My overview of government activities begins with an overview of public spending, by category, at the federal, state and local level, with data in the attached spreadsheet. The key point here is that much of what the government spends money on most working taxpayers never see. National defense. Interest and pensions. Income and health care for senior citizens. Education for children. And, to a lesser extent, income and health care for the poor, disabled and unemployed. Most of the remaining services that working age adults do see, protection services like police and fire departments, infrastructure and amenities such as roads, transit systems, parks and libraries, water and sewer systems and local trash collection – are provided by local governments. The only federal organization that regularly provides services direct to all of the American people is the Post Office.
The total expenditures of all levels of government add to $3.3 trillion dollars in 1995, but this simple addition double counts intergovernmental aid. The federal government provided $233 billion in such aid, with $202 billion going to state governments and $26 billion direct to local governments; some federal aid to state governments is later passed on to local governments as state aid. State governments provided $241 billion in aid, with $232 billion to local governments and $26 billion to the federal government, generally as a payback of prior federal aid. Local governments provided $13 billion in aid to state governments, but this is primarily something that occurs in New York State.
Including only “direct expenditures,” the three levels of government spent $2.8 trillion in 1995; gross domestic product was $7.4 trillion that year. The federal government spent $1.47 trillion, just over half of all direct government spending. State governments spent $596 billion (21 percent) and local governments spent $751 billion (27 percent). The rest of the table shows the amount of direct expenditures in each functional category, by each level of government, and its percent of total government spending, both overall and for each level of government.
Categories of services provided exclusively by the federal government — national defense, veteran’s services (other than veteran’s hospitals and other services tabulated elsewhere), the Post Office, and space research (ie. N.A.S.A.) – accounted for 14.7 percent of overall government direct expenditures, and 28.2 percent of federal government direct expenditures, in 1995. National defense alone accounted for over one in five dollars of federal expenditures, and one in ten dollars of government spending overall.
Education categories accounted for 14.4 percent of overall government expenditures, or one dollar in seven, with most of this at the state and local level. Higher education accounted for 3.4 percent, and public elementary and secondary schools for 9.4 percent, of overall government expenditures. Other education categories include vocational schools, administrative oversight agencies and – at the federal level – college student loans and grants. Education accounted for 17 percent of state government expenditures, with most of that in state colleges and universities. It accounted for 36.8 percent of local government expenditures, primarily in public elementary and secondary schools, which are by far the costliest local government service. The federal government spends little on education directly, thought it does provide some aid revenues to the other levels of government. State governments, as well, influence elementary and secondary education through intergovernmental school aid and regulation, though seldom providing public school services directly.
Social insurance, welfare, health care services and housing assistance categories accounted for 33.5 percent overall government expenditures in 1995. They collectively accounted for over 40 percent of federal expenditures and 40 percent of state expenditures. The largest programs in this group, Social Security and Medicare, by themselves accounted for 18 percent of overall government expenditures and more than one-third of all federal direct expenditures. In the census bureau’s functional classification scheme, Social Security and Medicare fall into the broader “insurance trust” category, rather than the “public welfare” category. According to the Bureau’s manual, however, to qualify as to qualify as an insurance trust “the system must be financed by a separate accounting fund of the administering government. This criteria excludes many pay-as-you-go plans. The fund must have some type of assured revenue stream or dedicated revenue source other than appropriations from the administering government (generally, contributions or premiums imposed on its members and/or member employers). As I discussed here http://www.r8ny.com/blog/larry_littlefield/social_security_the_generational_betrayal.html , it is unlikely that Social Security and Medicare actually meet these requirements, a fact with broad generational equity implications.
Payments to private health care vendors by Medicaid, the health care program for the poor, and other similar programs accounted for 4.3 percent of overall government expenditures; primarily a state run program, Medicaid accounted for over 20 percent of all state expenditures in 1995, a share that has been rising rapidly. Public hospitals accounted for 2.8 percent of overall expenditures, with all three levels of government participating. Most federal spending in the category is in Veterans Administration (VA) hospitals. Since public hospitals generally serve the poor, much of their revenue comes from Medicaid; as “direct” expenditures this money is counted as public hospitals spending, not Medicaid spending, by the Census Bureau to avoid double counting. The Medicaid program is, therefore, an even greater share of total public expenditures than this data would indicate. Taken together, health care vendor payments and public hospitals cost the three levels of government over $200 billion, or 7.1 percent of overall spending. That is in addition to Medicare spending, which cost another $180 billion.
Health care’s share of total government spending is almost certainly higher today. In fact, as I have discussed here http://www.r8ny.com/blog/larry_littlefield/socialized_medicine_get_real_its_already_here.html , directly (the programs listed above) and indirectly (subsidies through the exclusion of private health insurance from taxable income and the purchase private health insurance on behalf of public employees) federal, state and local governments cover three-quarters or more of third party health care expenditures.
Aside from Social Security, all the programs that provide cash payments to individual people, as a group, accounted for 4.1 percent of overall government expenditures. The welfare cash assistance category accounted for 2.0 percent, with federal SSI program for the disabled accounting for more than half of that. The state run, but substantially federally financed cash assistance programs that most people think of as “welfare” accounted for less than one percent of overall government expenditures in 1995 – even before the 1996 welfare reform was passed. Unemployment insurance and worker compensation, both of which are classified as “insurance trust” activities by the Census Bureau, accounted for another 1.6 percent of overall government spending; exclusively state run, they accounted for 7.3 percent of state spending.
In addition to cash assistance payments available to everyone, the federal government has two programs directed toward declining industries: farm income stabilization payments, and railroad retirement payments. Railroad pensions were nationalized as the industry declined, leaving three retirees for every worker and under-funded pension plans. In 1995, the federal government spent more on railroad pension payment than the states spent on worker compensation benefits. Farm income stabilization payments accounted for only 0.2 percent of overall spending in 1995, but have since risen. In fact, the decline in cash welfare expenditures other than SSI, and the increase in farm income stabilization payments, represents one of the major changes in public spending priorities in recent years. In 1995 $25.3 billion was spent on welfare cash assistance, but only $5.3 billion on farm subsidies. Under the farm bill passed in 2002, farm subsidies averaged nearly $20 billion per year. Temporary Assistance to Needy Families, the block grant program that replaced traditional cash welfare, will be funded at about the same level, but much of that money is now used for social services, child care, and similar items, rather than paid to individuals as cash assistance. In 2000, there were only $13.5 million in cash benefits paid. “Welfare” isn’t the issue, or the code word, it used to be, given how insignificant is has become; what may be a surprise to some is that it never was that significant to begin with.
The Census Bureau groups the “Housing and Community Development” function with other physical development functions such as transportation and water and sewer infrastructure, but this is an anachronism. Large-scale federally-financed urban renewal, and the actual construction of subsidized housing on a substantial scale, ended in the 1970s. Today, most expenditures in the category are for Section 8 housing vouchers, and for operating subsidies for existing public housing projects, intended to cover the difference between the cost of their operations and the rents their occupants are required to pay. Although directly spent at the federal, state and local level, most housing and community development spending is financed by the federal government. According to an OMB table, the federal government spent $4.7 billion on “community development” and $27.5 billion on “housing assistance” in 1995. Today, therefore, the category is more accurately grouped with other social assistance programs. Housing and community development accounted for 1.3 percent of overall government spending in 1995. It’s share, and federal funding for it, continue to fall, a problem for New York City, which has far more spending on it that just about anywhere else.
Interest on public debts is a major category of public spending in and of itself, even though it does not produce any public services. In 1995 it accounted for 10.6 percent of overall spending, 15.9 percent of federal spending, 4.2 percent of state spending, and 5.5 percent of local government spending. Pension payments to former public employees accounted for 3.6 percent of overall expenditures, 2.6 percent of federal expenditures, 1.8 percent of local expenditures, and 8.0 percent of state expenditures. The share is high at the state level because state governments often manage pension plans on behalf of local governments. Since the recipient employees are no longer working, pension payments do not lead to public services either.
General Expenditures Not Elsewhere Classified is a catchall category that includes boards of elections and economic development agencies among other things. At least in New York City, where I am very familiar with the data, however, the largest component is public employee benefits (such as health benefits), and judgments and claims (or liability insurance for governments that are not self-insured) that cannot be allocated to individual agencies, and thus to individual functions. The Census Bureau’s government finance database was designed at a time when these categories were less important than they are today. With those two large items sometimes included, in 1995 General Expenditures NEC accounted for almost four percent of total government spending, spread across all levels of government.
Here is the punchline. The functional categories of public expenditures discussed thus far – federal-only programs dominated by national defense and the post office; education; health care, housing and welfare; pubic employee pensions; interest on public debt; judgments and claims and unallocated public employee benefits, and interest payments – are just part of the scope of public services. These categories, however, accounted for over eighty percent – four dollars in five – of overall expenditures. They accounted for 93.6 percent of direct federal expenditures, and 74 percent – three-quarters – of state expenditures. Just a few categories in this group — national defense, the public schools, interest on debts, social security and Medicare — by themselves accounted for half of overall government spending, and 72.5 percent of federal spending.
Yet for the majority of Americans – those working age, not poor, disabled or unemployed, and not having children in public schools or colleges – nearly all these categories of public services are invisible. As a result of the World Trade Center disaster, I actually saw, over several months, soldiers protecting the area around my workplace from attack, but that is unusual. Of this 80 percent, the Post Office is the only government activity most people experience directly every day. What are visible to everyone are the functional categories that account for the other 20 percent of expenditures. Like the public schools, most of these are services provided by local governments. Their share of total government spending, their funding overall, is continually under pressure from the growing needs of categories already discussed.
I have grouped one some of these as “infrastructure and amenities,” including transportation, water and sewer systems, solid waste management, publicly owned electric and gas utilities, libraries, parks and recreation, and natural resources. These services accounted for 10.9 percent of overall government expenditures with streets and highways, the largest category in the group, accounting for 2.8 percent. They are primarily provided by local governments, which accounted for 59 percent of total spending in the category; the category, in turn, accounted for 24 percent of all local government expenditures. Infrastructure and amenities accounted for 12.4 percent of state expenditures, but just 3.4 percent of federal expenditures.
The federal government has substantial expenditures only in the natural resources function, which includes many functions of the Department of Agriculture and Department of the Interior, farm credit lending, federal dams, canals and electric programs, and similar activities. State governments have substantial expenditures in natural resources (hunting and fishing regulation) and streets and highways, with much of this spending, as at the federal level, occurring in rural areas. As for education, another primarily local government function, the federal and state governments are involved in financing infrastructure and amenity services, through intergovernmental aid, to a greater extent than providing them directly.
Another highly visible group of service categories is that which might be called public protection: the police, corrections, and judiciary, fire departments, public health departments and what the census bureau calls protective inspection. These services accounted for 6.7 percent of total government spending in 1995. Protective inspection is a state and local category that only includes those inspectors that aren’t incorporated into other, broader agencies and categories. Departments of Motor Vehicles, for example, are classified under transportation, and federal regulatory agencies, such as the Food and Drug Administration and Environmental Protection Agency, are classified under “health.” Like infrastructure and amenities and public education, public protection is a substantially local activity, with local governments accounting for half of all expenditures. Expenditures on public protection accounted for 12.7 percent of local government expenditure and 10.5 percent of state expenditure, but just 2.0 percent of federal expenditure – although with the creation of the Department of Homeland security, the share of federal spending is in this category is likely to have risen.
If public protection were combined with national defense, veteran’s hospitals and other veteran’s services, then “protection” in general could be said to have accounted for about 20 percent of total government expenditures in 1995. That share could rise if the rising cost of protecting against external threats exceeds a possible decline in the spending on local crime, due to falling crime and imprisonment rates.
If public protection and infrastructure and amenities benefit everyone, while other public spending benefits only selected people, why isn’t there continual political pressure to increase spending in these universal categories and cut spending on public services and benefits with limited eligibility? Because while universal services benefit everyone, they benefit no one in particular. And while we all share the future, the future provides a personal benefit to no one in particular, and infrastructure investment benefits the future while the lack of infrastructure maintenance doesn’t hurt until the future. Public services and benefits with limited eligibility, on the other hand, have specific, motivated beneficiaries highly concerned with what they particularly receive. Indeed, many of those who are most motivated to pay particular attention to universal public services are those who provide them, not those who receive them. Finding resources for infrastructure, parks, libraries, etc. is therefore a constant battle, especially in New York City.