The 2016 Budget: They've Gone About as Far as They Can Go
Budget Day, February 2, 2015, was a busy day for me, as I downloaded the budget data from the Historical Tables and then uploaded the data to usgovernmentspending.com. But I found the media atmospherics about free community college and taxes on the rich curiously disorienting.
That's because usgovernmentspending.com exists in a different reality. It doesn't deal in the marginal changes in political shape-shifting; it resolutely looks at the whole picture. And the reality is that the federal budget has gone about as far as it can go. The only question is: what comes next?
Let's look at overall federal spending, expressed in percent of GDP, to give you a feeling of how big the federal government's weight is relative to the rest of the economy. The chart shows the four big programs: pensions including Social Security, health care including Medicare and Medicaid, welfare, and defense, including veterans and the State Department.
It used to be that defense (in yellow) was the biggest program. Then it was Social Security (in red). Now it's health care (in green). The blue band in the bottom is “everything else” including interest on the national debt.
What does the chart tell us? It shows that for the last 70 years federal spending has been trickling along at a little above and a little below 20 percent of GDP. But something big has been happening. Defense spending has been getting smaller, from 10 percent of GDP at the height of the Cold War to about 4 percent of GDP right now. The dividend from the reduction in defense has gone into the great entitlements: pensions and health care.
What about revenues? Here's a chart showing federal revenue in percent of GDP, featuring federal income tax and social insurance taxes like FICA. If you click the link you can see the numbers.
The red band is social insurance taxes, the green band is individual income tax and the gray band is the corporate income tax; blue is everything else. Notice how the individual income tax has been pretty steady at around 7 percent of GDP except just before the Reagan tax cuts and in the big busts of 2000 and 2008. And notice how the social insurance bite went from 2 percent of GDP to 6 percent of GDP in the 30 years after 1950.
In his The Sources of Social Power, Michael Mann quotes Joseph Schumpeter, “The spirit of a people... is written in its fiscal history”. There you will hear “the thunder of world history”. Writes Mann: “The expenditure side gives a measure of the functions of the state; the revenues side chronicles the state's relative autonomy from, and dependence on, the groups located in civil society.
So what do the charts tell us? The spending chart tells us that the United States government thinks that the most important thing in the world is to give its seniors pensions of various kinds, with some health care and throwaway monies for the poor. The revenue chart shows that the government has its hands in the pocket of every wage and salaried worker in the nation, taking some $15 of every $100 earned.
Will this magnificent edifice of taxing and spending hold? I was talking to some middle-class folks over the weekend. Back in 2009 they really thought that the Affordable Care Act was really going to make health care affordable. Now they are really pissed off, because their premiums and deductibles are up.
I'm prepared to believe that many Democrats genuinely thought they could “bend the cost curve” with ObamaCare while taking care of the uninsured. But instead they blew up the health care system. And now the middle class is mad at them.
Federal spending on health care, by the way, has been exploding for the last 50 years with no end in sight. The following chart shows the trend.
After going from zero to 6 percent of GDP in in 50 years, federal health care is expected by the CBO to hit 8 percent of GDP by 2040 and continue on up. Here's a link to my chart of the latest CBO forecast.
So, whether we get free community college or not, the key political issue in the coming years is going to be the health care train wreck. Unfortunately for Democrats, it's likely that the American people will not blame insurance companies for that, at least not completely, but the man whose name appears on ObamaCare.
Have things really gone about as far as they can go? Maybe the ObamaCare meltdown is telling us something about that.