We live in a country in which a large number
of people, if not the vast majority, hold a set of beliefs about the
federal budget that are demonstrably inconsistent with the facts that
exist in the real world. The extent to which this is so is easily seen by
considering how many people would be surprised to discover that the size
of the federal government as a fraction of our economy—that is, as a
percent of gross domestic product (GDP)—in the 2000s was about where it
was in the 1970s and was actually slightly smaller in 2000 and 2001
(17.6%) than it was in 1961 through 1964 (17.8%-18.2%). How many people
would be shocked to discover that there were more federal government
employees in 1967 (2.85 million, 6.3 million if we include the military)
than there were in 2013 (2.77 million, approximately 4.3 million with the
military)? How many would also be shocked to find that federal employees
as a fraction of the civilian labor force has fallen by more than 50%
since the 1960s? And how many know that Americans are one of the
least-taxed people among the advanced countries in the world?
These are all simple and easily verifiable,
real-world facts that most people would find almost impossible to believe
given the deluge of disingenuous, antigovernment rhetoric that is designed
to encourage us to believe otherwise.
The fact that the size of the federal budget
as a fraction of our economy in the 2000s was about where it was in the
1970s and was actually slightly smaller in 2000 and 2001 than it was in
1961 through 1964 is shown in Figure 0.1.
Office of Management and Budget (1.1
Historical Statistics of the U.S.
This figure, which plots Total
Federal Outlays as a Percent of GDP from 1901 through 2013,
shows that in spite of what most people seem to believe:
The most significant increases
in the federal government's role in the economy (Federal Outlays as
a Percent of GDP) took place in the 1930s, 1940s, and 1950s.
Federal Outlays relative
to the size of the economy in 2013 (20.8% of GDP) was below where it was
in 1980 (21.1% of GDP).
The average level of Federal
Outlays relative to GDP in the 2000s (19.40%) was essentially the same
as it was in the 1970s (19.39%) and significantly less than it was in the
This is what out exploding
federal budget actually looks like in the real world.
Figure 0.2 shows the relationship
between the number of Federal Government Employees—Total,
Civilian, Military, and Postal—and the Civilian
Labor Force and Population of the United States from 1950
Bureau of Labor Statistics.
As is shown in this figure, the Total
number of Federal Government Employees (Civilian plus
Military) and federal Military employees fell substantially as
the Vietnam War wound down and the
came to an end. At the same time, the number of Civilian federal
employees has remained relatively constant since 1967 (hovering around
three million) in spite of the fact that the Civilian Labor
Force has doubled since 1967 and the civilian Population
increased by 90%. What's more, Figure 0.2 clearly shows that
Civilian federal employees as a fraction of the workforce has been cut
in half since the 1960s and by even more when we include Military
employees. Civilian federal employees were 4.3% of the labor force
in 1967; they were only 2.0% of the labor force in 2013, and it is worth
noting that 20% of all Civilian federal employees worked for the
Post Office in 2013 and delivered our mail!
This is what our ever-growing, out-of-control
federal bureaucracy actually looks like in the real world.
The fact that Americans are not terribly
overtaxed is shown quite clearly in Table 0.1 which is constructed
from the official statistics of the
Organization for Economic Cooperation and Development
table shows how the ranking of the United States among the 34 OECD
countries has changed since 1980 in terms of the percentage of gross
income (GDP) that is paid in taxes.
Organization for Economic Cooperation and Development,
We have moved from tenth from the bottom on
this list to third from the bottom over the past thirty-one years. Among
the advanced countries of the world, only Chile and Mexico paid less in
taxes as a percent of their gross income than we did in 2011.
This is what our unbearable tax burden
actually looks like in the real world.
The ideas that the federal budget and federal
employment have grown voraciously over the past fifty years and that
Americans are terribly overtaxed are only three of the fiscal myths people
believe today. In a recent survey (February 2013), the
Pew Research Center asked 1,504
respondents: "If you were making up the budget for the federal government
this year, would you increase spending, decrease spending or keep spending
the same" for nineteen different categories of government expenditures.
The expenditure categories and results of the survey are given in
Pew Research Center
These results suggest that the vast majority
of the American public is satisfied with the size of the federal
government we have, and, if anything, would like to see it increase rather
than decrease: For all categories of expenditures, other than the first
three, a larger proportion of the respondents would choose to increase
rather than decrease expenditures, and for all categories, even the first
three, a majority of those who had an opinion would either increase
expenditures or keep them the same. In addition, the three categories for
which more respondents would rather decrease than increase—Aid to the
world's needy, State Department, and Unemployment aid—sum
to just 3% of the federal budget while just five of the categories which
more respondents would increase rather than decrease—Social Security,
Military defense, Medicare, Health care, and Aid
to needy in U.S.—sum to over 70% of the federal budget.
stand in stark contrast with those of the
Pew Research Center/USA Today survey
conducted later that same month. In this survey the respondents were asked
if the president and Congress should focus on spending cuts, tax
increases, or both in order to reduce the federal budget deficit. The
results are given in Figure 0.4.
Pew Research Center/USA Today
Here we find that the overwhelming majority
of people (73%) would like to see the federal deficit problem solved
through only or mostly spending cuts rather than through only or mostly
tax increases (19%). In other words, an overwhelming majority of the
American people would like to have their cake and eat it too; they want to
increase the size of the federal government or keep it the same as they
solve the deficit problem through only or mostly spending cuts.
According to the
Management and Budget, the federal deficit was
equal to 20% of total federal expenditures in 2013. As a result of
rescinding some of the provisions of the
cuts combined with the expected recovery of the economy and some
spending cuts, this deficit is estimated to
decline to 10.6% of total federal expenditures by 2019. It should be
obvious that we are not going to be able to eliminate the remaining 10.6%
deficit through mostly spending cuts—as, apparently, 73% of the American
people want to do—by cutting the 3% of the budget that goes to Aid to
the world's needy, the State Department, or Unemployment aid.
If we are to eliminate the 10.6% deficit estimated for 2019 through mostly
spending cuts we are going to have to cut the 70% of the budget where we
find Social Security, Military defense, Medicare,
Health Care, and Aid to needy in U.S. because that's where the
Figure 0.5 shows a breakdown of the
federal budget with a 10.6% hole in it.
Office of Management and Budget (3.2
Even a causal examination of this chart
reveals that it is impossible to maintain the government the vast majority
of the American people seem to want and, at the same time, reduce the
deficit by as much as 10.6% through mostly spending cuts:
Maintaining our current levels
of expenditures on Social Security and Medicare—as over 80% of the
respondents in the Pew poll say they would chose to do—leaves only 58% of
the budget to cut after deducting the 6% of the budget that goes to
interest on the national debt. It would require a 18% cut in the rest of
the budget to cut the total budget by 10.6% if we were to exempt Social
Security and Medicare from cuts.
Maintaining our current levels
of expenditures on aid to the needy in addition to those on Social
Security and Medicare—as over 80% of the respondents in the Pew poll also
say they would chose to do—leaves only 41% of the budget to cut after
deducting interest on the national debt. A 10.6% cut in the total budget
would require a 26% cut in this 41% of the budget.
And if we were to include
maintaining our current levels of defense expenditures as well—as over 70%
of the respondents in the Pew poll say they would chose to do—it would
leave only 24% of the budget to cut. A 10.6% cut in the total budget would
require a 44% cut in this 24% of the budget.
are these cuts supposed to come from?
purpose of this eBook is to explain the federal budget—both the actual
numbers in the budget and the history of the budget—in order to clarify
the actual, real-world choice faced by the American people in dealing with
our fiscal problems.
Chapter 1: History of the National Debt begins with an explanation of
the relationship between federal expenditures, revenues, deficits, and the
national debt and why it is important to view these entities relative to
the size of the economy. Particular attention is paid to the definitions
and concepts that are needed to understand these relationships. The
history of the national debt from 1916 to the present is then examined in
detail, and the appendix at the end of this chapter gives a brief
explanation of some the ways we measure aggregate economic variables such
as total output, the average price level, and productivity.
Chapter 2: History of the Federal Budget examines the history of the
federal budget. All of the major expenditure and revenue components of the
budget are plotted from 1940 through 2013.
These plots show that even though the size of the federal budget
relative to the economy has been fairly stable since World War II, the
nature of the federal budget has changed dramatically: In the 1950s the
budget was dominated by defense expenditures; today it is dominated by
social-insurance programs. These plots also show how the funding of
the federal budget has changed as the importance of payroll taxes has
increased and corporate taxes have decreased. The
appendix at the end of this chapter lists all of the expenditures in the
federal budget in 2013, broken down by function and subfunction, along
with the percent of GDP and of the federal budget that each expenditure
represented in that year.
Chapter 3: Human Resources and Social Insurance examines the growth of
our federal social-insurance system since 1940. Federal
expenditures on all of the major
programs are plotted from 1940 through
2013. These plots show how the retirement and medical
programs have come to dominate our federal
social-insurance system. They also show that 1) federal retirement
programs are dominated by Social Security, 2) federal medical programs are
dominated by Medicare and Medicaid, and 3) only the medical portion of the
federal social-insurance system has increased relative to the economy
since the mid 1970s.
Chapter 4: Welfare, Tax Expenditures, and Redistribution examines the
welfare component of our federal social-insurance system. Federal
expenditures on each of the major welfare programs are plotted from 1940
through 2013, and the expenditures on each
federal welfare program in 2013 are given along with the percent of GDP
and of the federal budget that each program represented in that year.
The increases in welfare expenditures that have occurred since the 1960s
are seen to have been dominated by the increases in Medicaid and in the
refundable tax credits that were instituted to encourage welfare
recipients to work.
nature of federal entitlement programs is also explained, and it is shown
how we spend twice as much on our two largest entitlement programs—Social
Security and Medicare—than on all of our welfare entitlement programs
combined. Federal welfare expenditures in 2007 are then compared to the
benefits from the federal
tax-expenditure entitlement programs in that year. It is shown that
the federal tax-expenditure entitlement programs (commonly referred to as
tax breaks or loopholes) in 2007 had a much larger effect in
redistributing income from the general taxpayer to the top of the income
distribution than federal welfare programs had in redistributing income
from the general taxpayer to the bottom, and it is argued that the
special treatment of dividends and capital gains in the tax code is a far
more lucrative entitlement program for the wealthy than any government
program available to the poor.
Chapter 5: Summary and Conclusion
explains why eliminating waste, fraud, and abuse in the federal budget
cannot solve our deficit and debt problems and that if we are to solve
these problems we must either a) raise taxes or
b) make substantial cuts in defense and our federal retirement and
medical programs, specifically, Social Security and Medicare. The only
alternative is to cut the rest of the budget which will decimate our
social safety net and make it impossible for the government to provide the
services and benefits that
only government can provide: an effective
national defense; a fair and just
effective public health programs;
efficient streets, roads, highways, and
other forms of public transportation; a
clean and safe environment; safe
foods, drugs, and other
consumer products; safe working
conditions; an effective and efficient
personal healthcare system; a viable
social-insurance system; and a stable, growing economy.
services and benefits
cannot be provided by private enterprise guided by the profit motive. They
can only be provided by a democratically elected government whose elected
officials are dedicated to achieving these ends. And they most definitely
cannot be provided by elected officials
whose sole objective is to cut taxes and, thereby, defund the
government programs that are designed to provide these
services and benefits.
Table of Contents
Our Exploding Federal Budget
Our Ever-Growing, Out-of-Control Federal
Our Unbearable Tax Burden
The American Fiscal Dilemma
Outline of this eBook
Chapter 1: History of the National Debt
Concepts and Definitions
The National Debt, 98 Years and Counting
Appendix on Output, Prices, and
Chapter 2: History of the Federal Budget
Appendix on the Federal Budget in 2013
Chapter 3: Human Resources and Social Insurance
Payments for Individuals
Federal healthcare Programs
Federal Retirement and Disability
Food and Nutrition
Student Aid, Housing, and All Other
Summary and Conclusion
Chapter 4: Welfare, Tax Expenditures, and Redistribution
Federal Welfare Programs
Entitlements and Welfare
Summary and Conclusion
Appendix on Tax Expenditures
Chapter 5: Summary and Conclusion
Summary of the Federal Budget
Summary of Human Resources
Waste, Fraud, and Abuse
Summary and Conclusion