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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.

Sometimes, multiple (or even all twelve) Appropriations Bills are passed as a single piece of legislation; these are called Omnibus Spending Bills. To proponents of using the Omnibus, it is just an efficient way to get through the tedious Appropriations process. To detractors, they are massive bills, generally passed at the last possible moment with few Members having read them.

Once the Appropriations Bills have gone through committee, they must be passed on the floor of their respective Chambers. If there are differences between the Chambers’ Bills, these must be reconciled before going to the President.(11) Because these Bills require the force of law, the President must sign them. Or veto them, in which case they go back to Congress to override the veto or create new bills.(12) But they must be passed before the new Fiscal Year starts on September 30th; unlike the Budgets, and there are real problems if this deadline is missed.

In recent years, Congress has frequently passed Continuing Resolutions (“CR”), rather than true Appropriations Bills. Theoretically, these just continue the Appropriations from the previous fiscal year, hence the name. Sometimes they are written in language explicitly linking spending levels to the previous years, increased or decreased by a percentage. A big difference with CRs is that they have flexibility of duration. For example, if the September 30th deadline is approaching, Congress could pass a CR covering just a few days while they finish the Appropriations Bills. But, CRs have become more common in recent decades, leading to some Fiscal Years being funded largely with a series of short-term CRs.(13) This is not a sign of good governance.

Where does all that money go?

Now that we see how the decisions are made, we can get into the details – where the Federal Government actually spends its money. The Government does a lot of things, some of which you probably think are wonderful and some terrible. For the next few pages, we won’t care about what the Government does, only where it spends its money.

It is surprisingly difficult to find a simple, clear list of exactly where the money is going. One reason for this comes from the process described above: there is the President’s Budget, Congress’s Budget and Appropriations Bills. And of course, even the Appropriations don’t match spending exactly – it’s impossible to predict down to the penny where each dollar will be spent. If you spend a couple hours searching around for “definitive” figures, you’ll just end up with a big spreadsheet of numbers that don’t quite tie out and knowledge of what a “federal subfunction code” is.(14)

This is a long-winded way of saying that I’m just going to take a mess of sources and do my best with them.(15) There are two basic ways to look at spending: by function (e.g. Health) or by department (e.g. Treasury). We will use the former because I think it gives a clearer picture; if the money for Air Transportation comes from programs in several different departments, it’s going to the same place.

  • Medicare and Health: $1,106 Billion, 29% of total

This is the biggest and the fastest growing. Most ($1,069 billion) of health spending is mandatory. The largest amount of this is spent on Medicare, $594 billion. The rest is on Medicaid, CHIP, some smaller programs, and the subsidies on the exchanges for the ACA ($33 billion).(16) There is also $31 billion for health research, almost all of which goes to the National Institutes of Health.(17) Veterans health care is not included here.

This is enough money to fill the Empire State Building with $1 bills – with a few singles to spare.

  • Pensions: $984 Billion, 26%

Pretty simple:(18) this is Social Security. $832 billion goes to the Old Age and Survivors program, the rest to Disability. Again, veterans’ benefits are still to follow.

If you convert this to $20 bills, $984 billion would weigh as much as 20 Olympic-sized swimming pools. Filled with water.

  • Defense: $595 billion, 15%

As I’m sure you are aware, the United States spends as much on defense as the next six or seven countries combined. The breakdown is also interesting; the salaries (“personnel”) portion is smaller than I expected:(19)

Again, this doesn’t include spending on Veterans’ benefits. I promise I’m not ignoring them, they will be coming up soon. It also doesn’t include foreign aid.

It’s enough money to give every Syrian an amount of money sixteen times their country’s average income.

  • Welfare: $368 billion, 10%

This is a catch-all for means-tested programs other than Medicaid. The Supplemental Nutritional Assistance Program, aka “Food Stamps,” costs $105 billion. Unemployment insurance cost $35 billion and housing assistance $48 billion. Disability insurance is another $44 billion. What you think of as “Welfare” – called Temporary Assistance for Needy Families – costs $18 billion. The rest is made up of tax rebates, with the Earned Income Tax Credit and Child Credit being the largest.(20)

You could build your own International Space Station with this money. And a spare, just in case.

  • Interest: $240 billion, 6%

No real way to get around this one. In longer-term projections showing high debt-to-GDP ratios in the future, increased interest spending is a large portion of the problem. The CBO and OMB (and others) expect US Government borrowing costs to rise significantly.

Amazingly, Apple has about this much cash on its balance sheet. It’s also enough to buy an iPhone 7 for every man, woman and child in the USA.

  • Veterans: $174 billion, 5%

See, just like I promised. We actually spend more direct money on our veterans than our active-duty personnel. This is because we currently have 2,800,000 Department of Defense employees (1,300,000 active-duty, 800,000 reservists and 700,000 civilian) against around 22 million veterans. Veterans benefit spending is split exactly down the middle between pensions and health care.

You could buy a very inexpensive cellular phone plan for everybody in the world. That actually isn’t that impressive.

  • Education: $120 billion, 3%

This sounds like a lot – but the Federal input to US education spending is only 11% of the total. Education is mostly a state and local issue. Federal spending is split roughly in thirds. Primary and Secondary education get money for Head Start and various grants. Tertiary education spending goes mostly towards Pell Grants. Then there is $44 billion dollars that go into a catch-all for job training, vocational schools and many smaller programs.

It’s enough money to build around 7,000 new elementary schools each year.

  • Transportation: $92 billion, 2%

The majority, $68 billion, of this goes to ground transportation, mostly roads. Air transport makes up $21 billion and water the remainder.

This $92 billion is equivalent to building around 4500 miles of new Interstate Highways.