I've spent much of my life doing things that demanded a good knowledge of the workings of the federal budget and its interaction with the economy at large. In times like these, when the media actually pay some attention to the budget, little of what is said seems obscure to me (and I can identify a certain portion of it as ill-informed or disingenuous). But a great many intelligent and otherwise well-informed people are confused by it and find few places to look for sound information that does not take excessive effort to digest. The series of charts on these pages are intended to fill some of this gap.
The New York Times has posted on its Web site a budget "game" (with explanation) which allows us to try a variety of policy measures to see how they affect the budget in the near term (2014) and far term (2030). It is well done and gives a great deal of insight in minimum time with little effort.
But it could leave some doubt about exactly why things work as they do. Why is there no option to cut things like welfare or Aid to Families with Dependent Children (AFDC)? Why are there no options for greater savings on foreign aid? Why do people lay so much stress on Medicare, and say it's much more important in budget terms than Social Security?
This is going to try to provide a basis for intelligent opinion and thought on these and other issues. I have relied on data from authoritative sources and done my best to present everything in a clear and completely unbiased way — I have some policy views of my own, but I have tried to avoid anything here that tilts toward them. And above all, I've tried to find graphical ways to present things in a format that is easily understood.
To start with, here is the long-term (1945-2011) picture of the nation's gross domestic product (GDP) and government outlays.
(The graph uses a logarithmic scale to permit both small and large amounts to show clearly, and more importantly so that a quantity that grows at a constant rate of X% every year plots as a straight line. For instance, I've drawn a thin gray line with a slope of 3.25% per year representing the average growth in GDP since 1945. To learn more about how the budget works see my page on budget concepts, terminology, and links. For convenience the data have all been drawn from Tables 7-2 and 7-4 of "National Defense Budget Estimates for FY 2011" (Washington: Office of the Under Secretary of Defense (Comptroller), Mar 2010), which explains the ultimate origins.)
Outlays are what the government actually spends in a year. The budget authorizes agencies to write checks or let contracts, and if the contract calls for deliveries and payment in the future the outlay may not come in that year. Similarly, a year's outlays may include money budgeted in previous years. On average, the budget authorization for a given year will be close to the outlays. National defense outlays are now at their highest since World War II, and not so far short of the spending to defeat Germany and Japan. (All the figures are adjusted for inflation.) But there is no long term trend here — the big rise has all come since 9/11. Overall, national defense has been falling as a proportion of total government outlays, and increasing at a rate considerably below that of GDP.
Federal government outlays as a whole have tended to rise in a smoother way, at a rate that has generally been a bit less than the growth of the GDP in total. Over the past two years there has been a distinct jump, however. Some of the components of this will be more visible in some of the other charts, but in broad terms it is normal for nondefense spending to increase in recessions, due to payment of unemployment compensation plus heavier demand for whatever public assistance programs are available. In this case, the federal government has also been sending money to state governments, to forestall drastic cuts as their budgets are squeezed by the recession and falling revenues. (In general, the states are prohibited by their constitutions from borrowing to finance deficits, as the federal government does.)
For much of this period, state and local governments have increased their spending faster than the federal government. In the recession, however, they have had to cut back sharply.
Whatever else it may have done, the Korean War and its spending seems to have helped to pull the economy out of a relatively sharp downturn in the period following World War II. Since then the economy has grown at an average annual rate of about 3.25% per year, a bit faster between the early 1960s and late 1970s and a hair slower since. As the graph shows, the recession that began in Dec 2007 (as dated by the semi-official recession gatekeepers) really is the deepest in a very long time — in the 80 years since the Great Depression began in Aug 1929.
15 Nov 2010