Big-Ticket Government Purchases

According to the Office of Management and Budget (OMB), the federal government spent an estimated $3.7 trillion in 2013.  Keep in mind this $3.7 trillion budget only applies to the federal government.  Each state has its own tax regime, as do municipalities in the form of property taxes.

There are often misconceptions about what the government spends money on.  While the federal balance sheet is very complex due to on- vs. off-balance sheet accounting, here are some big-ticket items (2012 data):

Source:  http://usbudgetalert.com/spending.php

Here are estimated 2013 budget figures (gross data that excludes offsetting trust fund accounting):

Social Security	$818 billion
Defense	$660 billion
Income Security*	$564 billion
Medicare	$511 billion
Interest on National Debt	$421 billion
Health Care Services	$334 billion

*Federal pensions, unemployment, housing assistance, food and nutrition assistance, other income security

Source:  http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist03z2.xls

These six items alone add up to $3.3 trillion, representing the vast majority of the budget.  International affairs, science, space, technology, energy, environment, agriculture, commerce, transportation, community development, education, veterans, justice, and general government are among other expenses.

This demonstrates what lawmakers need to prioritize if meaningful spending cuts will ever be made to close our gaping budget deficits.  The complication, of course, is that there is minimal political willpower to touch any of these items.

Elephants in the Room

As the pie chart above depicts, Social Security, Medicare, and Medicaid combine for about 45% of the federal budget.  The big problem is that these pieces are growing rapidly.  Between 2008 and 2013, the Consumer Price Index increased by 8.2%.  Here is how entitlement growth compared:

Expenditure	2008	2013	Spending Growth
Social Security	$617B	$818B	33%
Medicare	$391B	$511B	31%
Non-Medicare Health Care	$248B	$334B	35%
Total	$1,256B	$1,663B	32%

Source:  http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist03z2.xls

Perhaps this growth rate will slow down, you would hope.  Unfortunately not.  Here are OMB estimates for 2013-2018 spending growth of these programs.  And if anything, the estimated growth for Medicare and Medicaid will likely be understated compared to what will actually occur over the next five years.

Expenditure	2013	2018	Spending Growth
Social Security	$818B	$1,086B	33%
Medicare	$511B	$615B	20%
Non-Medicare Health Care	$334B	$557B	67%
Total	$1,663B	$2,257B	36%

Entitlement programs are the third rail of American politics, and necessary reforms would likely need to be part of a grand compromise (e.g. Bowles-Simpson):

http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

Regardless of your political persuasion, when the threats of government shutdowns and debt defaults cannot even reduce entitlement spending growth by $1, it does not bode well for this possibility.

Any legitimate attempt to make reforms and stave off much greater financial difficulties is met with extreme viciousness.  It takes a mobilized electorate to realize there is no free lunch, and that starts with being armed with facts to see through self-interested politicians who feebly resort to scare tactics at the mere mention of reform.

Source: http://www.cagle.com/news/socialsecuritymedicare/

18 in America

Before attending Williams College, Dylan Dethier embarked on a unique journey at age 18.  Dylan took a year off after high school to travel the country and golf in all 48 contiguous states.  What makes Dylan’s trip so compelling?

·         Golfing at Pebble Beach to hardscrabble municipal tracks, with many unique venues in between

·         His playing partners, ranging from hosts at private clubs to the unemployed in Flint, MI

·         How he managed a 35,000 mile trip on such a low budget

·         The evolution of his maturity and perspective during this life-changing experience

Source:  http://www.amazon.com/18-America-Golfers-Journey-Essence/dp/145169363X

Dylan’s story has been chronicled by the New York Times, USA Today, National Public Radio, and numerous other media outlets.  His book is an exemplary read.  Dylan’s writing talents are in full display, there is captivating storytelling, and parts of the book are remarkably introspective.

After reading Eighteen in America, my own perspective on golf was broadened.  Dylan thoughtfully identifies the ways in which the sport provides commonalities for a wide variety of players.  He certainly took the road less traveled after being accepted into college, which adds to the allure of his story.

Jason Dufner and Jim Nantz even conveyed their enjoyment of the book.  For an entertaining and fresh perspective on golf’s essence, consider Dylan’s book:

http://www.amazon.com/18-America-Golfers-Journey-Essence/dp/145169363X

http://dylandethier.com/

Growth Rates and New Baselines

As taxpayers, we should carefully look at spending programs that had very high growth rates over the past few years.  Many programs, particularly in social assistance, are designed to ramp up during bad times to help smooth out income shocks for people.  Unemployment benefits are a prime example.  Therefore, we should not be surprised to see increased inflation-adjusted spending levels from 2008-2013 in certain programs.

The reduction in the nominal unemployment rate is often cited as evidence the economy is improving.  However, if this is the case, government spending that is counter-cyclical to the economy should significantly decline over the next few years as the economy improves.

By 2018, these programs should have a budget that is 20-25% higher than 2008 levels due to inflation adjustments.  Between 2008 and 2013, the Consumer Price Index increased by 8.2%, and an estimated CPI increase of 11-15% between 2013 and 2018 will produce that overall 20-25% increase over ten years.

However, opening up this OMB spreadsheet (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/hist03z2.xls) reveals a different story for many agencies (not limited to counter-cyclical spending), vastly exceeding 20-25% inflation:

Expenditure	Est. 2008-18 Increase
Federal Employee Pensions	40%
Food Stamps	67%
General Government	82%
International Affairs (non-Defense)	80%
Medicaid	113%
Medicare	57%
Social Security	76%
Transportation	44%
Veterans Benefits and Services	102%

Displaying these line items is not an indictment of the programs; rather, it is a mathematics-based conversation starter.  Some liberals and conservatives alike would shun at the mere mention of reducing the growth rate of some of these entities.  “Cutting” is the operative buzzword used to scare away attempts to reduce growth rates.

From an economic perspective, however, this level of increase over ten years—far outpacing inflation—is problematic for many reasons.  Remember, this time series is between 2008 and 2018, which is when the economy should return to nearly full employment and yield an apples-to-apples comparison.

Practically speaking, it is very difficult in Washington to reduce the spending growth of many programs, even when it is clearly warranted.  Consequently, these elevated levels become new baselines that all future spending is based upon.  This feature is crucial, because it essentially guarantees higher spending levels in perpetuity that exceed the economy’s ability to pay for them.

Whether or not you pay much attention to politics, understanding these economic concepts will empower us to thoughtfully analyze the budget and immediately recognize the shallowness of what many politicians and pundits claim about “cuts.”

Roth IRA Accounts and 401(k) Conversions

If you have not received my guide to retirement accounts (6-page Word document) and would like to view it, send me an e-mail at krkreflections@gmail.com .  There is a new section that may be especially beneficial for current MBA and other graduate school students.