As the Presidential posturing continues, is anyone interested in what Presidents have actually done with our money over the past 30 years? The Reagan defense buildup, the peace dividend, and the War on Terror explain much of the variation in total federal expenditures as a share of Gross Domestic Product over the past several administrations. Despite an aging population, spending on Social Security is at about the same share of GDP today as it was in the Carter Administration, although this is about to change as the baby boomers retire. Federal health care expenditures, which primarily benefit senior citizens, have soared as a share of GDP, although that growth was slower during the Clinton Administration. Federal spending on investments in the future – science, space and technology, energy, natural resources and the environment, community development and transportation – is much lower as a share of GDP than it was before the Reagan Revolution, though it has tended to increase somewhat under Presidents named Bush. Presidents named Bush also increase federal spending on the poor as a share of GDP, but overall spending on the poor is down as a share of GDP since the Carter Administration, with big shifts in the nature of that spending during the Reagan and Clinton administrations. And we’re lucky interest rates are low, because although the national debt is up as a share of GDP, the cost of interest payments has fallen, and a reversal of that trend could cause a downward economic spiral.
That is the summary my findings from a tabulation of federal expenditures as a share of GDP by administration, as presented in the tables attached to this post on revenues and debt: http://www.r8ny.com/blog/larry_littlefield/the_federal_budget_by_administration_overview_of_revenues_and_debt.html .
It should be noted that it is perhaps simplistic to assign shifts in fiscal priorities to Presidential administrations, because the Congress also plays a role, and control of Congress has shifted between the political parties over the years. Unfortunately, however, the way our political system has evolved, the Congress (like the New York State legislature) has emerged as a defender of interests who benefit from the way things are now, those who fund their campaigns and ensure perpetual incumbency. No matter how important it is to change course, Congress almost never pushes through legislation to do it by itself. Rather, it is the Presidency that attempts to do things for the good of the nation, and the Congress that tries to water changes down for the benefit or protection of this or that existing beneficiary. One can argue that Welfare Reform was the exception, with the Republican Congress passing bill after bill, vetoed by President Clinton, until they reached a compromise Clinton could sign. That is probably what the Founding Fathers intended. For the most part, however, the President makes proposal after proposal until something gets through Congress. So while Congress may be considered a co-equal partner, or more, in the total federal budget as it just is, it is fair to ascribe most change in the federal budget to the President at the time, or to external conditions. So what changes have these administrations made?
As the “simplified” table shows, federal expenditures rose from 19.7% of GDP under President Carter in FY 1979, to 20.9% of GDP in President Reagan’s last budget in FY 1989, and to 21.2% of GDP in FY 1993 under the last budget of President George HW Bush. In the case of President Reagan, an increase in National Defense spending from 4.5% of GDP to 5.5% of GDP, partially offset by a decline in spending on Veterans Benefits and Services (as the large World War II contingent began to age and qualify for other programs or die), is more than responsible for the increase in spending under President Reagan. That increase was partially offset by reductions in spending as a share of GDP on other things. Under President George HW Bush, on the other hand, the first phase of the “peace divided” kicked in, with National Defense spending dropping to 4.4% of GPP, or about what it had been under President Carter. Total federal spending still increased as a share of GDP under Bush I although, as I discussed in my first post in this series, the inability to come up with a good economic year for a fair comparison for that administration is a possible explanation.
President Clinton jacked up personal income taxes as a share of GDP, but also cut total spending as a share of GDP to just 18.2%, putting the nation’s books in order. Spending as a share of GDP fell across the board, but the reduction to just 3.0% of GDP for National Defense is the greatest. Meanwhile, in addition to slashing taxes as a share of GDP, George W. Bush increased spending on most of my broad categories, with total federal spending rising to 20.0% of GDP, still less than at the end of the Reagan Administration. Aside from soaring spending on Disaster Assistance, the greatest increase was in National Defense, to 3.9% of GDP. Although defense spending as a share of GDP is still much less than under President Carter, let alone Reagan, the increase since Clinton accounts for about half the total increase in spending as a share of GDP under Bush II. And, with more injured veterans requiring care, spending on Veteran’s Benefits and Services has begun to rise after a long decline. W. also increased spending on the International Affairs category, as had his father. Spending in that category had been slashed, relative to GDP, under both the Reagan and Carter administrations. Like cash welfare payments, however, International Affairs has always been a tiny share of our GDP, despite all the complaints about foreign aid and “welfare queens.”
The second greatest factor in the federal budget over the past several administrations has been soaring spending on Medical Care — Medicaid and Medicare. Federal spending in this category rose from 1.8% of GDP under Carter to 2.4% of GDP under Reagan and 3.5% of GDP under George HW Bush. The Clinton Administration slowed the increase down, with spending rising to 3.6% of GDP over 8 years. But with a huge increase in spending on everyone’s favorite interest group and voting block, senior citizens, via the Medicare prescription drug benefit, and the collapse of employer-financed health insurance, spending on Medical care soared to 4.4% of GDP (so far) under George W. Bush. And remember, that underestimates the increase in federal-related health care spending, because it doesn’t include the state and local share of Medicaid, and doesn’t include the soaring tax subsidy for employer-financed private health insurance (which is excluded from taxable income). More on that later.
Federal spending on Medical Care is set to soar even without any change in federal programs, as the baby boomers age and become eligible for Medicare, as Social Security spending trends show. Although people have been living longer, this has been offset, for programs such as Medicare and Social Security, by a shift from one-income couples to two-income couples, and the related rising level of economic output. With labor force participation at an all time high as a share of GDP, spending on Social Security actually fell from 4.2% of GDP under Reagan to 4.1% George W. Bush. It is about the same as it was in FY 79 under Carter. The same factor helped keep down spending on Medicare, relative the size of the economy. The number of people working rose, relative to the number of Medicare recipients.
But now, labor force participation has already started to fall as the baby boomers enter the years of poor health and retirement. Not only will health care spending soar, but GDP growth will be restrained by a shrinking labor force. Rising obesity levels will hurt on both ends, as businesses decide whether to hire (for example) a 55-year-old obese American who takes 10 pills a day and is sick 20 days a year or a 25-year-old Indian or Chinese who has lower productivity but is paid far less and does not require expensive health insurance. Since the 1960s generation of boomers, unlike the “stagflation” generation of the 1970s (mine), is qualified to retire at 65 rather than 67, Social Security will also eat up a rising share of the economy. Although healthier boomers, a hard working generation if nothing else, may choose to work longer, the obese my be forced to retire at 62 — or go on disability in their 50s.
There have been two big shifts in federal spending on the poor, one under President Reagan and one under President Clinton. Both cut assistance to the poor overall as a share of GDP while shifting its composition, while the “1000 Points of Light” administration of Bush I and “Compassionate Conservatism” administration of Bush II restored poverty spending to its former level of 1.9% (Bush I) or 1.8%) Bush II of GDP while keeping the Reagan and Clinton shifts in place. President Reagan cut spending on the poor to 1.5% of GDP, mostly by slashing spending on the public-job-of-last-resort Comprehensive Employment and Training Act (CETA), and cutting spending grants to state government for Social Services in half relative to GDP. Henceforth, more federal money would go to poor people to spend, rather than social workers to advise them how to live. Relative to GDP, spending on both “employment and training” and “social services” remains far below the level of the Carter administration, after additional cuts since 1989.
Under the Clinton administration, spending on the poor fell to 1.7% of GDP from 1.9% of GDP, not as big a drop as some might have imagined in the wake of “welfare reform.” Spending on “housing assistance” (public housing, Section 8), which benefits NYC in particular, fell 22% as a share of GDP, a cut that has remained in place under the second President Bush. Spending on “food and nutrition assistance” (ie. food stamps) fell 37% as s share of GDP, although this has been partially reversed under W. With food prices soaring, expect it to rise further as evidence of hungry Americans rolls in.
The big Clinton shift is within the “public assistance and related programs” category, as the more detailed table shows. Spending in the overall category rose from 0.8% of GDP to 0.9% of GDP. Spending on “welfare” as it is generally understood fell 20% as a share of GDP, even as it was transformed from a cash grant without reciprocal obligations to the “son of CETA,” a public service “workfare” job for those unable to find work in the private sector. This was supplemented by substantial increases in funding, generally via the tax code, for those in low-wage regular jobs, via Earned Income Tax Credit, which doubled as a share of GDP under Clinton, and daycare for low wage workers, which increased five-fold. This policy of supporting low-wage work was expanded under President George W. Bush, with a reversible tax credit (you get cash if you own no taxes) for children. The cost of the EITC, daycare assistance, and child tax credit to those who owe no taxes together were more than the cost of “welfare” as we used to know it in FY 2006.
This shows the absurdity of some of the debate over America’s relationship with the poor. Some conservatives claim assistance for the poor is not needed, because spending was slashed and the poor did not suffer. Some liberals claim the poor have suffered because spending to them was slashed. But in the end, federal assistance to the poor is down only slightly from 1.9% of GDP under Carter to 1.8% of GDP under W. What has changed is what the assistance is spent on. So that debate is about the consequences of something that didn’t in fact happen.
What has fallen — from 2.9% of GDP in FW 1979 under President Carter to 1.9% of GDP in FY 2006 under President George W. Bush — is federal spending on investments in the future: science, space and technology, energy, natural resources and the environment, community development and transportation. That policy change, in an overall sense, was made in the Reagan Administration, which cut spending in the category to 1.8% of GDP, with declines in every subcategory. The biggest cut was in federal investment in Energy, to almost zero. President Carter, rather than leave it to the market, decided that he, a nuclear engineer and businessman, knew the right response to the nation’s energy crisis — synthetic fossil fuels. That didn’t work out that well, and President Reagan cut the program. More recently, oilman and businessman President George W. Bush, and the Congress, have decided that rather than leave it to the market, they know the right response to our energy problems — ethanol.
President Reagan also slashed spending on community development, area and regional development, ground transportation, water resources, and pollution abatement (sewage treatment) relative to GDP. For more than 30 years prior, the federal government had taxed the cities to build the infrastructure of the suburbs and Sunbelt (roads, water and sewer systems), while imposing urban renewal and public housing on those cities, turning them into the homes of the worst off and most troubled. By the 1970s most older cities were in economic, social and fiscal collapse. What is the value of older, existing urban infrastructure if brand new stuff is available for free elsewhere? But in the 1980s — as federal infrastructure grants ended and suburbs rushed to impose “impact fees” on new development to cover their costs, some older cities such as New York City recovered. Thus, city dwellers should be grateful for the end of federal damage. The flip side is that investment in infrastructure is down overall, the suburban and Sunbelt infrastructure is aging and deteriorating, and to the extent that the older urban infrastructure ahs been rebuilt, it has happened with borrowed money — and the cost of that debt could prevent future infrastructure maintenance. As for the NYC MTA.
The Clinton administration, known for its “Atari Democrats,” cut funding for space flight relative to GDP, a downward trend that continued under W. Spending in other “future-oriented” categories also fell under Clinton, relative to GDP. President George W. Bush reversed the Clinton reduction with a near doubling of federal Education spending relative to GDP. Regardless of what you hear about “No Child Left Behind” being an “unfunded mandate.” Still, W. just restored funding for investments in the future to the level of his father and President Reagan. The Reagan cut remains in effect, with higher spending on Education offset by even greater reductions in other categories than The Gipper had made. And earmarks reduce the usefulness of what is left.
One other thought for the future, and it is a sad one. We have been lucky, in that the share of GDP the federal government spends in categories that provide us with no current benefits — past federal debts, and deposit insurance bailouts of un-payable private debts, has been low. Under the first President Bush, the former was 3.1% of GDP, the latter 0.4% of GDP, for a total of 3.5% of GDP for nothing. Despite his dissolute, “deficits don’t matter” ways, these figures had fallen to 1.8% of GDP and zero in FY 2006 under President George W. Bush, or about half as much of our economy, thanks to low interest rates on the national debt (due in large part to the fiscal prudence of President Clinton) and historically low rates of private debt default in the economy.
That is about to change. With our currency collapsing, and America forced to go hat in hand to foreigners to finance an exploding federal debt, expect interest rates — and the cost of the existing federal debt — to rise hugely. Meanwhile, the aftermath of the housing bubble, the credit card bubble, and Americans living beyond their means as if they were members of Congress, is likely to feature a financial crisis the likes of which most Americans alive today haven’t seen, and perhaps a Resolution Trust Corporation-type bailout. The next President is likely to face an environment like that of President Carter in his last two years, or the first President Bush, and this will probably drive federal and spending priorities for a while.
With the decline in investments in the future, the failure to (in reality) save the extra money contributed in payroll taxes by younger generations for their Social Security, rising national debts on top of that, and more and more spending on health care for today’s seniors even as the young are increasingly uninsured, our federal government has sacrificed our future. Similar “future-be-damned” policies have been in place at the state and local level, particularly in the State of New York and State of New Jersey. And many Americans have sacrificed their own futures, by living large on borrowed money. It is 2008, and the future is here.