Volume 13: Fiscal Policy, Part II: Spending


The Klein Bottle

Where does it all go?

“It’s a popular delusion that the government wastes vast amounts of money through inefficiency and sloth. Enormous effort and elaborate planning are required to waste this much money.” – P.J. O’Rourke

 

All of that sweet, sweet Federal tax revenue – and proceeds from borrowing – is going somewhere. Given how much of it there is, a lot of somewheres.

The nearly four trillion dollars of annual Federal spending represents approximately 21% of total US economic output. Federal money is everywhere – and yet most people have a difficult time seeing it. In a famous example, surveys show the average American thinks 31% of all Federal spending is on foreign aid. In fact, aid makes up less than 1% of the Federal budget. All of the spending that you usually think of – what’s called “discretionary spending” – makes up a surprisingly small amount of total outlays.

  • How is Federal Government spending policy determined?

  • Where does all that money go?

  • What if the process doesn’t work?

 

How is Federal Government spending policy determined?

This is going to shock you: the Federal Government spends money based on a series of complex, interminable, arcane parliamentary maneuvers, which serve largely as a front for completely opaque discussions which have previously occurred between Members of Congress and Federal agencies, with a heavy sprinkling of input from industry lobbyists and special interest groups. Considering this, the system works fairly well.

Federal spending comes in two basic flavors: mandatory and discretionary. They follow an almost entirely distinct process. Let’s tackle mandatory spending first, it’s simpler from a process perspective.

Mandatory spending is that which happens without specific, annual, Congressional action. This is where the name comes from: mandatory spending runs on autopilot based on what previous Congresses have done. The money will be spent even if the current Congress does nothing. In order to change mandatory spending, Congress must pass a new law (or equivalently, amend the current law). These new spending levels will then be mandatory for future years.(1)

Most mandatory spending is on entitlement programs like Social Security, Medicare and Medicaid. But another significant portion is on means-adjusted programs intended to provide basic necessities to those who can’t afford them. The largest of these programs are unemployment insurance and the Supplemental Nutrition Assistance Program. The mandatory portion is the majority of today’s Federal spending – and it’s the part that is growing.(2)

Legal details aside, I include interest on the national debt as part of mandatory spending. From a process perspective, it operates the same way: interest is paid automatically, without Congressional action. The key difference, of course, is that Congress can pass a new law that changes spending on other mandatory programs. Changing the interest rate paid on Federal debt instruments is not a great idea; doing so would probably be a default of the US Government.

All other spending done by the Federal government is discretionary, subject to an annual, multi-step process. Congressional supremacy in Federal spending is enshrined in the Constitution. However, the Constitution helpfully omits any guideline as to process, leading to a constantly ongoing evolution.(3)

Until recently, the Federal spending process was informal, and Congress’s role was squishy. Despite its nominal power, the Legislative branch had little ability to enforce its actions. This changed after President Nixon, claiming deficits were a cause of inflation, refused to spend all of the money that Congress had appropriated. In order to take back control, the Congressional Budget Act of 1974 was passed. It created Budget Committees in both Chambers and the Congressional Budget Office, or “CBO”, the arbiter of the costs of bills. Formalizing the process had the mechanical effect of increasing Congress’s power, at the expense of the President’s.(4)

In today’s process, the first step is when the President’s Budget is sent to Congress. This document is created by the White House’s Office of Management and Budget (OMB) and is due on the first Monday in February for the following fiscal year.(5) Generally, in preparing the budget, OMB will work with the Federal departments to get their detailed requests for funds. But, the President’s Budget has absolutely no legal standing; it is basically a symbolic document, a statement of principles.(6) When it has been received by Congress, the CBO will “score” the President’s Budget to see how much all the goodies cost.(7) It will also get referred to the Budget Committees, who, if not of the President’s Party, generally place it directly in the circular file.(8)

The next step is the Congressional Budget. In theory, each of the Chambers is supposed to consider and review the President’s Budget, and pass their own Budget resolution before April 1st. Each Chamber then can amend the other’s resolution, hopefully passing identical versions through each chamber by April 15th. But, of course, there is no way to force Congress to agree, and this deadline is frequently missed.(9)

Believe it or not, Congress’s budget is also mostly symbolic. It is what’s called a “concurrent resolution” which means that while the two Chambers have agreed, it is not sent to the President for a signature and therefore does not become law. If the President’s budget is a blueprint, Congress’ is a working drawing. It’s getting closer, but still not a physical structure.

For discretionary spending monies to actually leave the government’s hands, they must be included in the Appropriations Process. Each year, twelve Appropriations Bills must be signed into law to fund Government expenditures. This is no longer a drill, these are real dollar amounts that will really be spent.

Most of the work for appropriations occurs in each Chamber’s Appropriations Committee. Each of the Committees has twelve sub-committees, one for each appropriations bill.(10) The Appropriations Committees have such power that the chairmanships of these sub-committees are as desirable as those of many full Committees.