

According to Andolfatto, additional debt that is held domestically is a good thing as it "makes individuals feel wealthier." In a depression, the government can borrow money and give it away to drive private spending, "making everyone better off." (Well, they might be better off assuming inflation doesn't increase as a result.) Therefore, if you look at the national debt as money in circulation, then the debt is not an issue. Andolfatto reaches the following conclusion.

Of course, not having to worry about paying back the national debt does not mean there is nothing to be concerned about. But if the national debt is a form of money, wherein lies the concern? …

There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates. However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there. …

As long as inflation remains below a tolerable level, there is little reason to be concerned about a growing national debt. Like a firm that finances itself with convertible debt, the prospect of involuntary default is never a concern. [Bold emphasis added.]

The White House and some economists have expressed their belief that Washington still has decades to tackle the problem. They believe now is the time to invest in the future while interest rates are low and that there is little risk because of the credit worthiness and reputation of the US government. (They believe inflation is just a short-term spike.) However, other economists say this is simply too risky. An article from the Council on Foreign Relations states the following. [13]

"The debt doesn’t matter until it does," says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget. "By taking advantage of our privileged position in the global economy, we may well lose it."

Waste

Many areas of the government are grossly wasteful of resources and dollars. This is nothing new. Below is an excerpt from testimony by Chris Edwards before the House Committee on Oversight and Government Reform on wasteful government spending. [14]

Federal waste is not just a modern phenomenon. I have researched some of the oldest federal agencies and found that cost overruns, pork‐​barrel spending, fraud, and scandals were common as far back as the 19th century. In that century, for example, the Bureau of Indian Affairs was rife with corruption and organized groups plundered the aid sent to Indian tribes. The Army Corps of Engineers has also been known for mismanagement and pork‐​barrel spending for a very long time. The House Ways and Means Committee issued a report in 1836, for example, looking into chronic cost overruns in that agency’s projects.

So federal waste is not new, and it is not isolated to either political party. It is a structural problem with the way government works. Private businesses can also make bad decisions, have cost overruns, and misallocate investments. But private markets have built‐​in mechanisms to minimize those problems, whereas the government does not. The federal government has a hard time learning from its mistakes, and so wasteful spending has become chronic. [Bold emphasis added]

One aspect of the problem is that control of the government flips back and forth between the two major parties. The political appointees that oversee the departments and agencies change with each regime change. Many other issues exist as well.

Waste in government is rewarded, frugality is not

Federal policy makers equate spending with benefits for the people. The more the better! They are rewarded for increasing spending without measuring the resulting benefits. Those under them are doing what those in control expect of them.

With wasteful corporations, when their expenses outgrow their revenues, they are forced to cut costs and produce only what is needed or go out of business. Maintaining cash flow to cover their costs is critical.

However, the government can't go out of business and has no competition. Cash flow is irrelevant in its decisions because if it runs out of money, it increases taxes or borrows the money and increases the national debt. As opposed to funding one operation at a time, all we hear is that the entire omnibus bill must be funded or the government will shut down and there will be a financial collapse. It is all or nothing.

For these reasons, the government has grown so large with so much duplication and waste that no one can even list all of the government agencies. [15] The government is our nation's largest employer. Regardless of campaign rhetoric, neither major party benefits from reducing spending nor from eliminating waste. Consequently, they don't.

Meaningfully reducing the national debt will be difficult

The only certainty in the national debt issue is that the cause of high annual deficits and the unsustainable level of national debt is an imbalance between the revenues coming in and the spending going out. No restrictions exist on federal spending today. Congress consistently spends more than it receives regardless of the major party in control.

However, there is much disagreement about the best way to bring receipts and expenditures into balance. Some call for raising taxes, some for cutting spending, some for doing both, some for creating a balanced budget amendment, and some for leaving everything just as it is. Some studies indicate that raising taxes would be the best solution considering the economy. Others conclude that cutting spending would give better long-term results.

A testimony before Congress based on a paper from economists at Harvard and George Mason University concluded that spending cuts were more likely to reduce the deficit long term without triggering a recession than general tax increases. [16] An extensive, non-partisan study by the International Monetary Fund (IMF) covering 3,500 policy changes over 33 years in 16 countries determined that spending cuts were a "sure bet for a reduction in debt to GDP." [17] Unfortunately, any meaningful spending cuts that could reduce the deficit would never be made by Congress and they have no motivation to do it.

Politicians assume spending more is better

Part of the problem is supposedly that politicians believe spending cuts would be unpopular. They do not want to alienate their voters and lose the next election. Survey headlines produce this assumption. Although, sometimes political actors may commission surveys to justify their spending. Survey headlines influence our thinking as well. When I describe our Collaborative Democracy, some people respond that most citizens would not want to cut spending. Survey companies, the media, and politicians all play a part in spreading this disinformation.

For example, a survey in 2019 by Pew Research Center asked, "If you were making up the budget for the federal government this year, would you increase, decrease, or keep spending the same for…" followed by a list of 13 government programs. According to the articles, the majority of respondents said they would increase spending for 7 programs. Whereas, the majority favored keeping spending the same or cutting spending on 6 programs. Pew Research Center published the results under two headlines on the same day. One was, "Majorities favor increased spending for education, veterans, infrastructure, other govt. programs." The other was titled, "Little Public Support for Reductions in Federal Spending." [18]

This illustrates the problems with such generic polls and the headlines they use that mislead the public. I have several issues with this survey and the chosen headlines. 

1. Who knows what people are actually thinking when they responded to such a generic question. Unless you ask about increasing or decreasing a specific cost related to a specific service or issue, the responses are meaningless, especially for people who have no idea how the department spends its funds currently or what might be needed or not needed.

2. The headlines leave the impression that most Americans wanted more government spending in everything, which wasn't true. You could create alternative headlines based on the same data with the opposite bias. For example, an equivalently true headline could be, "People are opposed to increases in spending in almost half of government departments." The 6 departments where respondents wanted no increases spent more total money than the other 7. Therefore, another possible headline would be, "People oppose spending increases in government departments responsible for more than half of federal spending. Many want decreases." Without taking a side, the most honest headline would probably be, "Majorities favor increased spending in 7 departments, none or cuts in 6."

As this survey illustrates, convincing people that everyone wants to spend more money seems to be commonplace.