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"In thinking about our financial problems, the crucial first step is to understand how we got in this position. If we are not clear on what caused the problem, we will have a hard time solving it."
Federal Spending and the Debt
If we are to pass along to our kids and grand kids a nation with at least as much opportunity as was passed to us, we must get out fiscal house in order.
Each year, President Obama has sent Congress his proposals, but his budgets do not take the serious steps that are necessary to get the country back on track. The President has said he has no intention in balancing the federal budget.
Many difficult decisions must be made, but I believe that Congress must remember that every dollar it spends is either taken from a taxpayer who earned it or borrowed – with interest – for future generations to repay. We cannot correct all of the mistakes of the past at once, but we have to get started now at putting the country on a fiscally responsible path.
Direction of Spending
Most Americans know that federal spending has been increasing in recent years. But I suspect that few understand how historic the spending increases have been.
For that reason, the following charts should help us see the changes that have occurred from 1962 to 2015 and show us what has gone wrong.
The first chart shows how much the federal government taxes and spends per person. Since the population has grown over 50 years, we expect that the total amount of taxes collected and the total amount spending would probably grow as well. Tracking how much the federal government taxes and spends per American enables us to see how policy decisions have affected our fiscal health. This chart also removes inflation as a factor so that a dollar in 1962 is worth the same as a dollar in 2011. Thus, it provides a true “apples to apples” comparison.
As you can see, the federal government received, on average, $4,000 per American in 1962 and spent slightly more. Today, taxes per person have doubled to about nearly $9,000 per American, while spending has more than doubled to over $10,000 per person.
The chart below shows federal spending over time as a percentage of the economy. In 2014, federal spending was $3.5 trillion, which is nearly 17.5 percent more than when President Obama took office. The Congressional Budget Office (CBO) projects the federal government to spend over $3.6 trillion in 2015.
What is your money spent on?
Federal spending is generally divided into three categories: mandatory, discretionary, and net interest.
The next chart gives us a closer look at spending. It shows defense and non-defense spending per person, discounting for inflation, over the last 50 years.
In 1962 we spent about $2,000 per American to defend the country, and that is roughly the same that we are spending today. By contrast, non-defense spending has gone from $2,000 per American in 1962 to $10,000 per person today.
Let's talk a little about those entitlements. The reason it is called “mandatory spending” is that once the criteria for the program is set as far as who is eligible and what benefits they receive, the benefits must be paid for everyone who qualifies, regardless of the total cost. That is also the reason they are known as entitlements – everyone who meets the qualifications is “entitled” under law to receive the benefit.
As you can see, the growth of entitlements is responsible for the big increase in federal spending. In fact, mandatory spending and interest payments comprise more than 60 percent of federal spending.
The chart below shows total federal spending and highlights the portion that is in mandatory programs.
Discretionary Spending - Discretionary spending is provided through annual appropriations bills and must be approved by the Congress each year. It is often further divided into defense and non-defense categories. According to the Congressional Research Service, 47 percent of the total budget was discretionary spending in 1962, and it remained the largest portion of federal spending into the 1970's. Since then, mandatory spending has increased at a much faster rate than discretionary spending. Today, discretionary spending makes up less than 40 percent of the entire budget.
Net Interest - Net interest is the only part of future spending that cannot be reduced by legislative action because it is money that must be paid to service the U.S. debt. Net interest payments today make up over six percent of the federal budget, but that percentage could increase if interests rates rise. Unfortunately, many economists predict that those rates could rise dramatically over the next decade.
Future ProjectionsWith no changes, spending on Medicare, Medicaid, and Social Security will continue to rise and consume more of the federal budget. The future cost of these programs is being driven by a combination of several factors:
Some people may believe that they are just receiving the Medicare benefits they have paid for with their taxes. However, according to a 2011 study by the Urban Institute, a couple with two earners making an average wage receives benefits worth three times what they paid into Medicare over their working life. If there is only one earner in the family, the couple receives a benefit that is nearly six times what was paid through taxes.
In fact, Medicare costs have jumped over 65 percent over the last ten years, more than any other major program.
It is often said that Social Security does not contribute to the federal deficit, but this is not true. Since 2010, Social Security has had to pay more money out in benefits than it receives in tax revenue. To make up for this shortfall, Social Security redeems IOUs from the federal government that are being paid back with additional interest. In 2011, Social Security IOUs earned $114 billion in interest. The only way to redeem these IOUs is through taxes and borrowing from general revenue.
Defense is the first job of the federal government, and I think the first money the federal government spends should be for national security. Of the $1.2 trillion in automatic spending cuts set to begin in January, half will come from domestic programs and the other half from defense. This means that while it makes up only 19 percent of the federal budget, nearly 50 percent of the deficit reductions will come from defense. These $500 billion in cuts would come on top of $486 billion in defense cuts already set to begin in January.
Even if the government eliminated all spending on defense, foreign aid, federal salaries, and all other discretionary spending, we would still have a deficit this year of several billion dollars. In other words, all of the money that goes into the federal government in taxes is not enough to pay for the entitlement programs.
A more detailed look at how the federal government spends your money can be found below.