The Federal Budget and Government Spending [1 ed.] 9781534503243, 9781534503229

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at issue

The Federal Budget and Government Spending

Greenhaven Publishing’s At Issue series provides a wide range of opinions on individual social issues. Each volume focuses on a specific issue and offers a variety of perspectives—eyewitness accounts, governmental views, scientific analysis, newspaper and magazine accounts, and many more—to illuminate the issue. Extensive bibliographies and annotated lists of relevant organizations point to sources for further research. Enhancing critical-thinking skills, each At Issue volume is an excellent research tool to help readers understand current social issues and prepare reports.

The Federal Budget and Government Spending

at

issue

ECONOMICS

The Federal Budget and Government Spending

Other Books in the At Issue Series Cyberwarfare The Death Penalty The Deep State The Ethics of WikiLeaks Gerrymandering and Voting Districts Media Bias and the Role of the Press Pipelines and Politics Politicians on Social Media Populism in the Digital Age Reproductive Rights The Role of Science in Public Policy

The Federal Budget and Government Spending Lisa Idzikowski, Book Editor

Published in 2019 by Greenhaven Publishing, LLC 353 3rd Avenue, Suite 255, New York, NY 10010 Copyright © 2019 by Greenhaven Publishing, LLC First Edition All rights reserved. No part of this book may be reproduced in any form without permission in writing from the publisher, except by a reviewer. Articles in Greenhaven Publishing anthologies are often edited for length to meet page requirements. In addition, original titles of these works are changed to clearly present the main thesis and to explicitly indicate the author’s opinion. Every effort is made to ensure that Greenhaven Publishing accurately reflects the original intent of the authors. Every effort has been made to trace the owners of the copyrighted material. Cover image: olegator/Shutterstock.com Library of Congress Cataloging-in-Publication Data Names: Idzikowski, Lisa, editor. Title: The federal budget and government spending / Lisa Idzikowski, book editor. Description: New York : Greenhaven Publishing, [2019] | Series: At issue | Includes bibliographical references and index. | Audience: Grades 9–12. Identifiers: LCCN 2018004247| ISBN 9781534503229 (library bound) | ISBN 9781534503236 (pbk.) Subjects: LCSH: Budget—United States. | Government spending policy—United States. Classification: LCC HJ2051 .F3884 2019 | DDC 336.3/90973—dc23 LC record available at https://lccn.loc.gov/2018004247 Manufactured in the United States of America Website: http://greenhavenpublishing.com

Contents Introduction 1. The Government of the United States Depends on Taxes for Its Revenue National Priorities Project 2. Where Does the Money Come From? Antony Davies 3. The US Budget, Spending, and Debt Are Out of Control The Heritage Foundation 4. Government Spending Is Good for the United States Heather Boushey and Michael Ettlinger 5. Understanding the Federal Budget and How Money Is Spent David Trilling 6. The Pentagon Wastes Huge Amounts of Taxpayer Money William Hartung 7. The Defense Budget May Be Too Low, Considering Vital US Interests Justin T. Johnson 8. Government Spending and the Deficit Must Be Decreased Chris Edwards 9. Most States Require a Balanced Budget by Law National Conference of State Legislatures 10. The Budget Deficit Is Choking the United States Jonathan Masters 11. Can the United States Continue to Borrow Funds to Finance Debt? Jonathan Masters

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12. Reduce Spending to Increase Economic Growth Romina Boccia 13. Campaign Contributions and Lobbying Hurt the US Economy John Craig and David Madland 14. The United States Is Not the Only Country Suffering Slow Economic Growth United Nations 15. Many Countries, Including China, Own US Debt Center for Strategic and International Studies 16. Debt Runs High in Many Countries, Not Just the United States Marc Labonte Organizations to Contact Bibliography Index

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Introduction

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udgets, spending, and money itself are complex issues that confront individuals, families, schools, businesses, institutions, and governments. Maybe it’s managing a household, running a business, or operating a nonprofit organization. Perhaps it’s running a manufacturing plant or a hospital or managing the government budget for an entire country. In order to function, each of these entities must earn money or collect revenue, then spend or budget funds in an appropriate manner. How informed or realistic are citizens about budgets and spending? According to the most recent Gallup poll about budgeting and finance, only about one in three people in the United States prepares a household budget.1 Think about what that statistic might signify. If a budget is a method of tracking the amount of money that is being earned and spent by the budgeting entity and monitoring how those funds are being spent, less than half the adults in the United States are actively managing their monthly cash flow through using a budget. This could mean that these individuals do not have an accurate idea whether they have enough incoming cash to pay for monthly living expenses or have enough extra money saved for emergencies. As a survey from CareerBuilder discovered, “almost 8 out of 10 American workers say they live paycheck to paycheck to make ends meet.”2 It is interesting to analyze how governments conduct the business of budgeting and spending, and comparisons can be drawn between personal budgets and governmental budgets. Governments, like individuals, have needs and wants, but a key difference is that governments provide for a vast number of people: their citizens. In the United States, a set plan guides the formation of the federal budget and subsequent governmental spending. Article 1 of the US Constitution bestows upon Congress the power to create and collect taxes and borrow money if necessary. 7  x

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The Constitution doesn’t specify how to produce a budget, but it nonetheless directs Congress to conduct this business. The Budget Control Act of 1974 created agencies within the government that are authorized to aid in the budget process. Very basically, the president begins the process by submitting a budget request to Congress. A lengthy negotiation process occurs as Congress reviews the proposed budget and makes changes. The House and Senate approve appropriations bills and send them to the president. After the bills are reviewed and signed by the president, they become law and take effect. The US federal budget is staggeringly large, and a new budget is fashioned every year. Created by Congress, the budget process is also called the appropriations process. For fiscal year 2018, the budget is estimated to be about $4 trillion. Funds are divided among three main areas of spending: mandatory, discretionary, and interest payments on the national debt. Mandatory spending covers well-known federal programs such as Social Security, Medicare, and Medicaid. Discretionary spending pays for the military and everything else, including health and human services, the Justice Department, education, transportation, infrastructure, housing and urban development, and much more. How does the United States pay for all of this? Revenue flows into the government mostly in the form of taxes. A large portion comes from income tax, and the rest from a combination of individual payroll taxes, corporate taxes, and other sources. Realistically, the federal budget process is complex and not without difficulties. One of the most hotly debated issues is the problem of the government spending more than what it collects in revenues. Individuals and businesses cannot spend more than what they have, but the government can and does. When this happens, it is referred to as deficit spending. This causes the government to borrow money and results in a national debt. An important way the US government supports its debt is by selling US Treasury bonds. Many types of investors, including individuals, businesses, and even other governments, purchase these bonds, which are considered x 8

Introduction

safe investments. Some analysts worry about the percentage of US Treasury bonds owned by other countries. But many economists agree that there is no reason to be concerned and that this is necessary for the smooth functioning of the global economy. Another area of contention concerns the distribution of funds. Both types of spending—mandatory and discretionary—have proponents and opponents. Critics argue back and forth about the cost of entitlement programs, which constitute the biggest chunk of mandatory spending. Some opponents claim that entitlements are weighing down the US economy and potentially setting the country up for future economic disaster. The Social Security program, which was passed into law in 1935, is an often-cited example. This program alone cost the US government $945 billion in fiscal year 2017. And in the same year, Medicare, which is the health insurance program covering US senior citizens, cost the federal government $597 billion. Discretionary spending is not without its critics. Opponents of defense spending accuse some military sectors of wasting money. People sit up and take notice when stories hit the news about the Pentagon spending $640 dollars on a toilet seat! Others argue that not enough money is being spent to fix and improve America’s deteriorating infrastructure or public education. The topic of government budgets and spending is a complex issue in the United States. It is matter of concern with committed proponents and vocal opponents on each side of the issue. As the viewpoints in At Issue: The Federal Budget and Government Spending illustrate, the debate surrounding the US federal budget is a topic worthy of consideration and discussion. Notes

1. Dennis Jacobe, “One in Three Americans Prepare a Detailed Household Budget,” Gallup News, June 3, 2013. http://news.gallup.com/poll/162872/one-three-americans-prepare -detailed-household-budget.aspx. 2. Aimee Picchi, “Vast Number of Americans Live Paycheck to Paycheck,” CBS News, August 24, 2017. https://www.cbsnews.com/news/americans-living-paycheck-to -paycheck/.

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The Government of the United States Depends on Taxes for Its Revenue

1

National Priorities Project The National Priorities Project is a nonprofit organization with a mission to make the federal budget understandable to the American public. In order to fund the US government and its government programs, revenue in the form of taxes must be collected. The authors of this viewpoint outline the various types of taxes that are collected on a yearly basis by the US government. They also explain the breakdown of tax revenues and discuss how the various sources of tax revenue differ from one another.

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he federal government raises trillions of dollars in tax revenue each year, though a variety of taxes and fees. Some taxes fund specific government programs, while other taxes fund the government in general. When all taxes for a given year are insufficient to cover all of the government’s expenses—which has been the case in 45 out of the last 50 years1—the US Treasury borrows money to make up the difference. In 2015, total federal revenues in fiscal year 2015 are expected to be $3.18 trillion.2 These revenues come from three major sources: 1. Income taxes paid by individuals: $1.48 trillion, or 47% of all tax revenues. “Federal Revenue: Where Does the Money Come from Federal Budget 101,” National Priorities Project. Reprinted by permission.

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The Government of the United States Depends on Taxes for Its Revenue

2. Payroll taxes paid jointly by workers and employers: $1.07 trillion, 34% of all tax revenues. 3. Corporate income taxes paid by businesses: $341.7 billion, or 11% of all tax revenues. There are also a handful of other types of taxes, like customs duties and excise taxes that make up much smaller portions of federal revenue. Customs duties are taxes on imports, paid by the importer, while excise taxes are taxes levied on specific goods, like gasoline. [...] Once they are paid into the Treasury, income taxes and corporate taxes are designated as federal funds, while payroll taxes become trust funds. Federal funds are general revenues, meaning Congress and the president can decide to spend them on just about anything when they conduct the annual appropriations process (see our explanation of the federal budget process). Unlike federal funds, trust funds can be used only to pay for specific programs. The vast majority of trust fund revenues pay for Social Security and Medicare.

Income Taxes The US Constitution (Article I, Section 8) grants Congress the power to collect taxes. Early federal taxation was mostly in the form of excise taxes on goods such as alcohol and tobacco. Although an income tax existed briefly during the Civil War, it wasn’t until 1913, with the ratification of the XVI Amendment to the Constitution, that income taxes became permanent. At that time fewer than 1 percent of people with the highest incomes paid income taxes. Nowadays, more than 100 million American households file a federal tax return each year, and those income taxes make up the federal government’s single largest revenue source.3 The income tax system is designed to be progressive. That is, the wealthy are meant to pay a larger percentage of their earnings than middleor low-income earners. Due to the complexity of the tax code, however, this is not always the way it works out. 11  x

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Corporate Taxes Corporations pay income taxes similar to those paid by workers. Depending on how much profit a corporation makes, it pays a marginal tax rate anywhere from 15 to 35 percent.4 The top marginal tax rate for corporations, 35 percent, applies to taxable income over $18.3 million. [...] Individual income taxes make up a much larger share of all federal tax revenues than corporate taxes do, in part because the wages and salaries of all Americans are much larger than profits of all US corporations. The share of federal tax revenue paid by corporations has also declined substantially over time. While the official tax rate for most corporations is 35 percent, the effective tax rate—that’s the percentage of profits a corporation actually pays in taxes—varies enormously from one corporation to the next.5 That variation is the result of incredible complexity in the tax code as well as corporations’ varying exploitation of “loopholes” to avoid tax liability. Loopholes refer to provisions in the tax code that exempt certain activities from regular taxation. For example, multinational corporations can allocate profits to overseas operations and reduce their tax liability by doing so.

Payroll Taxes While individual and corporate income taxes are designated as federal funds, as described above, payroll taxes are designated as trust funds. Trust funds can be used only for very specific purposes —mainly to pay for Social Security and Medicare. Social Security, officially called the Old Age, Survivors, and Disability Insurance program, is meant to ensure that elderly and disabled people do not live in poverty. Medicare is a federal program that provides health care coverage for senior citizens and the disabled. Taxes to finance Social Security were established in 1935 as a payroll deduction—these are the payroll taxes you see taken directly out of your paycheck, labeled on pay stubs as Social Security and Medicare taxes or as “FICA,” an abbreviation for the x 12

The Government of the United States Depends on Taxes for Its Revenue

Federal Insurance Contributions Act. That’s the law that mandates funding for Social Security by means of a payroll deduction. The deductions from your paycheck are only half the story of payroll taxes. Employees and employers each pay 6.2 percent of wages into Social Security and 1.45 percent into Medicare. That means your employer deducts 7.65 percent of your wages from your paycheck to contribute to those programs, and then your employer contributes an equal amount, though you never see documentation of your employer’s contribution.

Borrowing In most years, the federal government spends more money than it takes in from tax revenues. To make up the difference, the Treasury borrows money by issuing bonds. Anyone can buy Treasury bonds, and, in effect, lend money to the Treasury by doing so. In fiscal year 2015, the federal government is expected to borrow $583 billion to make up the difference between $3.18 billion in revenues and $3.8 trillion in spending. Borrowing constitutes a major source of revenue for the federal government. Down the road, however, the Treasury must pay back the money it has borrowed, and pay interest as well. In 2015, the federal government will pay $229 billion in interest on the national debt. Endnotes 1.

Office of Management and Budget, Historical Table 1.2.

2.

Office of Management and Budget, President’s Budget for Fiscal Year 2016, Budget Authority.

3.

Internal Revenue Service, “Data Book 2014.”

4.

Internal Revenue Service, “Publication 542: Corporations,” 14 Nov. 2013.

5.

Citizens for Tax Justice, “The Sorry State of Corporate Taxes,” February 2014.

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Where Does the Money Come From?

2

Antony Davies Antony Davies is a senior affiliated scholar at the Mercatus Center at George Mason University. He is also cofounder and chief academic officer at FreedomTrust and an associate professor of economics at Duquesne University. He has authored over three hundred op-eds. In this viewpoint, Antony Davies explains two of the primary ways the government attains the money it spends: through individual taxation and through inflation taxation. He explains that although inflation taxes often go unnoticed due to the moderate rate of inflation, they still have a significant effect on Americans. Furthermore, he argues that inflation taxation is impossible to avoid but worth understanding nonetheless.

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he chief way the government gets the money it spends is through taxation. Forty-five percent of federal tax revenue comes from individuals’ personal income taxes. Another 39 percent comes from Social Security and Medicare withholdings. Since half of Social Security and Medicare taxes come directly out of people’s paychecks, about 65 percent of taxes the federal government collects come from individuals. Thirty-two percent of taxes come to the government from corporations. Estate and gift taxes, sources of significant debate, account for only 1 percent of federal tax revenues. “Where Does the Government Get the Money It Spends?” by Antony Davies, Associate Professor of Economics, Mercatus Center at George Mason University, July 31, 2010. Reprinted by permission.

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Where Does the Money Come From?

Can’t the Government Just Make Money by Printing It? Taxation is not the only way the government raises money. Prior to 1933, the United States was on a gold standard. The amount of gold the government had in its possession limited the number of dollars the government could print. What made the gold standard important was not the gold, but rather the limit on the number of dollars the government could print. A “land standard” or a “fresh water standard” that limited the number of dollars the government could print by the amount of land or fresh water the government owned would have achieved the same effect. The value of the object serving as the standard is not important. What is important is that the object exists in a fixed quantity. As long as the quantity of the object is fixed and the number of dollars is limited by the number of units of the object the government owns, the government will be unable to print as many dollars as it likes. When the government can print as many dollars as it likes, it has the ability to impose an “inflation tax.” In what way is inflation a tax? When the government prints money, prices rise. When prices rise, money loses value. For example, if a tank of gas costs $20, then the $20 bill in your pocket is worth a tank of gas. If the price of gas rises so now a tank costs $30, then the $20 bill in your pocket is only worth two-thirds of a tank of gas. The increase in the price of gas caused the money in your pocket to lose value. This isn’t only true for the money in your pocket; it is also true for the money in your bank account. If the government can print money to buy stuff and in so doing cause prices to rise, the resulting increase in prices causes money you own to lose value. The government has effectively taxed you to pay for the stuff it bought. Consider the following simple example: The money supply is $100,000, the economy produces 100,000 units of stuff each year, and the average price for one unit of stuff is $1. You have $5 in your wallet. With this $5 and with the price of stuff at $1 per unit, you can buy 5 units of stuff. Suppose that the government 15  x

The Federal Budget and Government Spending

wants to buy some stuff, but has no money. The government prints $10,000 and uses the newly printed money to buy some stuff. Since the money supply has risen 10 percent and the production of stuff has remained constant, the average price of stuff will rise 10 percent to $1.10. Now, if you want to buy some stuff with your $5, you can only afford about 4.5 units of stuff. In effect, the government has taxed you one-half of a unit of stuff to pay for the stuff it purchased. The inflation tax is insidious because it is usually unseen (when inflation is moderate, people tend not to notice it and, when they do, fail to appreciate that it is in fact a tax). Furthermore, it is impossible to avoid. Understanding that inflation is also a tax leads us to a fundamental truth: The only way the government can obtain money is through taxation.

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The US Budget, Spending, and Debt Are Out of Control

3

The Heritage Foundation The Heritage Foundation is an organization that promotes free enterprise, a strong national defense, individual freedom, traditional American values, and limited government. The author of this viewpoint argues that the United States needs to get its budget, spending, and debt in control. According to this viewpoint, the United States must reform its practices or else it will suffer from a debt crisis. The author offers recommendations for ways to avoid a debt crisis, such as enforcing spending caps, rejecting tax hikes, reforming entitlements, and delegating more responsibilities to state governments and the private sector.

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n 2015, the national debt reached $18.8 trillion and exceeded 100 percent of everything the economy produced in goods and services, as defined by gross domestic product (GDP). Publicly held debt (the debt borrowed in credit markets, excluding Social Security’s trust fund, for example) is alarmingly high at 74 percent of GDP. These high debt levels were last seen after the US had engaged in wartime spending following World War II. However, if mandatory spending—especially health care spending—continues to grow faster than the economy, then the level of debt will grow even higher. “Federal Spending, Budget, and Debt,” The Heritage Foundation. Reprinted by permission.

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High federal debt puts the United States at risk for a number of harmful economic consequences, including slower economic growth, a weakened ability to respond to unexpected challenges, and possibly a debt-driven financial crisis. Furthermore, most of the debt issued is to pay for more consumption spending. Unlike spending on investments, consumption financed through debt will lower the standard of living for future generations. Deficits fell in 2015 primarily because the economy is slowly improving, which brings in additional revenues and lowers spending on countercyclical programs like the Supplemental Nutrition Assistance Program (SNAP or food stamps). Also, discretionary spending caps implemented under the Budget Control Act of 2011 helped restrain the growth in spending. Finally, deficits during the recession were also partly driven by the stimulus bill and other temporary measures. Lawmakers should not take this short-term and modest deficit improvement as a signal to grow complacent about reining in exploding spending. Deficits are on the rise again, beginning in 2016, and within a decade they are projected to exceed $1 trillion annually. The Congressional Budget Office projects that interest on the debt alone will exceed the nation’s defense budget (not including spending on war or other emergencies) before the end of the decade. The nation’s long-term spending trajectory remains on a fiscal collision course. Total spending has exploded by 25 percent since 2004, even after inflation, and some programs have grown far more than that. Defense spending, however, is being cut. Social Security, Medicare, and Medicaid are so large and growing that they are on track to overwhelm the federal budget. These major entitlement programs, together with interest on the debt, are driving 85 percent of the projected growth in government spending over the next decade. The Affordable Care Act, or Obamacare, further adds to the problem, increasing entitlement spending by nearly $2 trillion in just 10 years. The long-term unfunded obligations in the nation’s major entitlement programs loom like an even darker x 18

The US Budget, Spending, and Debt Are Out of Control

cloud over the US economy. Demographic and economic factors will combine to drive spending in Medicare, Medicaid (including Obamacare), and Social Security to unsustainable heights. The major entitlements and interest on the debt are on track to devour all tax revenues in fewer than 20 years. Over the 75-year long-term horizon, the combined unfunded obligations arising from promised benefits in Medicare and Social Security alone exceed $50 trillion. The federal unfunded obligations arising from Medicaid, and even from veterans’ benefits, are unknown but would likely add many trillions more to this figure. By some estimates, the US federal government’s combined unfunded obligations already exceed $200 trillion in today’s dollars. Figures such as these are simply unfathomable. While the Budget Control Act of 2011 and sequestration are modestly restraining the discretionary budget, Congress continues to fund too many programs that represent corporate welfare. Corporate welfare and crony capitalism waste taxpayer resources by spending resources taken for the public benefit on a narrower, well-connected interest group instead. Taxation creates economic distortions. Excess taxation, that goes be­ yond what is necessary to pay for constitutional government, needlessly wastes taxpayer and economic resources. Every dollar spent by the federal government for the benefit of a wellconnected interest group is a dollar that is no longer available to American families and businesses to spend and invest to meet their own needs and wants. Corporate welfare spending is especially morally concerning when government spends resources that belong to the next generation of Americans to fund consumption spending today—or, in other words, when spending makes current Americans better off at the expense of future Americans. Moreover, mandatory or automatic spending—especially on entitlements—continues to grow nearly unabated. Without any changes, mandatory spending, including net interest, will consume three-fourths of the budget in just one decade. 19  x

The Federal Budget and Government Spending

If Washington fails to begin the important reform process, we could one day find ourselves teetering on the edge of a Greecestyle meltdown. To forestall such an eventuality, lawmakers should eliminate waste, duplication, and inappropriate spending; privatize functions better left to the private sector; and leave areas best managed on the local level to states and localities. They should change the entitlement programs so that they become more affordable and help those with the greatest needs. Congress should also fully fund national defense—a core constitutional function of government. Lawmakers should build on the success of the Budget Control Act of 2011 by limiting all non-interest spending with a firm cap that targets those spending levels necessary to reach balance before the end of the decade. It is not too late to solve the growing spending and debt crisis, but the clock is ticking.

Recommendations

Cut Spending Now and Enforce Spending Caps Congress should cut non-defense discretionary spending, first by enforcing the Budget Control Act’s spending caps with sequestration. Next, Congress should eliminate federal spending for programs that are unneeded or can hardly be considered federal priorities and are more appropriate for state and local governments or the private sector, like federal energy subsidies and loan guarantees to businesses. Examples of areas where cuts can be made include: • TIGER grants (National Infrastructure Investment Grants); • The Market Access Program; • The New Starts Program; • The Technology Innovation Program; and • Department of Energy (DOE) loan programs and loan guarantees.

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The US Budget, Spending, and Debt Are Out of Control

Reject Tax Hikes and Pursue Growth-Oriented Tax Reform There is a growing consensus that a simpler, flatter tax code—one with fewer, lower marginal rates and only essential deductions—is one of the best ways to promote growth. Heritage analysts favor an even bolder approach with a single rate on spent income. In any case, as long as government must tax, it should do so with the least possible burden on and interference with free-market choices. Higher taxes on small businesses and on investment capital always weaken the economy. Revenue will grow when the economy grows, but higher spending and taxes will reduce growth. The most effective way to spur economic recovery is to increase the incentives that drive growth. Reform Entitlements Congress should begin by repealing Obamacare, which would add nearly $2 trillion to federal spending over the decade. The costs of Medicare, Medicaid, and Social Security are on course to overwhelm the federal budget. Every year of delay raises the cost of reform and gives near-retirees less time to adjust their retirement strategies. Lawmakers should restructure these programs by changing the incentives that drive their excessive spending. Then Congress should take these programs off autopilot and set a budget for each major entitlement with an obligation to adjust them as necessary to keep each program within budget and protected from insolvency. Empower the States and the Private Sector Since the beginning of the 20th century, the federal government’s domestic activities have expanded well beyond what the Founders envisioned, leading to ever more centralized government, smothering the creativity of states and localities, and pushing federal spending to its current unsustainable levels. Even when Washington allows states to administer the programs, it taxes families, subtracts a hefty administrative cost, and sends the remaining revenues back to state and local governments with specific rules dictating how they may and may not spend the money. 21  x

The Federal Budget and Government Spending

Instead of performing many functions poorly, Congress should focus on the limited set of functions intrinsic to the federal government’s responsibilities. Most highway, education, justice, and economic development programs should be devolved to state and local governments, which have the flexibility to tailor local programs to local needs. Government ownership of business also crowds out private companies and encourages protected entities to take unnecessary risks. After promising profits, government-owned businesses frequently lose billions of dollars, leaving taxpayers to foot the bill. Any government function that can also be found in the yellow pages may be a candidate for privatization. Reform the Federal Budget Process The federal budget’s focus on just 10 years ahead diverts lawmakers from dealing with the mounting long-term challenges, such as retirement programs. Likewise, the lack of firm budget controls and enforcement procedures makes fiscal discipline easy to evade. Reforming the budget process is therefore an implicit part of reforming the budget itself. Congress should estimate and publish the projected cost over 75 years of any proposed policy or funding level for each significant federal program. Any major policy change should also be scored over this long-term horizon. In addition to calculating the costs of proposed congressional actions without regard to the economy’s response to those actions (known as “static” scoring), the government should require a parallel calculation that takes that response into account (known as “dynamic” scoring) to make more practical and useful fiscal information available to Congress when it decides whether to pursue certain actions. Although Congress must make substantial cuts in current and future spending, it must not compromise its first constitutional responsibility: to ensure that national defense is fully funded to protect America and its interests at home and around the globe.

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The US Budget, Spending, and Debt Are Out of Control

Facts and Figures • Government spending per household reached $29,867 in 2015 and is projected to rise by over 50 percent in only one decade to $48,088 per household in 2025. • No American family could spend and borrow as Congress does. If it could, a median-income family with $54,000 in yearly earnings would spend $61,000 in 2013, putting $7,000 on a credit card. This family’s total debt would already be over $300,000. • To set aside enough money today to pay the current debt and future unfunded costs just from Social Security and Medicare, each person in America today, including their children, would owe more than $210,000. • At $18.8 trillion, the national debt now amounts to $125,000 for every tax-filing household in America.

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Government Spending Is Good for the United States

4

Heather Boushey and Michael Ettlinger Heather Boushey is an economist at the Center for American Progress. Michael Ettlinger is vice president of economic policy at the Center for American Progress. At times the condition of the United States’ economy has appeared bleak. Heather Boushey and Michael Ettlinger suggest that the government has a role during these difficult periods in various efforts—such as targeted spending—that can create jobs and bring the economy back to a healthy state. They cite successful efforts to create jobs during the Great Recession of 2008–2012 as examples of how public investments can increase employment. They also argue against the notion that tax cuts for the wealthy can help create jobs and improve the economy.

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resident Barack Obama swept into office on a mantra of “Yes, we can.” Even though our economy was nearly two years into the Great Recession and jobs were being lost at a record pace, he projected a sense of optimism that, together, we could fix it. And history tells us that even when economic times are bleak, there are doable steps that a government can

This material “Government Spending Can Create Jobs—and It Has,” by Heather Boushey and Michael Ettlinger, September 8, 2011, was created by the Center for American Progress (www.americanprogress.org). Reprinted by permission.

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Government Spending Is Good for the United States

take that make a difference to get the economy back on a path of growth and job creation. Indeed, there’s a long history that when unemployment rises, the government steps in to pave the way for job creation. And these policies have been effective. It’s time to do so again because, well, yes, we can. There is an empirically grounded body of literature doc­umenting the effectiveness of fiscal expansion during recessions and the importance of economic multipliers in creating jobs above and beyond those directly created by one firm or one government project. The New Deal programs of the Great Depression are, of course, the granddaddy of these measures. The New Deal programs stabilized our economy, though it was the massive government job creation fueled by World War II that finally put an end to the economic devastation. Since then, presidents and congresses of all political stripes— including the Bush administration—have embraced short-term, temporary fiscal expansion to create jobs in times of labor market weakness. Each time, they worked as intended. And this isn’t just the experience of the United States. Economies around the world reflecting a wide range of economic ideologies understand the importance of government action in the face of economic crises. The role of government in our economy is not, of course, limited to times of economic distress. Government investments in basic science brought us the Internet, the microwave oven, and satellite communications, and have led the fight against cancer. Government investment in new, innovative businesses has helped many companies grow into household names. The Small Business Investment Company Program, financed by the federal Small Business Administration, helped Nike Inc., Apple Inc., and FedEx Corp. grow into the global business powerhouses they are today. Then there are the basic regulations, which create a level playing field for businesses so, for example, when you go to a gas station a gallon is a gallon, the aspirin you buy at the pharmacy is really aspirin, and the ground beef is actually beef. These basic kinds of rules prevent economically costly damage to consumers 25  x

The Federal Budget and Government Spending

and public health. The courts enforce contracts, and markets are regulated so investors can invest with some confidence that the information they receive is honest. Government spending is also an important part of the economy. Millions of people work for the government and millions more are employed in government-funded work and all those dollars flowing into the economy create even more jobs. For example, the Federal Highway Administration periodically estimates the impact of highway spending on direct employment, defined as jobs created by the firms working on a given project; on supporting jobs, including those in firms supplying materials and equipment for projects; and on indirect employment generated when those in the first two groups make consumer purchases with their paychecks. In 2007, $1 billion in federal highway expenditures supported about 30,000 jobs—10,300 in construction, 4,675 in supporting industries, and 15,094 in induced employment. Today, though, is a special time when it comes to the role of government. The lingering consequences of the Great Recession— the housing crisis, the jobs crisis, the fear among businesses to invest their earnings despite record profits—continue to push against faster economic growth and job creation. In short, the economy continues to suffer from a lack of demand. Monetary authorities have already pushed interest rates down to zero. Congress needs to step up and focus on expansionary fiscal policy. Unless Congress acts, the private sector will continue to generate insufficient demand. Because customers have less money to spend due to the collapse of the housing bubble and the ensuing high unemployment, businesses have little incentive to hire and invest. The federal government can help with this. It can take measures to create private-sector jobs by moving up investments that the public needs anyway—investments in roads and bridges, investment in changes that the country needs to make, such as the movement to a more energy efficient cleaner economy, investments in education and research and development. We know this most recently from fighting the Great Recession. x 26

Government Spending Is Good for the United States

Government Has a Critical Role to Play in Paving the Way for Job Creation The analysis of economic multipliers is well known and economists have found that the multipliers are largest when overall demand is weak, like current economic conditions in the United States. The American Recovery and Reinvestment Act of 2009 and other steps taken to address the Great Recession targeted funds toward a variety of specific job-creation efforts that have been shown to have created jobs and been cost-effective. A few concrete examples of how public investments have created jobs include: • Increased investments in infrastructure saved or created 1.1 million jobs in construction industry and 400,000 jobs in manufacturing by March 2011. Almost all of these jobs were in the private sector. The reason for this success is simple: Upgrading roads, bridges, and other basic infrastructure not only creates jobs but also paves the way for businesses small, medium, and large to benefit. Infrastructure investments lower the cost of doing business, making US companies more competitive. And they put people to work earning good, middle-class incomes, which expands the consumer base for businesses. • There were a variety of ways that the Recovery Act encouraged infrastructure investment. Build America Bonds, for example, lowered the cost of borrowing for states who invested in infrastructure, which meant that public projects are more affordable for states—and ultimately, a better deal for taxpayers. • By the end of 2010, $93 billion in investments to the green economy had created or saved nearly 1 million American jobs. These 997,000 jobs include both the “green jobs” created directly by investment in specific industries and indirectly by their suppliers, as well as the additional jobs created when workers spend their incomes back into the economy. 27  x

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• Three programs for energy efficiency retrofits, the Weatherization Assistance Program, Energy Efficiency Block Grant Program, and state energy programs collectively upgraded over half a million (530,000) buildings and employed almost 25,000 Americans since the programs began to ramp up from April 1, 2011 and June 30, 2011. • Three other clean energy programs also led to job creation. The Treasury Department’s cash grant in lieu of a tax credit (known as the 1603 program), the advanced energy manufacturing tax credit (known as the 48C program), and the Department of Energy loan guarantee program together cost the government about $7 billion and leveraged more than $12 billion in private capital and account for more than 120,000 direct jobs. • Direct aid to states, to a large extent, created jobs in the private sector. Every increase of $100,000 in state aid increased employment by 3.8 jobs for a year, of which 3.2 jobs were outside the government, health, and education sectors. • Funding from the Temporary Assistance to Needy Families Emergency Fund made it possible for 250,000 workers to find jobs through public-private partnerships. These programs protect families and their incomes otherwise hurt through no fault of their own by the economic downturn. Putting a floor under them helps to ensure that the customer base for businesses doesn’t totally dry up. • As a result of the State Fiscal Stabilization Fund and other components of the Recovery Act, the Department of Education reports that more than 400,000 teachers got to keep their jobs. • Money targeted toward the long-term unemployed helped not only those individual families hardest hit by the Great Recession but also kept dollars flowing into their local communities and helped unemployed workers access health care, undoubtedly mitigating the well-documented negative health effects of unemployment. In a report for x 28

Government Spending Is Good for the United States

the Department of Labor, Wayne Vroman, an economist at the Urban Institute, estimated that the unemployment insurance system closed about one-fifth (18.3 percent) of the shortfall in the nation’s gross domestic product during the Great Recession. Unemployment benefits for the long-term unemployed have kept an average of 1.6 million American workers in jobs every quarter during the recession. • In fiscal year 2010, the US Department of Agriculture’s Rural Development Fund allocated more than $21.2 billion to seven USDA programs that invest in rural infrastructure, businesses, and homes. These programs upgraded public utilities and community facilities provided broadband connections to businesses and homes, invested in rural businesses, and helped rural families purchase homes. In addition to improving quality of life, these investments resulted in over 300,000 jobs for rural residents. The steps taken in early 2009 brought the economy back from the precipice and created millions of private-sector jobs. Private employers have added jobs for 18 straight months, including over 300,000 jobs in manufacturing since its low point in late 2009. Overall, the private sector has added 2.4 million jobs since the economy bottomed out in February 2010, many of which are due to increased demand in the economy provided by government funding. There is much more to be done, however, as this isn’t enough jobs given the depth of the Great Recession. We know that overall, the Recovery Act created or saved millions of jobs. The nonpartisan Congressional Budget Office credits the Recovery Act with increasing employment in the second quarter of 2011 by 1.4 million to 4 million jobs and reducing unemployment by between 0.5 and 1.6 percent. Economists Alan Blinder and Mark Zandi estimate that the Recovery Act and other fiscal policies resulted in 2.7 million jobs, and that without them unemployment would have hit 11 percent and job losses would have totaled 10 million. And, by taking decisive action to address the hemorrhaging of jobs and the fall in economic activity, Congress and the 29  x

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administration actually reduced the deficit, relative to where it would be today had no such action been taken. At the most basic level, government spending reduced unemployment and thus increased tax revenues. The current projected budget deficit for fiscal year 2011 stands at $1.3 trillion. Had Congress done nothing to stop the hemorrhaging of jobs, economists estimate that the deficit would have ballooned to more than twice as large as it actually did, hitting $2.6 trillion in fiscal year 2011. Clearly, there is solid evidence that government spending can create jobs in a recession as deep and protracted as the Great Recession. In fact, given current conditions, investments in infrastructure, education, and other areas are critical to job creation and boosting the US economy. This is something that economic forecasters from across the political spectrum agree on: The need now is to boost demand, not cut spending.

Supply-Side Economics Is Not the Answer The supply-side mantra of tax cuts for the wealthy is not a job creation strategy for current economic conditions, especially given past policy decisions. It’s important to remember that we have been living in a Bush-tax-cut economy since 2001. That brought us an anemic economic recovery from the 2001 recession. Investment growth, employment growth, and overall economic output all were slower than any other economic recovery in the post–World War II era. The result: For the first time in over a half century, middle-class families saw their incomes fall during an economic expansion, from 2000 to 2007, in inflation-adjusted terms, even as the economy overall grew. What’s more, in the interest of encouraging firms to invest and create jobs, we have kept tax levels below the Bush levels for the entire Great Recession, and have already extended these tax cuts for another two years beginning in 2011. The problem we face is not that the wealthy are not rich enough. The problem is that the policies of the 2000s left us with a hollowed out middle class that should be the engine of economic growth. With companies sitting x 30

Government Spending Is Good for the United States

on large amounts of cash—the share of financial assets that is cash is higher than at any time since 1984—firms already have the funds to invest. Given this, another tax cut isn’t likely to tip the balance much, but what will is more customers, that is, more demand. There was once bipartisan agreement that recessions called for increased spending. In January 2008, Congress passed the Economic Stimulus Act, which injected over $150 billion dollars into the economy, with the support of 165 Republicans. President Bush signed it. In the spring of 2008, Congress extended benefits for the long-term unemployed, with the support of 182 Republicans. President Bush signed it into law. These policy actions had their intended effect by temporarily boosting spending. But employment declines continued, especially after the financial crisis of 2008 spilled over into the broader economy. Those consequences are still with us today—for employed and unemployed Americans alike. Yet it is increasingly apparent that the House Republican leadership has only one goal, spending cuts, even at the risk of throwing our government into default and even as a wide range of experts recognize that the key variable in demand right now is how much the federal government spends. The last thing our economy needs is cuts in public spending. “Cut, cap, and balance” is not an economic growth strategy, it’s a job-destroying agenda.

Yes, We Can Policymakers have a choice in front of them. They can create jobs. It is within their power. History shows us what works. We only need the will to take the right steps forward. We at the Center for American Progress boast a range of policy ideas to jumpstart job creation. So, too, do other progressive organizations and policymakers in the Obama administration and in Congress. We aren’t lacking in solutions. What we need is action.

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5

David Trilling David Trilling is a graduate of the Columbia University Business School. He has worked as a staff writer for Journalist’s Resource since 2016. While the federal budget process of the United States may seem mystifying, it is possible to understand it by looking at its key players and events. This process is outlined in the following viewpoint, which highlights typical areas of government spending and programs. David Trilling explains the various sources available to citizens who would like to keep track of the federal budget.

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he annual United States government budget, which these days runs over $4 trillion, takes 17 months to draft, 12 subcommittees to review and is covered in countless fingerprints. Journalists may be thankful that the process happens only once a year. But it is not inscrutable. And because the budget governs all federal spending, it’s a constant story. In this overview, we describe the different players and the data sources available to journalists and curious citizens alike. We also look at how Washington can punish state and local municipalities that don’t abide by controversial directives. “How the Federal Budget Process Works,” by David Trilling, Journalist’s Resource, March 10, 2017. https://journalistsresource.org/studies/government/budget/federal-budgetprocess-congress-trump. Licensed Under CC BY-ND 4.0 International.

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Understanding the Federal Budget and How Money Is Spent

Discretionary and Mandatory Spending Most government spending—about 63 percent in 2017—is mandatory. It covers programs the government must fund by law. These include Social Security and Medicare (programs for the elderly), which are directed by eligibility laws that Congress reviews from time to time. Food stamps and some transportation spending are also mandatory, as are veterans’ disability benefits and unemployment insurance. Also mandatory is interest on the national debt—about 7.7 percent of spending in 2017. Discretionary spending, on the other hand, requires annual approval by Congress; it includes all defense spending and many public services, such as environmental protection, scientific research, education grants and foreign aid. It is here that a president can leave his mark.

It Starts with the President Though Congress has the power to make the budget, by the Budget and Accounting Act of 1921 it is the president who starts the process with a request up to 17 months before the budget takes effect, notes the National Conference of State Legislatures: “While this budget does not offer any binding language, it is still regarded as a powerful directive for the executive branch to offer national policy.” After almost a year of research by the Office of Management and Budget (OMB), the president’s in-house budget advisers, the president submits his wish list to Congress around February 1 (or later if it is the president’s first year in office). The process should end with 12 spending bills awaiting his signature by September—in time for the fiscal year to begin October 1.

The Appropriations Process After Congress receives the president’s proposal, the House and Senate budget committees hold hearings to question administration officials about the requests and then draft their own plans, known as 33  x

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“budget resolutions,” which are frameworks with overall spending caps. The full House and Senate each vote on these resolutions, which can be altered with a majority vote. A bicameral committee then reconciles any differences. According to the Congressional Budget and Impoundment Control Act of 1974, the House and Senate should vote on the budget resolution by April 15, though the vote is often delayed. Next, House and Senate appropriations committees determine spending for all discretionary programs. These two committees have 12 subcommittees (12 in the House and 12 in the Senate) that specialize in different areas—such as defense, agriculture or transportation—and work with input from the nonpartisan Congressional Budget Office (CBO). The CBO is often described as a scorekeeper because it determines how much a program will cost and if it will stay within the spending limit set by the budget resolution. Each subcommittee drafts an appropriation bill on which the full House or Senate eventually votes. The House and the Senate each debate their versions of the 12 appropriations bills. After the 12 bills pass the full House or Senate, a bicameral conference committee reviews differences between the House and Senate versions of the bills. Once this conference committee agrees on a version of each of the 12 appropriations bills, these versions go to the full House and Senate for a vote. Only after the 12 bills pass both chambers of Congress can they go to the president for his signature. If the process drags past October 1, Congress can pass an emergency resolution to provide stopgap funding to federal agencies. In 2013, Congress did not agree on such funding in time and the government shut down for 16 days.

Budget Reconciliation Sometimes Congress uses a “budget reconciliation,” an optional procedure, to bring tax or spending plans into conformity with the budget resolution or to push through spending resolutions that

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do not have broad enough bipartisan support in either chamber of Congress. “Reconciliation legislation is used to change budget authority or spending outlays of existing law. However, in recent years Congress has changed the reconciliation process to solely focus on deficit reduction,” explains the National Conference on State Legislatures. For example, since 2015 Congressional Republicans have been trying to use a budget reconciliation to repeal the Affordable Care Act, a.k.a. Obamacare, which as a federal law is not funded by decisions made in annual appropriations committees (the Republicans’ chances improved when Donald Trump was elected president). In 2010, Democrats used the procedure to fund some provisions of Obamacare. Congressional supporters of George W. Bush used it to pass his tax cuts in 2001 and 2003.

When the Budget Process Does Not Work Congress did not pass a budget in Barack Obama’s last year in office. His last budget proposal, for 2017, died in Congress. Instead, in late 2016, Congress approved a “continuing resolution” to keep the government funded through the first quarter of the new Trump administration. At the time of this writing [March 2017], details of Trump’s spending plans were beginning to surface, including, reportedly, a large increase in defense spending and cuts to the State Department and the Environmental Protection Agency. (The Committee for a Responsible Federal Budget, a Washington watchdog that campaigns for lower federal debt, keeps an updated page of news on the 2017 budget process.)

Federal Assistance to State and Local Governments A noteworthy chunk of discretionary spending is assistance to states and local governments that is administered through federal agencies such as the Department of Agriculture or the Department of Housing and Urban Development (HUD). The government’s Catalog of Federal Domestic Assistance describes 2,308 federal

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programs and provides contact information for the agencies that award the funding, which can come in the form of grants. The grants are often managed by state or local governments or other local groups. When a president threatens to withhold federal funding from so-called “sanctuary cities”—cities that refuse to detain illegal immigrants—it is these programs he could target. A January 2017 Reuters analysis found the nation’s 10 largest cities stand to lose $2.27 billion annually in federal funds if they fail to enforce Trump’s immigration orders: “Among the funds at risk are $460 million that the federal government gave out to fund Head Start pre-school programs in the 10 largest ‘sanctuary cities’ in the most recent fiscal year, the analysis found. Washington also sent $238 million to municipalities to fund airport improvements and $153 million for HIV prevention and relief.”

Taxes Under Article 1 of the Constitution, Congress has the power to collect taxes and borrow. When Congress budgets more than the government takes in revenues, the Treasury borrows to fund the deficit by selling bonds. In the 2017 fiscal year, total government revenues were expected to be $3.64 billion and spending $4.15 billion, according to the OMB. (The difference is the deficit.) Taxes come largely in three forms: income tax paid by individuals (an estimated 49.6 percent of total revenue in 2017), corporate income taxes paid by businesses (9.9 percent), and payroll taxes paid by employers and their workers (32.7 percent), some of which go into trust funds like Social Security and Medicare. There are also customs duties, which are taxes on imports, and excise taxes, which target a specific product, like gasoline.

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Understanding the Federal Budget and How Money Is Spent

Tax Expenditures Revenues “lost” by the government due to deductions and other tax breaks are known as “tax expenditures.” When you deduct from your income taxes money you gave to charity or deduct the mortgage interest you paid on a home loan, these are tax expenditures. The Treasury Department describes tax expenditures as “revenue losses attributable to provisions of Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability. These exceptions are often viewed as alternatives to other policy instruments, such as spending or regulatory programs.” Tax expenditures do not require annual approval. Some are for set periods of time and some are basically permanent figures in the tax landscape. In recent years, they have surpassed all discretionary spending. Here is an estimate (in trillions of dollars) for 2017 compared with Obama’s estimated 2017 discretionary budget. .

Government Data Sources • To help it make decisions and define its powers under the Constitution, Congress created the Government Accountability Office (a nonpartisan agency that oversees government spending) and the Congressional Budget Office (for nonpartisan, objective analysis on government spending). The CBO publishes a handy glossary of budget terms. • The Congressional Research Service, a nonpartisan think tank reporting to Congress, has a detailed explainer on the federal budget process. • In the executive branch, the president has the Office of Management and Budget to help draft the initial proposal and understand what it costs.

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• The Internal Revenue Service (IRS) collects taxes and the Treasury Department borrows to raise funds. • The Catalog of Federal Domestic Assistance describes 2,308 federal programs and provides contact information for the agencies that award the funding. • The Bureau of Economic Analysis performs cost-benefit analyses of various programs affecting the US economy. • The Government Publishing Office posts budgets back to 1996 and the Federal Reserve Bank of St. Louis publishes them back to 1923.

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The Pentagon Wastes Huge Amounts of Taxpayer Money

6

William Hartung William Hartung directs the Arms and Security Project at the Center for International Policy. Hartung is an author and frequent contributor to the online news site TomDispatch.com. From bomb-detecting African elephants to $640 toilet seats, there are a number of examples of incredible fiscal waste at the Pentagon. William Hartung outlines a brief history of the moneywasting projects and practices conducted by the Pentagon and its defense contractors since the 1960s. In doing so, he makes the argument that the government spends too much of the federal budget on defense, which as of 2016 was approximately $600 billion annually.

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rom spending $150 million on private villas for a handful of personnel in Afghanistan to blowing $2.7 billion on an air surveillance balloon that doesn’t work, the latest revelations of waste at the Pentagon are just the most recent howlers in a long line of similar stories stretching back at least five decades. Other hot-off-the-presses examples would include the Army’s purchase of helicopter gears worth $500 each for $8,000 each and the accumulation of billions of dollars’ worth of weapons “A Short History of the Pentagon Wasting Your Money,” by William Hartung, Foreign Policy in Focus, April 12, 2016. http://fpif.org/short-history-pentagon-wasting-money/. Licensed under CC BY 3.0 United States.

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components that will never be used. And then there’s the one that would have to be everyone’s favorite Pentagon waste story: the spending of $50,000 to investigate the bomb-detecting capabilities of African elephants. (And here’s a shock: they didn’t turn out to be that great!) The elephant research, of course, represents chump change in the Pentagon’s wastage sweepstakes and in the context of its $600-billion-plus budget, but think of it as indicative of the absurd lengths the Department of Defense will go to when what’s at stake is throwing away taxpayer dollars. Keep in mind that the above examples are just the tip of the tip of a titanic iceberg of military waste. In a recent report I did for the Center for International Policy, I identified 27 recent examples of such wasteful spending totaling over $33 billion. And that was no more than a sampling of everyday life in the twenty-first-century world of the Pentagon. The staggering persistence and profusion of such cases suggests that it’s time to rethink what exactly they represent. Far from being aberrations in need of correction to make the Pentagon run more efficiently, wasting vast sums of taxpayer dollars should be seen as a way of life for the Department of Defense. And with that in mind, let’s take a little tour through the highlights of Pentagon waste from the 1960s to the present.

How Many States Can You Lose Jobs In? The first person to bring widespread public attention to the size and scope of the problem of Pentagon waste was Ernest Fitzgerald, an Air Force deputy for management systems. In the late 1960s, he battled that service to bring to light massive cost overruns on Lockheed’s C-5A transport plane. He risked his job, and was ultimately fired, for uncovering $2 billion in excess expenditures on a plane that was supposed to make the rapid deployment of large quantities of military equipment to Vietnam and other distant conflicts a reality.

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The cost increase on the C-5A was twice the price Lockheed had initially promised, and at the time one of the largest cost overruns ever exposed. It was also an episode of special interest then, because Secretary of Defense Robert McNamara had been pledging to bring the efficient business methods he had learned as Ford Motors’ president to bear on the Pentagon’s budgeting process. No such luck, as it turned out, but Fitzgerald’s revelations did, at least, spark a decade of media and congressional scrutiny of the business practices of the weapons industry. The C-5A fiasco, combined with Lockheed’s financial troubles with its L-1011 airliner project, led the company to approach Congress, hat in hand, for a $250-million government bailout. Wisconsin Senator William Proxmire, who had helped bring attention to the C-5A overruns, vigorously opposed the measure, and came within one vote of defeating it in the Senate. In a time-tested lobbying technique that has been used by weapons makers ever since, Lockheed claimed that denying it loan guarantees would cost 34,000 jobs in 35 states, while undermining the Pentagon’s ability to prepare for the next war, whatever it might be. The tactic worked like a charm. Montana Senator Lee Metcalf, who cast the deciding vote in favor of the bailout, said, “I’m not going to be the one to put those thousands of people out of work.” An analysis by the New York Times found that every senator with a Lockheed-related plant in his or her state voted for the deal. By rewarding Lockheed Martin for its wasteful practices, Congress set a precedent that has never been superseded. A present-day case in point is—speak of the devil—Lockheed Martin’s F-35 combat aircraft. At $1.4 trillion in procurement and operating costs over its lifetime, it will be the most expensive weapons program ever undertaken by the Pentagon (or anyone else on planet earth), and the warning signs are already in: tens of billions of dollars in projected cost overruns and myriad performance problems before

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the F-35 is even out of its testing phase. Now the Pentagon wants to rush the plane into production by making a “block buy” of more than 400 planes that will involve little or no accountability regarding the quality and cost of the final product. Predictably, almost five decades after the C-5A contretemps, Lockheed Martin has deployed an inflationary version of the jobs argument in defense of the F-35, making the wildly exaggerated claim that the plane will produce 125,000 jobs in 46 states. The company has even created a handy interactive map to show how many jobs the program will allegedly create state by state. Never mind the fact that weapons spending is the least efficient way to create jobs, lagging far behind investment in housing, education, or infrastructure.

The Classic $640 Toilet Seat Despite the tens of billions being wasted on a project like the F-35, the examples that tend to draw the most attention from the media and the most outrage among taxpayers involve overspending on routine items. This may be because the average person doesn’t have a sense of what a fighter plane should cost, but can more easily grasp that spending $640 for a toilet seat or $7,600 for a coffee pot is outrageous. These kinds of examples—first exposed through work done in the 1980s by Dina Rasor of the Project on Military Procurement—undermined the position taken by President Ronald Reagan’s administration that not a penny could be cut from its then-record peacetime Pentagon budgets. The media ate such stories up. Pentagon overpayments for everyday items generated hundreds of articles in newspapers and magazines, including front-page coverage in the Washington Post. Two whistleblowers were even interviewed on the Today Show, and Johnny Carson joked about such scandals in his introductory monologues on the Tonight Show. Perhaps the most memorable depiction of the problem was a cartoon by the Washington Post’s Herblock that showed Reagan x 42

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Secretary of Defense Caspar Weinberger wearing a $640 toilet seat around his neck. This outburst of truth-telling, whistleblowing, investigative journalism, and mockery helped put a cap on the Reagan military buildup, but—you won’t be surprised to learn— didn’t keep the Pentagon from finding ever more innovative ways to misspend tax dollars. The most outrageous spending choice of the 1990s was undoubtedly the Clinton administration’s decision to subsidize the mergers of major defense firms. As Lockheed (yet again!) and Martin Marietta merged, Northrop teamed with Grumman, and Boeing bought McDonnell Douglas, the Pentagon provided funding to pay for everything from closing down factories to subsidizing golden parachutes for displaced executives and board members. At the time, Vermont Congressman Bernie Sanders aptly dubbed the process “payoffs for layoffs,” as executives of defense firms received healthy payouts while laid-off workers were largely left to fend for themselves. The Pentagon’s rationale for giving hundreds of millions of dollars to these emerging defense behemoths was laughable. The claim—absurd on the face of it—was that the new, larger companies would provide the Pentagon with lower prices once they had eliminated unnecessary overhead. Former Pentagon official Lawrence Korb, who opposed the subsidies at the time, noted the obvious: There was no evidence that weapons programs grew any cheaper, cost overruns any less, or wastage any smaller thanks to government-subsidized mergers. As in fact became clear in the world of the weapons giants that followed, the increased bargaining power of companies like Lockheed Martin in a significantly less competitive market undoubtedly resulted in higher weapons costs.

It Took $6 Billion Not to Audit the Pentagon The poster child for waste in the first decade of the twenty-first century was certainly the billions of dollars a privatizing Pentagon handed out to up-armored companies like Halliburton that 43  x

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accompanied the US military into its war zones and engaged in Pentagon-funded base-building and “reconstruction” (aka “nation building”) projects in Iraq and Afghanistan. The Special Inspector General for Afghan Reconstruction (SIGAR) alone seems to come out with new examples of waste, fraud, and abuse on practically a weekly basis. Among Afghan projects that stood out over the years was a multi-million-dollar “highway to nowhere,” a $43-million gas station in nowhere, a $25-million “state of the art” headquarters for the US military in Helmand Province, with all the usual cost overruns, that no one ever used, and the payment of actual salaries to countless thousands of no ones aptly labeled “ghost soldiers.” And that’s just to begin enumerating a long, long list. Last year, Pro Publica created an invaluable interactive graphic detailing $17 billion in wasteful spending uncovered by SIGAR, complete with information on what that money could have purchased if it had been used productively. One reason the Pentagon has been able to get away with all this is that it has proven strangely incapable of doing a simple audit of itself, despite a congressionally mandated requirement dating back to 1990 that it do so. Conveniently enough, this means that the Department of Defense can’t tell us how much equipment it has purchased, or how often it has been overcharged, or even how many contractors it employs. This may be spectacularly bad bookkeeping, but it’s great for defense firms, which profit all the more in an environment of minimal accountability. Call it irony or call it symptomatic of a successful way of life, but a recent analysis by the Project on Government Oversight notes that the Pentagon has so far spent roughly $6 billion on “fixing” the audit problem—with no solution in sight. If anything, in recent years the Pentagon’s accounting practices have been getting worse. Among the many offenses to any reasonable accounting sensibility, perhaps the most striking has been the way the war budget—known in Pentagonese as the x 44

The Pentagon Wastes Huge Amounts of Taxpayer Money

Overseas Contingency Operations account—has been used as a slush fund to pay for tens of billions of dollars of items that have nothing to do with fighting wars. This evasive maneuver has been used to get around the caps that were placed on the Pentagon’s regular budget by Congress in the Budget Control Act of 2011. If the Pentagon has its way, nuclear weapons will get their very own slush fund as well. For years, the submarine lobby floated the idea of a separate Sea-Based Deterrence Fund (outside of the Navy’s regular shipbuilding budget) to pay for ballistic missilefiring submarines. Congress has signed off on this idea, and now there are calls for a nuclear deterrent fund that would give special budgetary treatment to bombers and intercontinental ballistic missiles as well. If implemented, this change would throw the minimalist budget discipline that now exists at the Pentagon decisively out the nearest window and increase pressures to raise the department’s overall budget, which already exceeds the levels reached during the Reagan buildup. Why has waste at the Pentagon been so hard to rein in? The answer is, in a sense, not complicated: The military-industrial complex profits from waste. Closer scrutiny of waste could mean not just cheaper spare parts, but serious questions about whether cash cows like the F-35 are needed at all. An accurate head count of the hundreds of thousands of private contractors employed by the Pentagon would reveal that a large proportion of them are doing work that is either duplicative or unnecessary. In other words, an effective audit of the Pentagon or any form of serious oversight of its wasteful way of life would pose a financial threat to a sector that is doing just fine under current arrangements. Who knows? If the Department of Defense’s wasteful ways were ever brought under genuine scrutiny and control, people might start to question, for example, whether a country that already has the capability to destroy the world many times over needs to spend $1 trillion over the next three decades on a new generation of 45  x

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ballistic missiles, bombers, and nuclear-armed submarines. None of this would be good news for the contractors or for their allies in the Pentagon and Congress. Undoubtedly, from time to time, you’ll continue to hear outrageous media stories about waste at the Pentagon and bombdetecting elephants gone astray. Without a concerted campaign of public pressure of a sort we haven’t seen in recent years, however, the Pentagon’s runaway budget will never be reined in, that audit will never happen, and the weapons makers will whistle a happy tune on their way to the bank with our cash.

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The Defense Budget May Be Too Low, Considering Vital US Interests

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Justin T. Johnson Justin T. Johnson is an expert on defense policies and budgets at the Allison Center for National Security and Foreign Policy. In the following viewpoint, Justin T. Johnson examines a strategy for determining an appropriate level of military defense spending. Beginning with an assessment of US vital interests and the threats these interests face, Johnson suggests that the military budget is underfunded. He reaches this conclusion through arguing that the threats the US faces have increased in recent years and breaks down how the defense budget should be spent.

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he debate about defense spending will likely reignite in September [2015] as Congress returns from recess and the end of the fiscal year draws near. Unfortunately, much of that debate will not be very helpful or informative. Instead of arguing the merits of a particular military spending level, much of the debate will revolve around Democratic opposition to increasing defense spending without proportional increases to non-defense spending. The usual arguments for cutting defense spending will likely pop up as well. But what’s really needed is a more thoughtful debate. Once you get beyond the talking

“What Should America Spend on Defense and Why?” by Justin T. Johnson, The Heritage Foundation, August 28, 2015. Reprinted by permission.

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points and the political agendas, what should the United States spend on defense?

The Ideal Defense Budget Debate Determining what the United States (or any country) should spend on national defense is much easier in theory than in reality. But let’s start with the theory. The first step is determining the vital interests of the United States. What must we, as a country, protect? Almost everyone would agree that we must protect America and our citizens from attacks by terrorists or nation-states. But beyond protecting the homeland and its people, it gets more complicated. Should the United States protect its allies? International commerce and the commons in and on which this commerce happens? The human rights of individuals in other countries? These are the types of questions that need to be answered in order to determine the vital interests of the United States. The next step is figuring out what threatens these vital interests. Some of these threats are obvious, such as nuclear war and terrorist attacks. Some threats seem to be growing, such as Russia’s aggressive actions and China’s cyberattacks. The goal should be a clear-eyed analysis of what truly threatens our vital interests today and what may threaten those interests in the future. The third step is figuring out how to protect America’s vital interests from both the threats of today and those of the future. This will likely include elements of hard power (i.e. the military) and soft power (i.e. diplomacy, alliances, trade) used in concert to deter or, if necessary, defeat the threats. This should produce a cohesive strategy for protecting America’s vital interests. While outlining a full strategy is too large a task for this article, the most recent National Defense Panel report is a good bipartisan example that assesses vital interests and threats and then outlines a strategy. Once you have a strategy, you need to develop the tools to implement that strategy. For the military, this means figuring out the capabilities and the capacity needed to execute the strategy. For x 48

The Defense Budget May Be Too Low, Considering Vital US Interests

example, protecting America from North Korean nuclear missiles may require an interceptor (a capability). But one interceptor is probably not enough—instead you need enough interceptors (capacity) to defeat all of North Korea’s nuclear missiles. While capabilities are usually pretty self-evident, questions of capacity are often more complex. Most Americans would agree that the US Air Force should have the ability to defeat the best fighter aircraft of our potential adversaries. But should the Air Force be big enough to fight against more than one potential adversary simultaneously? Answering questions of capability and capacity will lead directly to a defense budget. The US Navy needs a certain number of destroyers at any given time and the average lifespan of a destroyer is known, so the number of destroyers that need to be built per year can be figured out. This process can be repeated for each military capability, which eventually produces a defense budget. Of course, reality is not that simple. The defense budget is often constrained for economic or political reasons. The gap between what the United States actually spends and what it takes to fully resource and execute the strategy is risk. Unfortunately, risk is difficult to measure, but all too easy to ignore. A particular threat may be out of sight and out of mind, but it still exists and could still harm a vital interest of the United States. It’s similar to buying cheap car insurance. It may save a few bucks and turn out fine as long as you never have an accident. That is what it means to accept risk. To be clear, a strategy-based defense budget should not be an excuse for a wasteful defense budget at any level. On the macro level, if the United States spends too much on defense, it is wasting the precious resource of taxpayer money and contributing to the burden of debt on future generations. The total defense budget should not be one dollar more than absolutely necessary. On the micro level, wasteful and inefficient programs prevent capabilities and capacity from being used to protect the nation’s interests. Additional reforms must be implemented so that every dollar is used efficiently and appropriately. 49  x

The Federal Budget and Government Spending

The Real Defense Budget Debate So in theory, that is how a defense budget should be built. But where do things really stand? Since the imposition of the Budget Control Act in 2011, the base defense budget (excluding war costs) has gone down by 15 percent in real terms, while the threats to US vital interests have, if anything, increased. The Heritage Foundation’s 2015 Index of US Military Strength assessed the current capacity, capability, and readiness of the US military as “marginal.” In this context, President Obama has proposed increasing the base defense budget to $561 billion in FY2016, which represents a 5.8 percent inflation-adjusted increase over FY2015 defense spending. Republicans in Congress also want to spend $561 billion on defense, but plan to use overseas contingency operations (OCO) funding, or war budget, which is exempt from the Budget Control Act spending caps. In other words, the defense spending debate will not really be about defense spending. The true driving forces of the debate are the use of a budget gimmick and Democratic opposition to increasing defense spending without proportional increases in non-defense domestic spending. While the White House and Congress propose a defense spending level of $561 billion, many believe this is still well below a strategy-driven defense budget. A Heritage Foundation analysis suggested $584 billion as a starting point, a 10 percent increase over FY2015. The bipartisan National Defense Panel argued that the last budget proposal from former Defense Secretary Robert Gates in 2012 should be the minimum defense budget. For FY2016 that would be $638 billion, which is 20 percent higher than FY2015 in inflation-adjusted dollars. Let’s assume for a moment that the defense budget was increased to the Heritage Foundation or National Defense Panel’s preferred levels in FY2016. Where would this money come from and where would it go? Both the Heritage analysis and the National Defense Panel point out that entitlement programs are driving the national debt and must be reformed. For example, with two months of FY2015 remaining, the three major entitlement programs have x 50

The Defense Budget May Be Too Low, Considering Vital US Interests

already spent $108 billion more than last fiscal year. Until these programs are reformed, the budget situation will remain very challenging for discretionary spending. The Heritage Foundation analysis also proposes ways to save more than $50 billion in nondefense discretionary spending in FY2016 alone. The reality is that imposing many of these reforms to pay for increased defense spending will be politically challenging. The tempting alternative is to either increase deficit spending or increase taxes. Neither is a wise route. Increased deficit spending (and therefore higher national debt) has been shown to hurt economic productivity. Similarly, increasing taxes also hurts economic productivity. Enacting reasonable entitlement reform and cutting non-defense discretionary programs is the best way forward. There is much debate to be had on how best to reform entitlement programs and where to cut non-defense programs, and it will not be easy, but it is the best path toward an economically strong and militarily secure country. And where would this money go? The Heritage analysis proposes $31 billion in specific additions, primarily in preserving force structure and increasing readiness and modernization. This includes keeping the Army active duty end strength at 490,000 and the Marine Corps active duty end strength at 183,000. It also includes things like preserving the Navy cruiser fleet and accelerating F-35 purchases for the Air Force. Another obvious place to increase spending is in response to the military’s unfunded priorities lists. The FY2016 requests from each service total $21 billion and are largely focused on smaller items, such as an Army facility sustainment request for $912 million. While these documents provide a good way to increase the defense budget by roughly $52 billion, defense spending advocates should be willing to recognize that increasing defense spending too rapidly can be wasteful. Immediate budget increases can preserve today’s force structure, increase readiness, and increase procurement quantities for current production lines. New technologies and systems, however, cannot be bought overnight 51  x

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and large cash infusions can actually wreak havoc. The ideal scenario is an immediate defense budget increase to preserve force structure while increasing readiness and modernization. This should be followed by a steady increase over time to allow for the development of future systems and technologies. Whatever final defense budget number Washington settles on for FY2016, it will doubtless be well below the minimum level dictated by a rigorous, risk-informed, strategy-based analysis. Just like with cheap car insurance, the United States might not see the consequences of under-spending on defense this year. But when the accident happens, or when the threat grows so great not even Congress can turn a blind eye, the costs will be higher than if we had adequately invested in national defense today.

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Government Spending and the Deficit Must Be Decreased

8

Chris Edwards Chris Edwards is an economist who directs tax policy studies at the Cato Institute. In the following viewpoint, Chris Edwards argues that spending by the federal government must be cut and the deficit must be decreased. Edwards provides clear examples of his proposed program and outlines several strategies that helped put Canada back on the path to fiscal soundness, which serve as examples for how the United States could do the same. According to Edwards, the spending cuts he proposes would eliminate the federal deficit in the next decade.

F

ederal government spending is rising, deficits are chronic, and accumulated debt is reaching dangerous levels. Growing spending and debt are undermining economic growth and may push the nation into a financial crisis in coming years. The solution to these problems is to downsize every federal department by cutting the most harmful programs. This study proposes specific cuts that would reduce federal spending by almost one-quarter and balance the budget in less than a decade. Federal spending cuts would spur economic growth by shifting resources from lower-valued government activities to highervalued private ones. Cuts would expand freedom by giving people “A Plan to Cut Federal Government Spending,” by Chris Edwards, Downsizing the Federal Government, June 23, 2017. Reprinted by permission.

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more control over their lives and reducing the regulations that come with spending programs. The federal government has expanded into many areas that should be left to state and local governments, businesses, charities, and individuals. That expansion is sucking the life out of the private economy and creating a top-down bureaucratic society that is alien to American traditions. So cutting federal spending would enhance civil liberties by dispersing power from Washington. The Congressional Budget Office (CBO) projects that federal spending will rise from 20.7 percent of gross domestic product (GDP) in 2017 to 23.4 percent by 2027 under current law.1 Over the same period, tax revenues are expected to rise much more slowly, reaching 18.4 percent of GDP by 2027. As a consequence, fast-growing spending will produce increasingly large deficits. Policymakers should change course. They should cut spending and eliminate deficits. The plan presented here would balance the budget within a decade and generate growing surpluses after that. Spending would be reduced to 18.0 percent of GDP by 2027, or almost one-quarter less than the CBO projection for that year. Some economists claim that cutting government spending would hurt the economy, but that notion is based on faulty Keynesian theories. In fact, spending cuts would shift resources from often mismanaged and damaging government programs to more productive private activities, thus increasing overall GDP. Markets have mechanisms to allocate resources to high-value activities, but the government has no such capabilities.2 It is true that private businesses make many mistakes, but entrepreneurs and competition are constantly fixing them. By contrast, federal agencies follow failed and obsolete approaches decade after decade.3 So moving resources out of the government would be a net gain for the economy. Consider Canada’s experience. In the mid-1990s, the federal government faced a debt crisis caused by overspending, which

x 54

Government Spending and the Deficit Must Be Decreased

is similar to America’s current situation. But the Canadian government reversed course and slashed spending from 23 percent of GDP in 1993, to 17 percent by 2000, to just 15 percent today.4 The Canadian economy did not sink into a recession from the cuts as Keynesians would have expected, but instead grew strongly during the 1990s and 2000s. Thus policymakers should not think of spending cuts as a necessary evil to reduce deficits. Rather, the US government’s fiscal mess is an opportunity to make reforms that would spur growth and expand individual freedom. The plan proposed here includes a menu of spending reforms for policymakers to consider.

Spending Cut Overview This section describes how cutting spending would eliminate the federal deficit within a decade and generate growing surpluses after that. The starting point for the plan is the CBO’s baseline projection from January 2017.5 Under the plan, spending would decline from 20.7 percent of GDP today to 18.0 percent by 2027. The deficit would be eliminated by 2024 and growing surpluses would be generated after that. Under the plan, spending cuts would be phased in over 10 years and would total $1.5 trillion annually by 2027, including about $225 billion in reduced interest costs that year.6 Falling spending and deficits would allow room for tax reforms. One reform would be to repeal the tax increases under the 2010 Affordable Care Act.7 Another reform would be to slash the federal corporate tax rate from 35 percent to 15 percent, which would match the reformed Canadian rate. Such a cut would spur stronger economic growth and lose little revenue over the long term.8 In sum, the best fiscal approach would be to cut spending and reform the most damaging parts of the tax code. That would end the harmful build-up of debt, expand personal freedom, and generate benefits for all Americans from a growing economy.

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Spending Cut Details Tables 1 and 2 below list proposed cuts to reduce federal spending to 18.0 percent of GDP by 2027. Table 1 shows the cuts for health care and Social Security. These reforms would be implemented right away, but the value of savings would grow larger over time. The figures shown are the estimated annual savings by 2027, generally based on CBO projections.9 Table 2 shows cuts to discretionary programs and entitlements other than health care and Social Security.10 These cuts would be valued at $499 billion in 2017, but the plan assumes that they would be phased in one-tenth each year over the next decade.11 Table 1: Proposed Federal Budget Cuts Health Care and Social Security Agency and Activity

Annual Savings $Billions, 2027

Health Care Repeal Affordable Care Act exchange subsidies

106

Repeal Affordable Care Act Medicaid expansion

142

Block grant Medicaid and grow at 2%

119

Increase Medicare premiums

69

Increase Medicare cost sharing

10

Cut Medicare improper payments by 50%

77

Cut non-Medicaid state health grants by 50%

43

Total cuts

566

Social Security Administration Price index initial Social Security benefits

27

Raise the normal retirement age for Social Security

10

Cut Social Security Disability Insurance by 25%

54

Cut Supplemental Security Income by 25%

19

Total cuts Total Annual spending cuts in 2027

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110 $676

Government Spending and the Deficit Must Be Decreased

Table 2: Proposed Federal Budget Cuts Discretionary Programs and Other Entitlements Agency and Activity

Annual Savings $Billions, 2017

Department of Agriculture End farm subsidies

27.8

Cut food subsidies by 50%

51.0

End rural subsidies Total cuts

3.9 82.7

Department of Commerce End telecom subsidies

1.2

End economic development subsidies

0.2

Total cuts

1.4

Department of Defense End overseas contingency operations

65.0

Total cuts

65.0

Department of Education End K–12 education grants

23.7

End all other programs

88.1

Total cuts (terminate the department)

111.8

Department of Energy End subsidies for renewables

1.7

End fossil/nuclear/electricity subsidies

1.7

Privatize power marketing administrations

0.5

Total cuts

3.9

Department of Homeland Security Privatize TSA airport screening

5.9

Devolve FEMA activities to the states

12.0

Total cuts

17.9

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Department of Housing and Urban Development End rental assistance

30.9

End community development subsidies

10.2

End public housing subsidies

6.5

Other cuts

9.2

Total cuts (terminate the department) Department of the Interior Reduce net outlays by 50% through spending cuts, privatization, and user charges

56.8 6.8

Department of Justice End state/local grants

6.2

Department of Labor End employment training services

3.7

End Job Corps

1.6

End trade adjustment assistance

0.6

End Community Service for Seniors

0.4

Total cuts

6.3

Department of Transportation Cut highway/transit grants to balance trust fund

12.2

Privatize air traffic control (federal fund savings)

2.2

Privatize Amtrak and end rail subsidies

4.5

Total cuts

18.9

Department of the Treasury Cut earned income tax credit by 50%

30.5

End refundable part of child tax credit

20.1

End refundable part of AOTC Total cuts

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4.0 54.6

Government Spending and the Deficit Must Be Decreased

Other Savings Cut foreign aid by 50%

13.2

Cut federal civilian compensation costs by 10%

32.9

Privatize the Corps of Engineers (Civil Works)

6.9

Privatize the Tennessee Valley Authority

0.4

Privatize the US Postal Service

n/a

Repeal Davis-Bacon labor rules

9.0

End EPA state/local grants

4.3

Total cuts Total annual spending cuts

66.7 $498.9

The reforms listed in Tables 1 and 2 are deeper than the savings from “duplication” and “waste” often discussed by federal policymakers. We should cut hundreds of billions of dollars of “meat” from federal departments, not just the obvious “fat.” If the activities cut are useful to society, then state governments or private groups should fund them, and those entities would be more efficient at doing so. The proposed cuts are illustrative of how to start getting the federal budget under control. Further reforms are needed in addition to these cuts, such as major structural changes to Medicare. The important thing is to start cutting as soon as possible because the longer we wait, the deeper will be the debt hole that is dug.

Subsidies to Individuals and Businesses The federal government funds more than 2,300 subsidy programs, more than twice as many as in the 1980s.12 The scope of federal activities has expanded in recent decades along with the size of the federal budget. The federal government subsidizes farming, health care, school lunches, rural utilities, the energy industry, rental housing, aviation, passenger rail, public broadcasting, job training, foreign aid, urban transit, and many other activities. 59  x

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Each subsidy causes damage to the economy through the required taxation. And each subsidy generates a bureaucracy, spawns lobby groups, and encourages even more people to demand government hand-outs. Individuals, businesses, and nonprofit groups that become hooked on federal subsidies essentially become tools of the state. They lose their independence, have less incentive to innovate, and shy away from criticizing the government and its failures. Table 2 includes cuts to subsidies in agriculture, commerce, energy, housing, foreign aid, and other activities. Those cuts would not eliminate all of the unjustified subsidies in the budget, but they would be a good start. Government subsidies are like an addictive drug, undermining America’s traditions of individual reliance, voluntary charity, and entrepreneurialism.

Aid to the States Under the Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Constitution’s Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The amendment embodies federalism, the idea that federal and state governments have separate areas of activity and that federal responsibilities are “few and defined,” as James Madison noted. Unfortunately, policymakers and the courts have mainly discarded federalism in recent decades. Through “grants-in-aid” Congress has undertaken many activities that were traditionally reserved to state and local governments. Grant programs are subsidies that are combined with federal regulatory controls to micromanage state and local activities. Federal aid to the states totals almost $700 billion a year, and is distributed through more than 1,100 separate programs.13 The theory behind grants-in-aid is that the federal government can operate programs in the national interest to solve local x 60

Government Spending and the Deficit Must Be Decreased

problems efficiently. However, the aid system does not work that way in practice. Most federal politicians are preoccupied by the competitive scramble to maximize subsidies for their states, regardless of program efficiency or an appreciation of overall budget limitations. Furthermore, federal aid stimulates overspending by state governments and creates a web of complex federal regulations that undermine state innovation. At all levels of the aid system, the focus is on regulatory compliance and spending, not on delivering quality public services. The aid system destroys government accountability because each level of government blames the other levels when programs fail. It is a triumph of expenditure without responsibility. Federal aid is a roundabout funding system for state and local activities. It serves no important economic purpose. By federalizing state and local activities, we are asking Congress to do the impossible—to efficiently plan for the competing needs of a diverse country of 320 million people. The grant-in-aid system should be eliminated. Policymakers should revive federalism and begin terminating grant programs. Tables 1 and 2 include cuts to grants for education, health care, highways, justice, transit, and other activities. There is no reason why such activities should not be funded at the state and local levels.

Military Expenses Cato Institute defense experts Chris Preble and Ben Friedman have proposed numerous cuts to US military spending.14 They argue that the United States would be better off taking a waitand-see approach to distant threats, while letting friendly nations bear more of the costs of their own defenses. They note that US policymakers support extraneous missions for the military aside from the basic role of defending the nation. As such, the military budget should be trimmed in a prudent fashion as part of an overall plan to downsize the government 61  x

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and balance the budget. The current plan assumes that spending on overseas contingency operations—which will be $65 billion in 2017—would be phased down to zero.

Medicare, Medicaid, and Social Security The projected growth in Medicare, Medicaid, and Social Security is the main cause of America’s looming fiscal crisis. Budget experts generally agree on the need to restructure these programs. The reforms listed in Table 1 include cuts to Medicare, Medicaid, and Social Security. Policymakers should repeal the 2010 Affordable Care Act (ACA). That would reduce spending on Medicaid and end spending on the exchange subsidies. In addition, policymakers should convert Medicaid from an open-ended matching grant to a block grant, while giving state governments more program flexibility. That was the successful approach used for welfare reform in 1996, which encouraged state innovation. Changing Medicaid to a block grant and capping annual spending growth at 2 percent would save about $119 billion annually by 2027.15 Table 1 includes modest Medicare changes based on CBO estimates.16 Reforms include increasing deductibles and increasing premiums for Part B to cover 35 percent of the program’s costs. It also assumes that the Medicare improper payment rate would be cut to half of its current rate.17 However, larger Medicare reforms are needed than just these cuts. Cato scholars have proposed moving to a system based on individual vouchers, personal savings, and consumer choice for elderly health care.18 Such a reform would create strong incentives for providers and patients to improve system quality and reduce costs. For Social Security, the growth in initial benefits should be indexed to prices rather than wages to slow the program’s growth. That reform would save about $27 billion annually by 2027 and growing amounts after that. The plan also includes a CBO option

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to modestly raise the normal retirement age. In addition, the fraudplagued Social Security Disability Insurance and Supplemental Security Income programs would be trimmed 25 percent compared to current spending projections.

Privatization A privatization revolution has swept the world since the 1980s. Following Britain’s lead, governments in more than 100 countries have transferred thousands of state-owned businesses to the private sector. More than $3 trillion of railroads, energy companies, postal services, airports, and other businesses have been privatized.19 Governments of both the political right and left have sold off state-owned businesses. Privatization spurs economic growth. It allows entrepreneurs in competitive markets to reduce costs, improve service quality, and increase innovation. Privatization also benefits the environment by reducing activities that waste resources. Despite the global success of privatization, reforms have largely bypassed our own federal government. There are many activities that have been privatized abroad that remain in government hands in this country. That creates an opportunity for US policymakers to learn from foreign privatization and enact proven reforms here. Table 2 includes the privatization of Amtrak, the air traffic control system, airport screening, electric utilities, and the Army Corps of Engineers. Such reforms would reduce budget deficits and improve management. The savings listed in the table stem from the elimination of federal subsidies to these activities. Consider the nation’s air traffic control (ATC) system, which is run by the Federal Aviation Administration. The FAA’s modernization efforts have often fallen behind schedule and gone overbudget.20 The ATC system needs major improvements to meet rising travel demands, but the FAA is not up to the challenge. The solution is to privatize the ATC system and separate it from the government. Canada privatized its ATC in 1996, setting

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up a private, nonprofit corporation, Nav Canada.21 The company is self-supporting from charges on aviation users. It is one of the safest systems in the world, and has won international awards for its efficient and innovative management.22

Conclusions Without reforms, projections show that federal spending will consume an increasing share of the US economy in coming years. It seems unlikely that American voters would let the government grow endlessly without demanding major budget changes. Also, to support the projected rise in spending, the government would need to raise taxes substantially. But it is unlikely that taxes could be raised much above current levels because of resistance from citizens and the realities of the global economy.23 Policymakers will have to make large spending cuts sooner or later, and the sooner the better to avoid accumulating more debt. They should begin reforming the government with the menu of cuts presented here. Leaders of other nations have pursued vigorous cost cutting when their debt started getting out of control, and there is no reason why our political leaders cannot do the same. Notes

1 Congressional Budget Office, “The Budget and Economic Outlook: 2017 to 2027,” January 2017. 2 Chris Edwards, “Central Planning and Government Failure,” DownsizingGovernment .org, Cato Institute, September 2015. 3 Chris Edwards, “Bureaucratic Failure in the Federal Government,” DownsizingGovernment.org, Cato Institute, September 2015. 4 Chris Edwards, “We Can Cut Government: Canada Did,” Cato Policy Report, Cato Institute, May–June 2012. For the latest data, see www.fin.gc.ca. 5 Congressional Budget Office, “The Budget and Economic Outlook: 2017 to 2027,” January 2017. 6 As the deficit was reduced, interest costs would fall. I modeled interest costs using CBO projections. I adjusted for the fact that federal debt held by the public is projected to grow faster in coming years than indicated by the accumulation of annual deficits. 7 ACA tax revenues are about 0.7 percent of GDP annually. See Congressional Budget Office, Letter to Speaker John Boehner regarding H.R. 6079, July 24, 2012.

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Government Spending and the Deficit Must Be Decreased 8 Chris Edwards, “Corporate Tax Cuts: Canada’s Experience,” Cato at Liberty, Cato Institute, April 21, 2017. And see Chris Edwards, “Corporate Tax Rates and Revenues in Britain,” Cato at Liberty, Cato Institute, March 8, 2017. 9 Some of the Medicare and Social Security savings were based on options in Congressional Budget Office, “Options for Reducing the Deficit: 2017 to 2026,” December 8, 2016. 10 The figures for Table 2 are mainly sourced from the Budget of the U.S. Government, Fiscal Year 2018, Analytical Perspectives (Washington: Government Printing Office, 2017), Table 26-1. The figures are estimates for fiscal 2017. 11 Note that the values of cuts would be greater in 2027 than in 2017. I have assumed that the values would grow at the same rate as discretionary spending in the CBO baseline. 12 Chris Edwards, “Independence in 1776; Dependence in 2014,” Cato at Liberty, Cato Institute, July 3, 2014. For the most recent count, see www.cfda.gov. 13 The number of programs is discussed in Chris Edwards, “Fiscal Federalism,” Cato Institute, June 2013, www.DownsizingGovernment.org/fiscal-federalism. 14 Benjamin H. Friedman and Christopher Preble, “A Plan to Cut Military Spending,” Cato Institute, November 2010, www.DownsizingGovernment.org/defense. 15 This figure is in addition to the Medicaid savings from repealing the ACA. 16 Some of these are described in Congressional Budget Office, “Options for Reducing the Deficit: 2015 to 2024,” November 2014. 17 The current improper payment rate is 11 percent, according to the Centers for Medicare and Medicaid Services. 18 Chris Edwards and Michael Cannon, “Medicare Reforms,” Cato Institute, September 2010, DownsizingGovernment.org/hhs. 19 Chris Edwards, “Privatization,” DownsizingGovernment.org, July 12, 2016. 20 Chris Edwards, “Privatizing Air Traffic Control,” DownsizingGovernment.org, Cato Institute, April 8, 2016. 21 www.navcanada.ca. 22 Chris Edwards, “Privatizing Air Traffic Control,” DownsizingGovernment.org, Cato Institute, April 8, 2016. 23 In short, as taxes were raised the economy would weaken and the tax base would move abroad. This theme is explored in Chris Edwards and Daniel J. Mitchell, Global Tax Revolution (Washington: Cato Institute, 2008).

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9

Most States Require a Balanced Budget by Law National Conference of State Legislatures

First organized on January 1, 1975, the National Conference of State Legislatures is an organization dedicated to supporting, strengthening, and defending state legislatures. This viewpoint suggests that the federal government might take a lesson from state governments. It examines the issue of having a balanced budget as it applies to state governments and the federal government. All states except Vermont are required by law to balance the budget. The same is not true for the federal budget.

R

equirements that states balance their budgets are often said to be a major difference between state and federal budgeting. State officials certainly take an obligation to balance the budget seriously, and in the debate over a federal balanced budget in the early- and mid-1990s, much of the discussion centered on the states with balanced budgets. This article is concerned with the nature, definition and enforcement of state balanced-budget requirements.

Nature of State Balanced-Budget Requirements All the states except Vermont have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional “State Balanced Budget Requirements,” National Conference of State Legislatures, April 12, 1999. Reprinted by permission © National Conference of State Legislatures.

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Most States Require a Balanced Budget by Law

provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that “some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.” The requirements vary in stringency from state to state. In some states the requirement is that the introduced budget be balanced, or that the enacted budget be balanced. In other states policymakers are required to ensure that expenditures in a fiscal year stay within the cash available for that fiscal year. Other states may carry unavoidable deficits into the next fiscal year for resolution. There are three general kinds of state balanced bud­get requirements: • The governor’s proposed budget must be balanced (43 states and Puerto Rico). • The budget the legislature passes must be balanced (39 states and Puerto Rico). • The budget must be balanced at the end of a fiscal year or biennium, so that no deficit can be carried forward (37 states and Puerto Rico). Such provisions can be either constitutional and statutory, but are more rigorous if they are constitutional since they are not subject to legislative amendment. Some states have two or all three of the possible balanced-budget requirements, and a few have only a statutory requirement that the governor submit a balanced budget. Weighing such considerations against one another, one federal study concluded that 36 states have rigorous balancedbudget requirements, four have weak requirements, and the other 10 fall in between those categories.

What Has to Be Balanced? State balanced budget requirements in practice refer to operating budgets and not to capital budgets. Operating budgets include annual expenditures—such items as salaries and wages, aid to local 67  x

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governments, health and welfare benefits, and other expenditures that are repeated from year to year. State capital expenditure, mainly for land, highways, and buildings, is largely financed by debt. Court decisions and referendums on borrowing have led to the exclusion of expenditures funded by long-term debt from calculations whether a budget is balanced. In practice, the following kinds of state revenues and expenditures also have little impact on state balanced budgets: • Almost all federal reimbursements or grants to a state are committed to specific purposes, and the governor and legislature have little discretion over the use of most federal funds. • Transportation trust fund money raised from state motor fuel taxes is usually earmarked for highways and other transportation purposes. • Some tax collections may be diverted to local governments or other specified purposes without appropriations. • Some states allow agencies or programs to collect and spend fees, charges or tuition without annual or biennial appropriations. In each case, it is practically impossible for revenues and expenditures to get out of balance, since expenditures are controlled by available funds. Thus it is not surprising that the focus of “balancing the budget” tends to be on the general fund although general fund expenditures compose only 50 percent to 60 percent of total state spending.

Enforcement of Balanced Budget Requirements State requirements for balanced budgets do not impose legal penalties for failure to do so. There are, however, two sorts of enforcement mechanisms. Prohibitions against carrying deficits into the next fiscal year and restrictions on the issuance of state debt help to enforce balanced budget provisions by making it difficult to finance a deficit. In many states governors or joint x 68

Most States Require a Balanced Budget by Law

legislative-executive commissions can revise budgets after they are enacted to bring them into balance. Unlike the federal government, states are not able to issue debt routinely. Issues of general obligation debt require at least the approval of the legislature and in many states, voter approval. The issue of revenue bonds requires legislation to create an agency to issue bonds and the creation of a revenue stream to repay the debt. These practices mean that the issuance of debt is fully in the public view. It is extremely rare for a state government to borrow long-term funds to cover operating expenses, although Louisiana did in 1988 and Connecticut did in 1991. There do not appear to be any other examples of this practice from recent years. A legislature and governor can jointly revise a budget at any time. But most legislatures are not in session throughout the year, and some legislatures meet only for a few months every other year. Requiring legislative consent for every change in a budget would impose delays or the costs of special sessions. Therefore, many state constitutions allow governors or special commissions to revise budgets after they have been enacted to bring expenditures into line with revenues. Thirty-six states allow governors some degree of authority to reduce spending when it is necessary to maintain a balanced budget, even if enacted budgets call for specific amounts of expenditure. Some states prohibit executive budget revisions, and many restrict the amounts and nature of such reductions. Some states have, in addition, joint legislative and executive boards or commissions that are constitutionally permitted to make budget revisions, for example, to deal with unforeseen revenue shortfalls, emergencies, or unanticipated federal funds.

Practice State balanced-budget rules are not as rigid as those recommended for the federal government in the early 1990s, which would have forbidden total expenditures above total revenues in any year and would have prohibited new borrowing. By this standard, states 69  x

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routinely run deficits because they borrow to finance capital expenditures. But this does not violate state balanced-budget requirements. Nor does rolling deficits in operating funds forward from one fiscal year to another, if a state constitution permits the practice. Fiscal stress, however, can induce governors and legislators to adopt expedients so they can observe the letter, if not the spirit, of balanced budget requirements. Among these are sales of state assets, postponing payments to vendors, reducing payments to pension funds, borrowing from one state fund to finance expenditures from another, and “creative” accounting. Such expedients reflect the stress that can arise between legal demands for a balanced budget and political demands for the continuation of state programs without tax increases. The fact that such expedients tend to be limited to times of fiscal stress is in itself a measure of how seriously state elected officials take their responsibility to produce balanced budgets.

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10

Jonathan Masters As deputy editor at the Council on Foreign Relations, Jonathan Masters writes on issues of national security and civil liberties. Jonathan Masters outlines the ideas and strategies of several experts who argue that the US federal budget deficit must be brought under control and lowered. The experts offer different ways to achieve this, but all agree that spending must be decreased. Budget deficits and debt threaten the United States’ position as a global economic power, so economic changes are necessary for the country to compete in the global market.

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f current policies remain in place, the Congressional Budget Office (CBO) estimates the US budget deficit for 2011 will be close to $1.5 trillion, or 9.8 percent of GDP [gross domestic product]. While CBO “benchmark” projections see a short-term, gradual decline in deficits as the economic recovery continues, long-term deficits loom large with ballooning entitlement outlays stemming from an aging population and rising health care costs. Most economists fear that large budget deficits and growing debt poses a considerable threat to US global economic competitiveness. Maya MacGuineas of the New America Foundation suggests the

“The Budget Deficit and U.S. Competitiveness,” by Jonathan Masters, Copyright (2011) by the Council on Foreign Relations,. Reprinted by permission.

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government needs a dramatic shift from a consumption-oriented budget to one centered on investment, including R&D and human capital. The Peterson Institute’s C. Fred Bergsten says an “early correction” is necessary to prevent investment-killing interest rate hikes and an inopportune rise in the dollar’s exchange rate. CFR’s [Council on Foreign Relations] Sebastian Mallaby says ongoing deficits may reduce the willingness of major investors to buy and hold US Treasuries, pushing up interest rates and threatening the dollar’s reserve currency status. Daniel Mitchell of the Cato Institute asserts the best way to control red ink is to cap the rise of federal spending and allow revenue growth from the economic recovery to “catch up.” The Economist’s Greg Ip advocates a “medium-term plan” that includes a reform of the tax system and, possibly, raising the retirement age.

Maya MacGuineas The United States is on an unsustainable fiscal path, and changes will be made, whether on our own terms or because we are forced to by markets. But dealing with our deficits and debt needs to be more than just an exercise in getting the numbers to add up (which will be hard enough). A balanced, multi-year fiscal consolidation plan needs to be a central part of a strategy to enhance US growth and competitiveness. If we fail to reduce our borrowing needs, at some point there will be upward pressure on interest rates, increasing the cost of capital as well as the interest payments owed by the government, dampening investment, and harming economic growth. This could come on gradually or in the form of a fullblown fiscal crisis. But dealing with the debt is only the first step. At the same time we need to ensure that we dramatically shift our budget from a consumption-oriented budget to an investment-based budget. This will mean spending more on certain areas of public investment, from research and development to investment in human capital, and less—much less—on many of our major entitlement programs x 72

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such as Social Security and Medicare, for those who do not need them. Moreover, our tax code needs to be overhauled and updated for the modern economy. Revenues will have to go up to deal with the deficit, but it is thus more important than ever to be careful to do as little damage to the economy as possible. The tax base should be reconsidered, rates should be reduced when possible, and issues such as the mobility of capital must be taken into account. Consumption taxes could help promote savings; a carbon tax could help lead to improved energy policies; and reforming tax expenditures could greatly improve the efficiency, complexity, and fairness of our tax code. Overwhelming? Somewhat. But if we use the need to deal with our fiscal situation as an excuse to make some long-overdue changes, our economy could benefit tremendously.

C. Fred Bergsten, Director, Peterson Institute for International Economics Early and effective correction of the budget deficit is critical to the global competitiveness of the US economy. This is because there are only two possible financial consequences of our continuing to run deficits of more than $1 trillion annually as now projected for the next decade or more. One is sky-high interest rates that would crowd out private investment. The other is huge borrowing from the rest of the world that would push the exchange rate of the dollar so high as to price US products out of international markets. Either outcome would severely undermine US global competitiveness. The saving rate of the US private sector, despite modest recovery from its rock-bottom lows prior to the recent crisis, is far too meager to finance enough investment to grow US productivity and economic output at an acceptable rate. Government deficits anywhere near current levels tap such a large share of this pool of funds that they starve the capital needs of productive enterprise.
The traditional “escape value” from this dilemma, facilitated by the central international role of the dollar, is for the United States 73  x

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to borrow abroad. We can do so in only two ways, however: by offering interest rates so high that they will also stultify domestic investment or, more likely, by letting the dollar climb to levels that are substantially overvalued in terms of US trade competitiveness. Every rise of a mere 1 percent in the trade-weighted average of the dollar in fact reduces the US current account balance by $20 to $25 billion, after a lag of two years, cutting economic growth and destroying 100,000 to 150,000 jobs in an economy already suffering from high unemployment. Partly as a result of persistent budget deficits, the dollar has been overvalued by at least 10 percent—and frequently by much more—over the past forty years. As a result, US competitiveness and the entire US economy have been severely undermined. In addition, the United States has become by far the world’s largest debtor country, and its external balance is on a wholly unsustainable trajectory. The trade and budget deficits are not “twins” in any mechanistic sense. The latter inherently promotes the former, however, as we have observed over these last four decades. Elimination of the fiscal imbalance, and preferably the maintenance of a modest surplus over the course of the business cycle to produce an adequate level of overall national saving, is imperative to avoid further severe deterioration of the international economic position of the United States.

Sebastian Mallaby The United States is running an unsustainable budget deficit. The International Monetary Fund calculates that it will come to 10.8 percent of GDP in 2011, worse than the 8 percent projected for the group of advanced G20 countries and far worse than the 2.5 percent projected for the emerging G20 countries. The future doesn’t look much better. The IMF calculates that the gap between the current budget path and a sustainable budget path is larger for the United States between now and 2016 than for any other country bar Japan. Deficits for a few years don’t matter. The United States can borrow easily to cover its budget gap thanks to the dollar’s status x 74

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as the leading reserve currency. But sustained deficits do matter. They add to the stock of national debt, driving up the cost of interest payments and draining the government of resources. When cumulative deficits drive national debt to around 90 percent of GDP, a country’s growth rate starts to suffer. On current projections, the United States will hit that level within a decade. Sustained US deficits may also create doubts about the US commitment to repay creditors. The more the US government owes, the more tempting it is to reduce the value of those obligations via inflation or a depreciating dollar. The fear that US officials will succumb to these temptations, justified or not, may dampen investors’ willingness to hold US Treasuries, threatening the dollar’s reserve currency status. At some unpredictable point, investor jitters could spark a rush for the exit, driving US interest rates up and causing the dollar to fall sharply. How pressing is this risk? CFR’s Center for Geoeconomic Studies tracks the foreign-exchange reserves held by BRIC [Brazil, Russia, India, and China] central banks; the data show that faith in the dollar may already be waning. China, for example, held 70 percent of its reserves in dollars in 2005, but the share has since fallen to 63 percent. Another CFR chartbook underscores the importance of foreign governments’ confidence in the dollar. More than a third of US government debt is in the hands of foreign official investors. If they were to sell even a small share of their stake, the United States would be in trouble.

Daniel Mitchell Competitiveness, like beauty, is in the eye of the beholder. But there’s presumably widespread agreement that it is good for a nation to have a prosperous and dynamic economy that generates above-average income and growth. Government impacts competitiveness in many ways, including monetary policy, trade policy, and regulatory policy. Moreover, the presence of sound institutions, such as property rights and the rule of law, is critical for an economy to have a good foundation. 75  x

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Fiscal policy also is an important part of the mix. Excessive government spending can slow growth by diverting labor and capital from more productive uses. Punitive tax rates can hinder prosperity by discouraging work, saving, investment, and entrepreneurship. And large budget deficits can undermine competitiveness by “crowding out” private capital and building negative expectations of future tax increases. In extreme cases, high budget deficits can destabilize entire economies, either because a government resorts to the printing press to finance deficits or because investors lose faith in a government’s ability to service debt, thus leading to a sovereign debt crisis. The United States hopefully is not close to becoming either Argentina or Greece, but the trend in recent years is not very encouraging. The burden of government spending has exploded, which, combined with temporarily low tax receipts because of a weak economy, has pushed annual red ink above $1 trillion per year. The good news is that the deficit situation will get a bit better in coming years. Even modest growth rates will cause revenues to climb (that’s the kind of tax increase nobody opposes). Indeed, revenues will soon be above their long-run average, as a share of economic output. The bad news is that we’ll still have too much red ink because the federal government’s budget is about twice as big as it was when Bill Clinton left office. Even more worrisome, government borrowing actually will begin to increase again by the end of the decade because of demographic changes such as retiring baby boomers. The best way to control this red ink while also boosting competitiveness is to cap the growth of government spending. If revenues increase by an average of 7 percent each year (as the president’s budget projects, even without tax increases), then we can reduce deficits by making sure spending grows by less than 7 percent annually. x 76

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Given the enormous size of the budget deficit, this doesn’t solve the problem overnight. If spending was allowed to grow 2 percent each year, the budget wouldn’t be balanced until 2021. But it would be a big step on the road to fiscal recovery. To turn a phrase upside down, this makes a necessity out of virtue. Spending restraint is good for growth since it leaves a greater share of resources in the productive sector of the economy. And since this also happens to be the best way of letting revenue catch up to spending, it also solves the deficit issue.

Greg Ip Textbook economics tells us that government deficits eat up scarce savings, pushing up interest rates and the dollar. That discourages private investment and exports, a lethal combination for our productivity and competitiveness. The textbook does not apply to our current circumstance: Today’s deficit is occurring against a backdrop of deeply depressed private demand, which is evident from the fact that interest rates are so low. This argues against too rapid a cut in the deficit, because the Federal Reserve can’t compensate for fiscal austerity through lower interest rates. At some point, though, the recovery will be more firmly established. If we still haven’t put the deficit on a firm downward path by then, interest rates will rise, reflecting not just competition for savings but compensation to investors who fear we’ll escape our debts via default or inflation. That interest rate penalty will add to the cost of capital of every business in the United States. A medium-term plan to reduce the deficit will help keep both interest rates and the dollar low, speeding the reorientation of the American economy from borrowing and consumption to saving and exports. There are no painless ways to reduce the deficit: Spending will have to drop and taxes will have to rise. But it can be done in ways that make the economy more productive. On spending, for example, gradually raising the retirement age to sixty-seven then indexing it to life expectancy will reduce future liabilities 77  x

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for both Social Security and (somewhat less) for Medicare, while at the same time expanding the supply of labor by encouraging Americans to work longer. Taxes can be raised via reform that makes the entire system less of a burden to growth. Relative to other countries, America taxes income too much and consumption too little. This can be corrected either through a broad-based consumption tax or, more narrowly, by raising the gasoline tax. This would both not only raise revenue and cut carbon emissions, it would do more to make alternative energy viable than our current preference for subsidies and mandates. Rather than raise marginal tax rates, which discourages work and saving, better to eliminate distortionary exemptions such as for mortgage interest which tilts investment toward housing.

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11

Jonathan Masters As deputy editor at the Council on Foreign Relations, Jonathan Masters writes on issues of national security and civil liberties. Jonathan Masters analyzes the complex issue of US debt and the potential outcomes if the US Treasury continues borrowing to meet its financial obligations. Masters defines and explains the debt limit— or “ceiling”—and the consequences that may result from hitting or exceeding it. He also discusses the question of whether having a debt ceiling makes sense from a policy perspective.

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he US Treasury has borrowed trillions of dollars over the past decade, much of it from foreign investors, to help finance two long wars, rescue the US financial system, and promote economic growth via fiscal stimulus. The country’s ability to borrow is restricted by statute, and Congress has perennially been called upon to authorize the issuance of new debt space. The federal government reached its borrowing capacity in May 2013, and, in the absence of new borrowing authority from Congress, the Treasury is taking extraordinary measures to meet its financial obligations. The United States has always been able to raise its debt limit in a timely fashion, and many economists assert that

“U.S. Debt Ceiling: Costs and Consequences,” by Jonathan Masters, Copyright (2013) by the Council on Foreign Relations. Reprinted by permission.

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a failure to do so in late 2013 would plunge the government into default and precipitate an acute fiscal crisis.

What Is the US Federal Debt Limit? The government must be able to issue new debt as long as it continues to run a budget deficit. The debt limit, or “ceiling,” sets the maximum amount of outstanding federal debt the US government can incur by law. As of May 2013, this number stands at $16.699 trillion. Increasing the debt limit does not enlarge the nation’s financial commitments, but allows the government to fund obligations already legislated by Congress. Hitting the debt ceiling would hamstring the government’s ability to finance its operations, like providing for the national defense or funding entitlements such as Medicare or Social Security. Under normal circumstances, the government is able to auction off new debt (typically in the form of US Treasury securities) in order to finance annual deficits. However, the debt limit places an absolute cap on this borrowing, requiring congressional approval for any increase (or decrease) from this statutory level. A debt limit was instituted with the Second Liberty Bond Act of 1917, and Congress has raised the cap more than seventy times since 1962. Some analysts contend that by requiring legislative consent, the debt limit affords Congress some oversight authority and engenders some fiscal accountability. Historically, opposition parties have often used debt-limit negotiations to protest existing policies. Increasing the debt limit does not enlarge the nation’s financial commitments, but allows the government to fund obligations already legislated by Congress.

How Has the Debt Limit Been Raised Recently? The debt ceiling was raised as part of the Budget Control Act of 2011, a bill signed by President Obama in August of that year, just hours before a government default. The last-minute

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legislative compromise set forth a process by which Treasury’s borrowing capacity was increased by a total of $2.1 trillion in three increments: by $400 billion in August, $500 billion in September, and $1.2 trillion in January 2012. The federal government hit its debt limit again in December 2012, whereupon Treasury was forced to take emergency measures to extend borrowing for several weeks. In February, President Obama signed the No Budget, No Pay Act of 2013, a bill that suspended enforcement of the debt ceiling until late May. On May 19, the federal borrowing limit came back into force and was raised $305 billion to $16.699 trillion.

When Will the United States Hit Its Debt Ceiling? The federal government reached its capacity to issue debt on May 20, 2013, directly after the ceiling was last raised. However, Secretary Jacob Lew, as his predecessors had before him, said Treasury would begin taking certain “extraordinary measures” (discussed below) that would enable the government to pay its bills and stave off default for several weeks. “I respectfully urge Congress to protect America’s good credit and avoid the potentially catastrophic consequences of failing to act by increasing the debt limit in a timely fashion.” On October 1, Secretary Lew penned another admonitory letter to Congress that specified October 17 as the date by which “final extraordinary measures” would be exhausted. “There are no other legal and prudent options to extend the nation’s borrowing authority,” he wrote.

What Can the Government Do If the Debt Limit Is Not Raised? The US Treasury has the power take extraordinary measures to forestall a default—the point at which the government fails to meet principal or interest payments on the national debt. These include under-investing in certain government funds, suspending

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the sales of nonmarketable debt, and trimming or delaying auctions of securities. Congressional delay in raising the debt ceiling forced Treasury to begin taking some of these measures in May 2011, in January 2013, and again in May of that year. If Congress does not act to raise the debt limit despite such emergency measures, federal spending would have to plummet or taxes would have to rise significantly (or a combination thereof). However, former Treasury secretary Timothy Geithner warned in the past that because the government’s obligations are so great, “immediate cuts in spending or tax increases cannot make the necessary cash available.” If Treasury is unable to issue new debt or take further actions to bridge the deficit, the government would be forced to default on some of its financial commitments, limiting or delaying payments to creditors, beneficiaries, vendors, and other entities. Among other things, these payments could include military salaries, Social Security and Medicare payments, and unemployment benefits.

What Are the Implications for Financial Markets? Most economists, including those in the White House and from former administrations, agree that the impact of an outright government default would be severe. Federal Reserve Chairman Ben Bernanke has said a US default could be a “recovery-ending event” that would likely spark another financial crisis. Short of default, officials warn that legislative delays in raising the debt ceiling could also inflict significant harm on the economy. Many analysts say congressional gridlock over the debt limit will likely sow significant uncertainty in the bond markets and place upward pressure on interest rates. Rate increases would not only hike future borrowing costs of the federal government, but would also raise capital costs for struggling US businesses and cashstrapped homebuyers. In addition, rising rates could divert future taxpayer money away from much-needed federal investments in such areas as infrastructure, education, and health care.

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The protracted and politically acrimonious debt limit showdown in the summer of 2011 prompted Standard and Poor’s to take the unprecedented step of downgrading the US credit rating from its triple-A status, and analysts fear such brinksmanship in late 2013 could bring about similar moves from other rating agencies. “Failure to raise the federal debt ceiling in a timely manner (i.e., several days prior to when the Treasury will have exhausted extraordinary measures and cash reserves) will prompt a formal review of the US sovereign ratings and likely lead to a downgrade,” said Fitch Ratings, which maintains a “negative” outlook on the US triple-A rating. A 2012 study by the nonpartisan Government Accountability Office [GAO] estimated that delays in raising the debt ceiling in 2011 cost taxpayers approximately $1.3 billion for FY 2011. The stock market also was thrown into frenzy in the lead-up to and aftermath of the 2011 debt limit debate, with the Dow Jones Industrial Average plunging roughly 2,000 points from the final days of July through the first days of August. Indeed, the Dow recorded one of its worst single-day drops in history on August 8, the day after the S&P downgrade, tumbling 635 points. The United States failed to pass an annual spending measure by October 1, 2013, the start of the fiscal year, resulting in a partial shutdown of federal services that analysts say could eventually drag on economic growth, and even cause a recession if no action is taken in the short term. “If such projections prove accurate, the weaker than expected economic expansion would be even more susceptible to the adverse effects from a debt ceiling impasse than prior to the shutdown,” said a brief from the Treasury Department.

What Are the Implications for the Dollar? Historically, the US Treasury market has been driven by huge investments from surplus countries like Japan and China, which view the United States as the safest place to store their savings. A 2011 Congressional Research Service report suggests that a loss

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of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings, thus inducing others to do so, and causing a run on the dollar in international markets. However, others claim that a sudden sell-off would run counter to foreign economic interests, as far as those interests run parallel to a robust US economy. While many US exporters would benefit from dollar depreciation because it would increase foreign demand for their goods (effectively making them cheaper), the same firms would also bear higher borrowing costs from rising interest rates. A potential long-term concern of some US officials is that persistent volatility of the dollar will add force to recent calls by several other countries for an end to its status as the world’s reserve currency. A 2010 survey performed by the McKinsey Global Institute found fewer than 20 percent of business executives surveyed expected the dollar to be the dominant global reserve currency by 2025.

Does a Federal Debt Limit Still Make Good Policy Sense? Many experts contend that the federal debt ceiling is an anathema to sound fiscal policy, suggesting it unwise to inhibit the government’s ability to meet financial obligations already legislated. “It serves no useful purpose to allow members of Congress to vote for vast cuts in taxation and increases in spending and then tell the Treasury it is not permitted to sell bonds to cover the deficits,” writes budget expert Bruce Bartlett. “No other nation has such a screwy system,” he notes. A GAO analysis of the 2011 debt ceiling crisis recommended “that Congress should consider ways to better link decisions about the debt limit with decisions about spending and revenue to avoid potential disruptions to the Treasury market and to help inform the fiscal policy debate in a timely way.” In December 2012, the White House proposed amending the law in order to grant the president greater freedom to raise the x 84

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debt ceiling as needed. Under the proposal, which was rejected by the GOP [Republican] leadership, the president would have been empowered to effectively raise the limit unilaterally unless a two-thirds majority of Congress voted in opposition. Chairman of the Senate Republican Policy Committee John Barrosso (R-WY) said Congress should not relinquish its control over the issuance of federal debt. “By exercising its constitutional authority through a debt limit, Congress allows itself a moment of reflection to consider the policies that have led to the current debt and consider reforms that will decrease future debt trajectory.” He adds that ending the limit “would remove the last action-forcing mechanism to address our nation’s runaway debt.”

How Does a Debt Limit Crisis Differ from a Government Shutdown? A partial federal shutdown took place on October 1, 2013, after Congress failed to appropriate funds for the current fiscal year. This last occurred in October 1995. In such a case, a specific set of procedures is enacted. A large portion of the federal government— work deemed “non-essential”—is suspended indefinitely and workers are furloughed without pay until funding is reestablished. A shutdown does not impede the government’s ability to pay interest or principal on its debt as long as Treasury has appropriate headroom under the ceiling. In other words, a shutdown does not precipitate a federal default. On the other hand, if Congress fails to raise the debt limit, the government can no longer borrow funds, but federal operations may continue for the period that Treasury is able to use existing revenue or secure additional resources through special measures. Therefore, most employees will continue to be paid, at least in the short term. However, Treasury’s continuing inability to borrow further capital would eventually lead to a default, assuming radical revenue increases or spending decreases are not instituted. Most experts agree that the potential negative consequences of a debt-limit debacle are much greater and far-reaching than 85  x

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that of a shutdown—particularly given the risk of a government default that would jeopardize the full faith and credit of the United States. The impact of a shutdown, while painful to the workers who are furloughed and the citizens who are temporarily denied certain government services, is limited to the symbolic message of political paralysis it presents to markets.

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12

Romina Boccia Romina Boccia is an expert on economic and fiscal matters at the Heritage Foundation. She focuses on issues of government spending and the national debt. In this excerpted viewpoint, Romina Boccia summarizes the situation of increasing debt confronted by the United States in 2013. She points to lower tax revenues (due to the recession) and temporary spending measures as key contributors to the deficit, which has resulted in the government having to borrow money to finance spending growth. A case is made for large cuts in spending, including cuts to entitlement programs and health care. If the suggested cuts are made, she argues that healthy economic growth will be the result. Austerity is the result of countries’ democratic decisions to wait until the last minute before acting, under the pressure of the markets, mainly by raising taxes rather than implementing long-waited reforms. —Lorenzo Bini Smaghi, former member of the executive board of the European Central Bank.1

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embers of the Senate and the House of Representatives have convened the first budget conference in four years. With the deadline of December 13 [2013] for the conference report,

“Cutting the U.S. Budget Would Help the Economy Grow,” by Romina Boccia, The Heritage Foundation, November 20, 2013. Reprinted by permission.

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lawmakers have little time to agree on a budget plan for fiscal year 2014 and beyond, and yet so much depends on their succeeding. Excessive federal spending and high debt slow economic growth. Despite a broad consensus that the US fiscal path is unsustainable without significant reductions in spending— especially in the growing spending on entitlements—many policymakers are hesitant to embrace large-scale budget cuts for fear of slowing the economy. This fear is misplaced because significant budget cuts today would enable stronger economic growth tomorrow. If lawmakers neglect entitlement reform and further spending reductions, growing spending and high debt will significantly depress US economic growth.

The Budget Situation Federal spending is taking an increasing share of the productive resources in the economy. At well above one-fifth of gross domestic product (GDP), federal spending is too high, and chronic deficits are quickly driving publicly held debt above three-fourths of GDP. The federal government has used borrowing to finance much of the spending growth over the past two decades. For the past four years, low tax revenues due to the recession and temporary government spending measures—such as the stimulus, the Troubled Asset Relief Program (TARP), and assistance programs— have resulted in consecutive trillion-dollar annual deficits. Despite expiration of these temporary spending measures, sequestration, and a surge in revenues, annual deficits remain staggeringly high at $700 billion for fiscal year 2013 and will surge beyond $1 trillion before the end of the decade.2 Growing federal spending, especially on health care and retirement entitlements, will drive deficits and debt to even higher levels after 2023. Tax revenues are quickly growing to beyond their historical average of about 18 percent of GDP. With the $3.2 trillion in tax increases over the decade enacted under President Barack Obama, tax revenues are now growing faster than spending, but not enough to curb the growth in deficits and debt.3 x 88

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Spending will remain well above the historical average of 20.2 percent in the near term and will dramatically surge after the end of the decade as entitlement programs, including the Medicaid expansion and health care subsidies in the Affordable Care Act (Obamacare), overwhelm the federal budget.

Sequestration Much of the budget conference debate is focused on undoing sequestration, a 2.5 percent reduction of projected spending over 10 years that went into effect on March 1, 2013. This demonstrates the extent to which policymakers are willing to drag their feet on even moderate spending reductions. When Congress and the President negotiated over increasing the debt ceiling in the summer of 2011, they agreed to raise the debt limit in three installments for a total increase of $2.1 trillion. To offset this increase, they enacted caps to limit the growth in discretionary spending to save $917 billion over 10 years. To achieve at least $1.2 trillion in additional spending reductions, Congress established a “super committee” to identify specific cuts. Sequestration, an idea originally proposed by the Obama Administration,4 was intended as a mechanism to force cuts by threatening automatic spending cuts if the super committee failed, which it ultimately did.5 These automatic spending reductions demonstrate Washington dysfunction. Rather than deliberately identifying waste and inappropriate federal spending, the President and Congress relinquished their responsibility to govern to a blunt instrument that barely even slows the growth in total federal spending. Even with sequestration, nominal federal spending is projected to grow by 69 percent in 10 years. Lawmakers should deliberately budget within sequestration spending levels and do much more to slow the explosion in spending and debt. […]

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Budget Cuts Today, Economic Growth Tomorrow Lawmakers face a choice of either confronting the nation’s spending crisis head-on by reforming entitlement and other structural spending or continuing to operate with their heads in the sand, waiting for a spending and debt tsunami to wash over the nation and drown economic growth. Research shows that reductions in government spending free resources in the economy for investment and job creation, thus spurring economic growth. For example, the CBO [Congressional Budget Office] assessed three different deficit scenarios and their impact on the economy: a $2 trillion increase in primary deficits, a $2 trillion decrease in primary deficits, and a $4 trillion decrease in primary deficits. The CBO’s results show that any short-term boost in gross national product (GNP)6 from higher deficit spending in the short term would be more than offset by the long-term reduction in economic growth from higher interest rates and a crowding-out effect of private investment. Equally, any short-term dip in GNP from additional deficit reduction would be followed by stronger economic growth over the long term.7 Government spending changes the composition of total demand, such as by increasing consumption at the expense of investment. Poorly targeted deficit spending would boost GNP in the short term, but leave less available for productive investments in the future. Deficit spending shifts economic resources from the future to the present, leaving younger generations with a larger tax burden and fewer resources to invest. In reverse, lower government spending frees economic resources for investment in the private sector, which improves consumer wealth. In sum, additional government spending today harms economic growth in the long term, while budget cuts today would enable the economy to grow much faster tomorrow. The CBO scenario does not specify how deficit reduction would be accomplished—whether through entitlement reforms or by raising taxes. However, the mechanism is important. If the President and Congress raised taxes further, they would reduce x 90

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the incentives to work, save, and invest, consequently lowering economic growth. Higher taxes would also mean that fewer resources would be available in the economy to build businesses and hire workers. Balancing the budget with a massive tax increase rather than by limiting spending is a recipe for economic stagnation. The long-term health of the economy depends less on a balanced budget than on limiting the size and scope of the government. […]

Much Larger Spending Cuts Needed Despite the hype about sequestration, federal spending will grow rapidly over the next decade and will accelerate beyond the 10-year budget window. In addition to enforcing sequestration, lawmakers should reform entitlement and other structural spending to rein in spending and debt now and not wait until a debt crisis forces severe austerity measures on Americans. Putting the budget on a path to balance with spending cuts would spur economic growth by reducing uncertainty and by freeing up resources for investment and job creation. As the European crisis demonstrates, the option to make gradual changes will expire, and Americans and the US economy will suffer a selfinflicted wound from unavoidable austerity measures if lawmakers continue to procrastinate the inevitable. References

1. Lorenzo Bini Smaghi, “Reform Denial Poses Bigger Threat to Italy Than Austerity,” Financial Times, The A-list blog, March 5, 2013, http://blogs.ft.com/the-a -list/2013/03/05/reform-denial-poses-a-bigger-threat-to-italy-than-austerity/(accessed March 6, 2013; subscription required). 2. Romina Boccia, Alison Acosta Fraser, and Emily Goff, “Federal Spending by the Numbers 2013,” Heritage Foundation Special Report No. 140, August 20, 2013, http:// www.heritage.org/research/reports/2013/08/federal-spending-by-the-numbers-2013. 3. Curtis Dubay and Romina Boccia, “Tax Revenue Rose Five Times Faster Than Spending Fell in 2013,” The Heritage Foundation, The Foundry, October 31, 2013, http://blog .heritage.org/2013/10/31/tax-revenue-rose-five-times-faster-than-spending-fell -in-2013/. 4. Bob Woodward, “Obama’s Sequester Deal-Changer,” The Washington Post, February 22, 2013, http://www.washingtonpost.com/opinions/bob-woodward-obamas-sequester

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The Federal Budget and Government Spending -deal-changer/2013/02/22/c0b65b5e-7ce1-11e2-9a75-dab0201670da_story.html (accessed April 1, 2013). 5. Alison Fraser, ed., “Federal Spending by the Numbers 2012,” Heritage Foundation Special Report No. 121, October 16, 2012, http://www.heritage.org/research /reports/2012/10/federal-spending-by-the-numbers-2012. 6. “Unlike the more commonly cited GDP, GNP excludes foreigners’ earnings on investments in the domestic economy but includes U.S. residents’ earnings overseas; changes in GNP are therefore a better measure of the effects of policies on U.S. residents’ income than are changes in GDP.” Congressional Budget Office, “Macroeconomic Effects of Alternative Budgetary Paths,” p. 3. 7. The CBO uses a common Solow-type model to consider how different deficit scenarios affect output and income based on changes to the nation’s capital stock and labor wages.

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13

John Craig and David Madland At the Center for American Progress, John Craig is a research assistant, and David Madland serves as managing director for economic policy. In this viewpoint, John Craig and David Madland demonstrate the negative effects of campaign contributions and lobbying to the US economy. The contributors and lobbyists seek income and special favors for their monetary support in a practice called “rent-seeking.” Unfortunately, according to the authors, the practice is widespread in the United States.

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he US Supreme Court struck down two campaign finance provisions in the past few years that limited independent political expenditures by corporations and other organizations and placed aggregate limits on individual donations. The Court found that the provisions infringe on the right of free speech and that the aggregate limits do not prevent a narrowly defined version of corruption. Since then, federal courts have begun overturning state lobbying regulations under the logic used by the Supreme Court. While there is considerable disagreement about whether the Court was correct in finding that those campaign finance rules failed This material “How Campaign Contributions and Lobbying Can Lead to Inefficient Economic Policy,” by John Craig and David Madland, May 2, 2014, was created by the Center for American Progress (www.americanprogress.org) . Reprinted by permission.

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to prevent corruption, imposing limits on campaign financing and lobbying may be justified for another reason—promoting productive economic activity. The primary way that campaign contributions and lobbying may dampen economic growth is via a practice known as rent-seeking— the process of seeking income through special government favors rather than through productive economic activity. When firms and individuals engage in rent-seeking behavior, it has several negative effects on economic growth. Not only do people spend more time and money trying to get a bigger piece of the economic pie for themselves rather than trying to enlarge the pie, but the policies they seek are often wasteful, inefficient, or even harmful. If rent-seeking is a successful strategy for businesses or individuals, it can impose great harm on society by slowing or even stopping economic growth. As Nobel Prize–winning economist Joseph Stiglitz explains, rent-seeking not only wastes tax dollars on unnecessary or inefficient projects—redistributing money from one part of society to the rent-seekers—but it is a “centripetal force” that hollows out the economy because “the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else.” While it is impossible to quantify the economic harm done by rent-seeking to the American economy, this issue brief reviews the literature and finds that the harm is likely quite significant. Certainly, not all money in politics is spent for the purpose of capturing private favors, but there is evidence that at least a significant percentage of it is. Most Americans do not make campaign contributions or lobby politicians. Rather, the vast majority of money spent on these activities comes from wealthy citizens and business interest groups. Moreover, studies find that businesses with the most to gain from favorable public policy engage in the most political activity. Even worse, research indicates that campaign contributions and lobbying often help shape policy outcomes, which suggests that rent-seeking efforts are often successful. While disagreement exists x 94

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about how much influence campaign contributions and lobbying have, money in politics seems to be most effective in shaping the outcomes of issues that are less visible and less ideological, exactly the type of special favors one would expect rent-seeking to target. Furthermore, there have been several findings that show a clear relationship between specific instances of lobbying or campaign contributions and government favors. To take just a few examples: • One study found that increasing lobbying reduces a corporation’s effective tax rate, with an increase of 1 percent in lobbying expenditures expected to reduce a corporation’s next-year tax rate between 0.5 percentage points and 1.6 percentage points. • Another study based on data from 48 different states found that a $1 corporate campaign contribution is worth $6.65 in lower state corporate taxes. • Finally, federal contracts were more likely to be awarded to firms that have given federal campaigns higher contributions, even after controlling for previous contract awards. These findings are deeply troubling for our democracy and our economy. And, unless actions are taken, the damage is likely to grow worse in the future. With recent court rulings knocking down important restrictions on money in politics, rent-seekers will have even greater opportunity to seek special favors, doing further harm to the economy.

Rent-Seeking Most economists agree that rent-seeking causes a net societal loss that harms the economy. Rent-seeking involves spending resources to influence a division of profits, instead of creating a good or service that other businesses or individuals are willing to pay an amount that exceeds the cost of producing said good or service. While rent-seeking exists in both private and public forms, the scope of this paper is the discussion public rent-seeking and specifically two public rent-seeking activities—lobbying and campaign funding. 95  x

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When engaging in rent-seeking from public institutions, businesses and individuals may seek favors from the government through both legal activities—lobbying and contributing to political campaigns—and illegal strategies—bribery and corruption. What identifies rent-seeking behavior is that resources are spent in an attempt to influence policy in order to obtain a greater share of benefits. The benefits targeted by rent-seeking vary but include: profits from state-created monopolies, favorable government contracts, beneficial regulations, tariffs that dampen foreign competition, and tax preferences and subsidies. The major economic concerns of rent-seeking can be categorized into three types of inefficiencies: 1. Resources are wasted engaging in rent-seeking. 2. Policies sought by rent-seeking result in an inefficient use of resources. 3. Rent-seeking policies may prove so destructive that they cause resources to sit idle. The first inefficiency created by rent-seeking is that private resources are intentionally wasted on pursuing and competing for rents rather than producing economic gain. An important caveat of this waste is that it is irrelevant whether or not the rent-seeker achieves the sought-after policy goal. What triggers this waste is the fact that time, effort, and resources were diverted away from producing goods or rendering services that others are willing to pay for and instead used to influence policy for private gain. The second economic concern of rent-seeking behavior is that the policy positions sought and protected create a misallocation of government or private resources. In the case of government resources, it may be that scarce government revenue is used to create a special interest tax subsidy instead of investing in research or infrastructure that would be more beneficial to society as a whole. Private resources may also be misallocated. Without proper regulations, for example, banks may overleverage themselves if they believe that the federal government will bail them out. x 96

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Finally, rent-seeking could prove so harmful to the economy that not only are resources not used in the most efficient manner possible, but they are actually idle. During a recession or its aftermath, for instance, workers are unemployed and significant capital remains on the sidelines. Indeed, some argue that the 2008 financial crisis—the effects of which we are still suffering from—was fueled by rent-seeking behavior. […]

Conclusion Economic growth depends upon an efficient use of resources. As this brief has outlined, however, rent-seeking is inherently inefficient because it diverts resources from potentially moreproductive activities and thus imposes significant economic costs. Sadly, the evidence suggests that there is significant rentseeking in the US economy. Not only are large sums of money spent on campaign contributions and lobbying, the research indicates that these efforts can and do shape policy outcomes. To be sure, not all effort to influence policy is clearly rent-seeking and harmful to the economy, but at least some of the policy changes brought about by money in politics have been wasteful, inefficient, or directly harmful. Additional research is needed to help clarify the scope of the harm that rent-seeking does to the US economy. But as this brief ’s review of the literature suggests, the harm is likely quite significant. Even worse, the economic costs of rent-seeking are likely to grow in the future. With the barriers that limit money in politics falling in the courts, it should be expected that even more money will be directed toward rent-seeking activities in the future.

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The United States Is Not the Only Country Suffering Slow Economic Growth United Nations

The United Nations is an intergovernmental organization that was founded in 1945. Its key goals are promoting international cooperation and maintaining international order. This viewpoint from the United Nations indicates that the United States is not the only country experiencing slow economic growth—in fact, economic uncertainties have had an effect on economies around the world. The viewpoint briefly explains the United States’ current economic situation and policies as well as those of other countries and regions, giving a larger picture of how national economies affect one another.

Global Issues

Prolonged Period of Slow Economic Growth Amid Significant Uncertainties The World Economic Situation and Prospects (WESP) 2017, launched on January 17, states that the world economy continues to face significant uncertainties and downside risks over changes in the international policy environment, unconventional monetary policy, debt overhang in emerging economies and volatile financial flows. According to the report, the world economy has yet to emerge from the period of slow growth. The world economy is estimated to have expanded by just 2.2 per cent in 2016, the slowest “World Economic Situation And Prospects: February 2017 Briefing”. Copyright © United Nations. Reprinted with the permission of the United Nations.

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rate of growth since the Great Recession of 2009. The previously anticipated recovery in global growth toward the pre-crisis trend failed to materialize. A modest global recovery is expected over the next two years, with world gross product forecast to grow by 2.7 per cent in 2017 and 2.9 per cent in 2018. The report underscores that the projected recovery is more an indication of economic stabilization than a signal of a robust and sustained revival of global demand. The report also illustrates some change in global inflation, with deflationary pressures in developed economies easing. The recovery in oil prices that has been observed since early 2016 will temporarily put significant upward pressure on headline inflation in many countries. Self-Perpetuating Cycle of Slow Economic Growth The report warns that the prolonged episode of weak global growth could be self-perpetuating, through the linkages of weak investment, dwindling trade, flagging productivity and low income growth. Many economies have experienced a marked downturn in private and public investment in recent years. Governments— particularly in commodity-exporting countries—have curtailed much-needed public investment in infrastructure and social services, in response to sharp revenue losses. The resulting weak demand for capital goods has contributed to the slowdown in trade growth. World trade volumes expanded by just 1.2 per cent in 2016, the third-lowest rate in the past 30 years. At the same time, labour productivity growth has slowed markedly in most developed economies and in many large developing and transition economies. The slow productivity growth has in turn weakened wage growth, which has held back aggregate demand. Developing Countries as the Main Drivers of Growth The report projects that developing countries will continue to be the main drivers of global growth, accounting for about 60 per cent of the growth of world gross product in 2016–2018. East and 99  x

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South Asia remain the world’s most dynamic regions, benefiting from robust domestic demand and supportive macroeconomic policies. As commodity prices trend higher, commodity-exporting economies are likely to see some recovery in growth. On the other hand, growth in the developed economies is expected to improve only slightly in 2017, with headwinds arising from weak investment and policy uncertainty. WESP 2017 warns that gross domestic product (GDP) growth in the least developed countries (LDCs) is projected to remain well below the Sustainable Development Goals (SDGs) target of at least 7 per cent. Under the current growth trajectory and assuming no decline in income inequality, nearly 35 per cent of the population in LDCs may remain in extreme poverty by 2030. The report also discusses some positive developments related to environmental sustainability. The level of global carbon emissions has stalled for two consecutive years. This reflects the declining energy intensity of economic activities and the rising share of renewables in the energy structure, but also slower economic growth in some major emitters. Calling for More Effective Policy Mix WESP 2017 cautions that many countries continue to depend excessively on monetary policy to support growth. It calls for policy measures that move beyond demand management, stressing the importance of investment in technological change and efficiency gains. Concerted policy efforts are crucial to revive investment and foster a recovery in productivity that will result in stronger global growth. In particular, the report proposes more investments in key areas, such as research and development, education, and infrastructure. These measures need to be fully integrated with structural reforms that target the various aspects of sustainable development, including poverty, inequality and climate change. The report emphasizes that global policy cooperation and coordination are crucial to achieve further and equitable economic gains in trade and investment, to expedite clean technology transfer, to raise climate finance, to strengthen international tax cooperation and x 100

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to address the challenges posed by large movements of refugees and migrants.

Developed Economies

United States: Shifting Direction of Policy GDP in the United States of America increased by 1.6 per cent in 2016, marginally faster than the estimate of 1.5 per cent reported in the WESP 2017. The accumulation of non-farm inventories made a strong positive contribution to GDP growth in the final quarter of the year, and will support more solid growth in 2017. However, business fixed investment remains soft, and may be further restrained in the short term by uncertainty regarding the impact of announced and forthcoming policy changes that are being introduced by the new Administration. A number of executive orders and presidential memos have already shifted the direction of the United States policy in the arenas of trade, immigration, healthcare and regulation. Some of these changes may have far-reaching implications for the economic, social and environmental dimensions of sustainable development. The United States has withdrawn from the Trans-Pacific Partnership (TPP), an agreement under negotiation with Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Viet Nam, which goes beyond trade to include a wide spectrum of issues in areas such as investment, e-commerce, intellectual property, government procurement and regulatory coherence. The Administration has also clearly indicated an intention to renegotiate the North American Free Trade Agreement (NAFTA), which has governed trade relations among Canada, Mexico and the United States since 1994. These policies may impact not only investment decisions but also the volume of international trade. Other policy changes may impact international policy coordination efforts that address, for example, the challenge of large movements of refugees and migrants. The direction of fiscal policy in the United States remains unclear. The new Administration may propose an expansion 101  x

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of infrastructure investment and significant tax cuts, especially for corporations. A rise in infrastructure spending could raise growth prospects for 2018, but may also entail a large increase in the federal deficit. Other potential policy initiatives, such as the introduction of import tariffs and other protective measures, could raise inflation and slow economic growth, especially if other countries respond with retaliatory measures. Japan: Policy Easing Supports Short-Term Prospects Short-term economic prospects for Japan benefit from the additional fiscal and monetary easing measures introduced in 2016. However, the longer-term prospects remain constrained by the large overhang of government debt, an ageing population, a slowdown in productivity growth and entrenched deflationary expectations. Nationwide consumer price inflation in Japan averaged -0.1 per cent in 2016. The significant drag on the overall price level from low oil prices dissipated towards the end of the year. Nevertheless, the strong yen and weak wage growth will continue to exert downward pressure on inflation. Forecasts reported in the WESP 2017 project inflation will reach 0.6 per cent in 2017, and will remain below the central bank’s target of 2 per cent in 2018. The Japanese Government introduced a new fiscal stimulus package in August 2016, including 4.6 trillion yen additional spending for the current fiscal year and the postponement to October 2019 of the consumption tax increase planned for April 2017. The stimulus package amounts to 28.1 trillion yen, making it the third-largest ever implemented. It is expected to give a strong boost to government investment spending in 2017, which is forecast to contribute roughly 0.4 percentage points to GDP growth. The rise in government investment in Japan will partially compensate for the persistently weak private sector non-residential investment, as export-oriented firms remain under pressure from the strong yen and sharp slowdown in global trade. Residential investment, on the other hand, has rebounded. Housing starts x 102

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have been supported by Japan’s negative interest rates, which have allowed home-loan rates to fall to an all-time low. With monetary policy expected to remain accommodative for the foreseeable future, the housing sector is expected to strengthen further. Europe: Economic Activity in Western Europe Will Remain Subdued Economic activity in Western Europe will remain subdued, with growth expected to stay at 1.8 per cent in the European Union (EU) for 2016–2018. This implies a downward revision compared to the previous forecast, primarily due to the negative impact from Brexit. On the upside, domestic demand will continue to support growth, as low inflation rates and lower unemployment in some countries bolster private consumption, while the expansive monetary policy stance supports business investment. At the same time, several factors will continue to prevent a more vibrant economic revival across the region. These include the major uncertainty stemming from Brexit, which has already dented business investment in some key sectors both in the United Kingdom and its major European trading partners. In addition, structural issues such as a need for labour market reforms impede the development of small- and medium-sized companies in several countries. Unemployment still remains high in several countries, with negative effects on overall growth. High public and private debt levels constrain investment in some countries and lingering balance sheet problems in the banking sector put a drag on the proper functioning of the banking system. A number of risk factors could affect this baseline forecast, notably further negative fallout from Brexit, more severe problems in the banking sector, a recurrence of the debt crisis in Greece and policy uncertainties related to forthcoming elections in numerous countries including France, Germany and the Netherlands in 2017. In the EU member States from Eastern Europe and the Baltics region, economic growth remains on a higher trajectory than in the EU-15 as the countries continue to catch up through capital accumulation and productivity growth. However, the pace of 103  x

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economic expansion slowed slightly to 3 per cent in 2016, following the robust investment cycle of 2014–2015 driven by the expedited absorption of the remaining 2007–2013 EU funds.

Economies in Transition

CIS Economies Tentatively Stable, While Growth in South-Eastern Europe Accelerates The Commonwealth of Independent States (CIS) region has entered a period of tentative stabilization in 2016 and is expected to return to modest growth in 2017. The aggregate GDP of the CIS and Georgia is projected to expand by only 1.4 per cent in 2017, with a slight pick-up to 2.0 per cent forecast for 2018. Domestic demand in the region remains weak and investment shrunk in most countries in 2016. Relatively low commodity prices, persistent geopolitical tensions and structural factors constrain growth prospects. The ongoing fiscal adjustment in the energyexporters is also restraining demand. Although monetary policy was generally eased in 2016, interest rates in larger economies remain relatively high. The continuing international sanctions against the Russian Federation weigh on business sentiment and investment prospects. The Russian economy, along with other CIS energy exporters, is expected to remain on a low-growth track. Import-substitution policies and a weaker currency have supported the agriculture and the chemical industries. However, the strengthening of the Russian rouble in early 2017 may pose certain risks. In the region’s smaller countries, falling remittances from the Russian Federation have depressed incomes since 2015. However, some modest recovery was observed in Kyrgyzstan in 2016. On the other hand, stronger links with China within the framework of the “Belt and Road” initiative should support the Central Asian economies and produce positive spillover effects. The risks to the outlook are mostly on the downside, as the recovery of commodity prices is expected to be limited and the region remains dependent on primary commodities and lowx 104

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tech exports. The banking system, despite some progress toward financial stability, remains fragile. Geopolitical risks are also undermining confidence and business sentiment in the region. In South-Eastern Europe, economic activity gained further strength in 2016, driven by the strong pick-up in Serbia. The improved performance largely reflects domestic factors, including strong public investment in 2016 and improved labour markets that supported private consumption. The region’s GDP growth is projected to strengthen from an estimated 2.6 per cent in 2016 to 3.1 per cent in 2017 and 3.3 per cent in 2018. Inflationary pressures remained very low, with inflation projected to accelerate modestly in 2017 as energy prices strengthen. The region remains closely linked with the EU and highly dependent on external financing.

Developing Economies

Africa: Growth to Recover Moderately Amid Challenges Following a sharp growth deceleration in 2016, the African region is expected to recover moderately this year. There is, however, a marked divergence in the growth prospects across the region. The projected increase in global commodity prices will ease fiscal and external pressures for the commodity exporters. Nevertheless, given that global commodity prices are expected to remain well below pre-2014 levels, a strong growth rebound appears unlikely in the highly commodity-dependent economies such as Algeria, Angola and Nigeria. In contrast, the growth outlook is more favourable for countries in the East African Community, including Ethiopia, Kenya and the United Republic of Tanzania, as well as the Western African economies of Côte d’Ivoire, Ghana and Senegal. Growth in these economies will continue to be driven by robust private consumption and large infrastructure projects. Yet, the growth outlook for Africa is faced with several external and domestic risks. On the external front, this includes a renewed downturn in global commodity prices, a sharper-than-expected growth moderation in China and high 105  x

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uncertainty in the international policy environment. On the domestic front, an escalation of security concerns and political unrest in several African countries would adversely affect investment and disrupt economic activity. In addition, highly agriculture-dependent economies remain highly susceptible to weather-related shocks. East Asia: Domestic Demand Continues to Drive Positive Near-Term Outlook Amid Weak Export Performance East Asia’s economy is estimated to have grown by 5.5 per cent in 2016, with a marginal pick-up to 5.6 per cent projected for both 2017 and 2018. Private consumption and public investment continue to drive growth. However, export growth of the region remained exceptionally weak in 2016. This has negatively affected consumer sentiment, resulting in weaker household spending in several economies. While overall fiscal balances have recently worsened in some countries, the relatively low public debt levels mean that there is still room for fiscal expansion. However, existing estimates of fiscal multipliers show that the effectiveness of fiscal spending varies significantly across economies. In this light, economies would have to identify the most effective means of fiscal intervention to maximize its positive impact on growth. While East Asia’s economic outlook remains stronger than that of other regions, risks for East Asia tilt to the downside. Factors that could drive faster economic growth in 2017, such as stronger demand in developed economies, higher global commodity prices and rising infrastructure investment are subject to considerable uncertainty. A downside risk to growth is posed by the high and rising corporate and household debt in several countries, including China, which could further add to Governments’ contingent liabilities and curb their engagement in supportive fiscal measures. The surge of international bond issuance in East Asia in January 2017 indicates an ongoing strong appetite for debt across the region.

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South Asia: Positive Economic Outlook Supported by Robust Private Consumption South Asia is the fastest-growing developing region and its economic outlook remains largely positive, benefiting from robust private consumption, a modest pick-up in investment and the continuing implementation of domestic reforms. Macroeconomic policies have also played a positive role: monetary policy continues to support economic activity, while the fiscal policy stance displays some flexibility despite remaining moderately tight. The positive economic outlook will likely enable further progress in labour market indicators and poverty reduction, albeit gradual and moderate. Among the largest countries, India has positioned itself as the most dynamic emerging economy. Despite the negative short-term effects of the so-called demonetization policy, India’s economy is projected to expand at a robust pace in 2017, driven by strong private consumption and slight pick-up in investment demand. The outlook for the Islamic Republic of Iran is strengthening visibly, due to the strong expansion of oil production and exports, increasing business confidence and a surge in foreign investments. In Pakistan, growth is also projected to remain robust at above 5 per cent, driven by strong consumption, rising investment and a supportive monetary policy stance. Despite the favourable outlook, South Asian economies face several downside risks. The reform agenda could experience setbacks in some countries, while political instabilities might dampen investment prospects. Heightened regional geopolitical tensions could also weigh on the outlook. For instance, intraregional trade facilitation and integration projects could experience delays and obstacles, while large investments on connectivity infrastructure may face institutional uncertainty. Western Asia: Subdued Growth Amid Continuing Macroeconomic Adjustments The economic outlook for Western Asia remains weak and turbulent amid macroeconomic adjustments in oil-dependent economies, 107  x

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ongoing conflicts and long-lasting geopolitical concerns. In 2016, regional GDP growth declined to an estimated 2.1 per cent, mainly due to deteriorating economic conditions in the countries of the Cooperation Council for the Arab States of the Gulf (GCC). In these economies, lower oil prices have seriously affected investment and government budgets, prompting Governments to undertake major reforms towards fiscal austerity. While non-oil exporting economies exhibited a more heterogeneous outlook, military conflicts and geopolitical tensions continue to curb investment and restrain economic activity. Among GCC countries, economic activity in Saudi Arabia is expected to remain subdued in 2017, amid fiscal austerity and restrained investment. The economies of Bahrain, Oman and the United Arab Emirates are also projected to remain on a modest growth path in 2017. Among the more diversified countries, the Turkish economy is projected to expand at a solid rate as domestic demand remains resilient. In the Syrian Arab Republic and Yemen, the economies are in a perilous state due to intensifying armed conflicts and severe foreign exchange shortages. Against this backdrop, regional labour markets have de­ teriorated recently due to both economic and non-economic factors. Unemployment rates have risen, while job creation has been hampered by the economic slowdowns. Conflicts have caused large-scale unemployment in Iraq, the Syrian Arab Republic and Yemen, with some negative spillover effects to the labour markets of Jordan, Lebanon and Turkey. The region’s labour markets continue to be affected by high structural unemployment, particularly among the youth, and a widespread lack of decent work. Latin America and the Caribbean: Return to Positive Growth in 2017, but Strong External and Internal Headwinds After contracting for two consecutive years, the economy of Latin America and the Caribbean is expected to return to positive growth in 2017. The region’s aggregate GDP is projected to grow by 1.3 per cent in 2017 and by 2.1 per cent in 2018, following an estimated x 108

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decline of 1.0 per cent in 2016. While the region continues to face significant internal and external headwinds, economic growth is forecast to gradually pick up in most countries. The modest recovery is expected to be supported by an improvement in external demand, an increase in commodity prices, and some monetary easing in South America amid lower inflation. South America’s two largest economies, Argentina and Brazil, are expected to emerge from recession in 2017, but the recovery will likely be shallow as unemployment, fiscal consolidation and indebtedness weigh on demand. Mexico is projected to see only modest growth in 2017/18 amid restrictive monetary and fiscal policies and uncertainty over future US trade policies. While Central America and the Caribbean will likely continue to outperform South America in terms of growth, the economic situation and prospects vary widely across countries. The region’s economic prospects are subject to significant downside risks, including a sharper-than-expected deceleration in China, the adoption of protectionist measures in the United States and renewed financial market turbulences. The subdued medium-term outlook poses a threat to the social achievements of the past decade and could significantly complicate the region’s path towards the realization of the SDGs.

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Center for Strategic and International Studies The Center for Strategic and International Studies oversees the China Power Project, which is run by expert scholars and officials. This viewpoint discusses the relationship between American debt and foreign bond ownership. The United States has a large economic debt and consequently sells US Treasury bonds to finance this debt. Many Asian countries own Treasury bonds, including China. US bonds are seen as desirable investments by many foreign countries, and in the long run this economic relationship between the United States and bondholders is necessary for the global economy.

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any worry that China’s ownership of American debt affords the Chinese economic leverage over the United States. This apprehension, however, stems from a misunderstanding of sovereign debt and of how states derive power from their economic relations. The purchasing of sovereign debt by foreign countries is a normal transaction that helps maintain openness in the global economy. Consequently, China’s stake in America’s debt has more of a binding than dividing effect on bilateral relations between the two countries. Even if China wished to “call in” its loans, the use of credit as a coercive measure is complicated and often heavily constrained. A “Is It a Risk for America That China Holds over $1 Trillion in U.S. Debt?” Center for Strategic and International Studies. Reprinted by permission.

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creditor can only dictate terms for the debtor country if that debtor has no other options. In the case of the United States, American debt is a widely-held and extremely desirable asset in the global economy. Whatever debt China does sell is simply purchased by other countries. For instance, in August 2015 China reduced its holdings of US Treasuries by approximately $180 billion. Despite the scale, this selloff did not significantly affect the US economy, thereby limiting the impact that such an action may have on US decision-making. Furthermore, China needs to maintain significant reserves of US debt to manage the exchange rate of the renminbi [Chinese currency]. Were China to suddenly unload its reserve holdings, its currency’s exchange rate would rise, making Chinese exports more expensive in foreign markets. As such, China’s holdings of American debt do not provide China with undue economic influence over the United States.

Why Do Countries Accumulate Foreign Exchange Reserves? Any country that trades openly with other countries is likely to buy foreign sovereign debt. In terms of economic policy, a country can have any two but not three of the following: a fixed exchange rate, an independent monetary policy, and free capital flows. Foreign sovereign debt provides countries with a means to pursue their economic objectives. The first two functions are monetary policy choices performed by a country’s central bank. First, sovereign debt frequently comprises part of other countries’ foreign exchange reserves. Second, central banks buy sovereign debt as part of monetary policy to maintain the exchange rate or forestall economic instability. Third, as a low-risk store of value, sovereign debt is attractive to central banks and other financial actors alike. Each of these functions will be discussed briefly.

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Foreign Reserves Any country open to international trade or investment requires a certain amount of foreign currency on hand to pay for foreign goods or investments abroad. As a result, many countries keep foreign currency in reserve to pay for these expenses, which cushion the economy from sudden changes in international investment. Domestic economic policies often require central banks to maintain a reserve adequacy ratio of foreign exchange and other reserves for short-term external debt, and to ensure a country’s ability to service its external short-term debt in a crisis. The International Monetary Fund publishes guidelines to assist governments in calculating appropriate levels of foreign exchange reserves given their economic conditions. Exchange Rate A fixed or pegged exchange rate is a monetary policy decision. This decision attempts to minimize the price instability that accompanies volatile capital flows. Such conditions are especially apparent in emerging markets: Argentinian import price increases of up to 30 percent in 2013 led opposition leaders to describe wages as “water running through your fingers.” Since price volatility is economically and politically destabilizing, policymakers manage exchange rates to mitigate change. Internationally, few countries’ exchange rates are completely “floating,” or determined by currency markets. To manage domestic currency rates, a country might choose to purchase foreign assets and store them for the future, when the currency might depreciate too quickly. A Low-Risk Store of Value As sovereign debt is government-backed, private and public financial institutions view it as a low-risk asset with a high chance of repayment. Some government bonds are seen as riskier than others. A country’s external debt may be viewed as unsustainable relative to its GDP [gross domestic product] or its reserves, or a country could otherwise default on its debt. Generally, however, sovereign debt is more likely to return value and therefore is safer x 112

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relative to other forms of investment, even if earned interest is not high.

Why Does China Buy US Debt? China buys US debt for the same reasons other countries buy US debt, with two caveats. The crippling 1997 Asian Financial Crisis prompted Asian economies, including China, to build up foreign exchange reserves as a safety net. More specifically, China holds large exchange reserves, which were built up over time due in part to persistent surpluses in the current account, to inhibit cash inflows from trade and investment from destabilizing the domestic economy. China’s large US Treasury holdings say as much about US power in the global economy as any particularity of the Chinese economy. Broadly speaking, US debt is an in-demand asset. It is safe and convenient. As the world’s reserve currency, the US dollar is extensively used in international transactions. Trade goods are priced in dollars and due to its high demand, the dollar can easily be cashed in. Furthermore, the US government has never defaulted on its debt. Despite US debt’s attractive qualities, continued US debt financing has concerned economists, who worry that a sudden stop in capital flows to the United States could spark a domestic crisis. Thus, US reliance on debt financing would present challenges— not if demand from China were halted, but if demand from all financial actors suddenly halted. From a regional perspective, Asian countries hold an unusually large amount of US debt in response to the 1997 Asian Financial Crisis. During the Asian Financial Crisis, Indonesia, Korea, Malaysia, the Philippines, and Thailand saw incoming investments crash to an estimated -$12.1 billion from $93 billion, or 11 percent of their combined pre-crisis GDP. In response, China, Japan, Korea, and Southeast Asian nations maintain large precautionary rainy-day funds of foreign exchange reserves, which—for safety and convenience—include US debt. These 113  x

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policies were vindicated post-2008, when Asian economies boasted a relatively speedy recovery. From a national perspective, China buys US debt due to its complex financial system. The central bank must purchase US Treasuries and other foreign assets to keep cash inflows from causing inflation. In the case of China, this phenomenon is unusual. A country like China, which saves more than it invests domestically, is typically an international lender. To avoid inflation, the Chinese central bank removes this incoming foreign currency by purchasing foreign assets—including US Treasury bonds—in a process called “sterilization.” This system has the disadvantage of generating unnecessarily low returns on investment: by relying on FDI [foreign direct investment], Chinese firms borrow from abroad at high interest rates, while China continues to lend to foreign entities at low interest rates. This system also compels China to purchase foreign assets, including safe, convenient US debt.

Who Owns the Most US Debt? Around 69 percent of US debt is held by domestic financial actors and institutions in the United States. US Treasuries represent a convenient, liquid, low-risk store of value. These qualities make it attractive to diverse financial actors, from central banks looking to hold money in reserve to private investors seeking a low-risk asset in a portfolio. Of all US domestic public actors, intragovernmental holdings, including Social Security, hold about 31 percent of US Treasury securities. The secretary of the treasury is legally required to invest Social Security tax revenues in US-issued or guaranteed securities, stored in trust funds managed by the Treasury Department. The Federal Reserve holds the second-largest share of US Treasuries, about 13 percent of total US Treasury bills. Why would a country buy its own debt? As the US central bank, the Federal Reserve must adjust the amount of money in circulation to suit the economic environment. The central bank performs this function x 114

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via open market operations—buying and selling financial assets, like Treasury bills, to add or remove money from the economy. By buying assets from banks, the Federal Reserve places new money in circulation in order to allow banks to lend more, spur business, and help economic recovery. Excluding the Federal Reserve and Social Security, a number of other US financial actors hold US Treasury securities. These financial actors include state and local governments, mutual funds, insurance companies, public and private pensions, and US banks. Generally speaking, they will hold US Treasury securities as a low-risk asset. Overall, foreign countries each make up a relatively small proportion of US debt-holders. Although China’s holdings have represented around 20 percent of foreign-owned US debt in the past several years, this percentage only comprises roughly 6 to 7 percent of the total. Moreover, Japan has at times over the past several years overtaken China as the largest foreign holder of US debt. Internationally, this situation is common: most sovereign debt is held domestically. European financial institutions hold the majority of European sovereign bonds. Similarly, Japanese domestic financial actors hold approximately 90 percent of Japanese net sovereign debt. Thus despite international demand for US sovereign debt, the United States is no exception to the global trend: US domestic actors hold the majority of US sovereign bonds.

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16

Marc Labonte Marc Labonte has written for the Congressional Research Service as a specialist in macroeconomic policy. This viewpoint indicates that while it is certainly true that the United States maintains a high level of debt, it is not the only country in the world to do so. Compared to other countries, the United States does not hold the highest or lowest level of debt. Marc Labonte indicates that the main concern is for Treasury bonds backed by the United States to continue to be seen as the safest place to invest money.

T

he federal budget deficit totaled $1.4 trillion in FY2009, which was the first time it ever topped $1 trillion. It remained over $1 trillion for the next three fiscal years. The government’s ability to finance a budget deficit depends on the size of the economy. For this reason, and to compare the deficit to historical or foreign deficits, it is more meaningful to measure the deficit relative to gross domestic product (GDP). By this measure, the deficits since 2009 are unusual but not unprecedented. The deficit was above 10% of GDP in 2009, 9% of GDP in 2010, 8% of GDP in 2011, and 7% of GDP in 2012. Seven previous times in US history the federal budget deficit has exceeded 10% of GDP, these being during or following the Civil War (1865), World War I (1918, 1919), and “The Sustainability of the Federal Budget Deficit: Market Confidence and Economic Effects,” by Marc Labonte, Congressional Research Service, December 14, 2012.

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World War II (1942–1945). Before 2009, it had not exceeded 7% of GDP since 1946. Federal budget deficits cause the publicly held federal debt to increase. The FY2009 deficit of 10% of GDP, in a year when GDP fell, caused the debt-to-GDP ratio to rise by 12.6 percentage points. The debt has increased from 41% of GDP in 2008 to 73% of GDP in 2012. This was the highest the debt has been relative to GDP since World War II, when it peaked at 109% of GDP. The current policy debate on the “fiscal cliff ” occurring at the end of 2012 has raised the question of whether a deficit of the current magnitude is manageable and what risks it poses to the economy. Since deficit reduction could have a contractionary effect on the economy in the short run at a time when the economy is still fragile, restoring fiscal sustainability poses another set of risks that must be balanced against the risks of continuing an unsustainably large deficit. This report will evaluate sustainability issues.

At What Point Does the Public Debt Become Unsustainable? Some economists worry that if the public debt keeps rising, it will become unsustainable. By definition, the debt becomes unsustainable when private investors are no longer willing to hold it, at least at normal interest rates. Private investors become unwilling to hold a nation’s debt when they become convinced that the government will either default on (in other words, renege on promises to repay) or monetize the debt (in other words, finance it through money creation) in a way that would result in rapidly increasing price inflation that reduces the existing debt’s relative value. Although it is not possible to establish a threshold level at which a country’s debt becomes unsustainable, the trend that causes unsustainability is well known: a country cannot continually increase its debt at a rate that exceeds the growth rate of the economy. When it does, it causes debt service to absorb more and more of national income. As private investors observe that 117  x

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the government is unable or unwilling to make policy changes to prevent the debt burden from increasing, they will decide to flee the country’s debt before the point where the government is forced to default or monetize. The decision by some investors to flee the debt will make it more onerous for the government to finance the debt, because it will now have to offer higher yields to attract new buyers, and higher yields will result in a larger deficit and more borrowing. This phenomenon is sometimes referred to as a “debt spiral.” Thus, unsustainability tends to be triggered rapidly, as no investor wants to be the one still holding the debt when eventual default or hyperinflation occurs. The exact point when investors choose to flee depends on psychological factors that are hard to predict and likely to vary by country. Because it is the upward trend in debt that leads to unsustainability, investors may accept very large deficits for a few years, as long as they are convinced that in the future the government will reduce the deficit to a sustainable level before it is too late. For example, governments are often able to finance large deficits in wartime—the largest deficits relative to GDP in US history occurred as a result of the Civil War, World War I, and World War II—because investors expect a rapid decline in the deficit once peacetime leads to a rapid decline in military spending. Investors’ willingness to accept large deficits for a time will depend in part on the current level of debt relative to GDP. In that regard, the 16 percentage point reduction in debt to GDP between 1993 and 2001 left the United States in a relatively good starting position to absorb the 30 percentage point increase in debt to GDP that has occurred since 2001. Although the increase in debt in 2012 brings the federal debt as a share of GDP to its highest level since 1950, it will remain at less than three-quarters of its World War II peak.

Are Financial Markets Treating the Debt as Unsustainable? Standard financial market measures currently do not suggest widespread concern about potential US default. Although investors’ x 118

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views on the sustainability of the deficit cannot be observed directly, they are implicit in Treasury yields. If investors believed that the government would default on its debt or erode its value through inflation, they would demand higher yields to compensate against these risks. Yet Treasury yields have gone down, instead of up, as the deficit has increased. Since the financial crisis, long-term yields have been below 3% for the first time since the 1950s. Besides Treasury yields, another indicator of market fears of default are prices for credit default swaps, which can be thought of as a type of insurance against default. Although the cost of credit default swaps for US Treasuries rose during the recent financial crisis to atypical levels, they still implied a very low probability of default and the rise was much less than in European countries affected by the sovereign debt crisis, discussed below. (They have fallen since.) These data strongly indicate that investors do believe that future deficits will be reduced to sustainable levels. The ease of financing this year’s historically large deficit is partly attributable to unique economic conditions. The United States entered its longest post-war recession in December 2007 (which ended in June 2009), featuring the most severe disruption to financial markets since the Great Depression. September 2008 saw a “flight to quality” by investors who shunned risky assets and sought to hold only the safest assets. Investors perceived Treasury securities to be the safest assets, partly because they are the most liquid (i.e., easily tradeable). While investors have not shown widespread concern about the sustainability of government borrowing so far, this does not prove that borrowing is on a sustainable path. Investor behavior is compatible with a belief that policy steps will be taken to reduce the deficit to a level that stabilizes debt compared to GDP, but there is no guarantee that the government will take those steps. There is nothing preventing investors from re-evaluating their views at any time, however. As long as federal deficits remain at unsustainable levels, there is the risk—however small—that interest rates could rise quickly as a result of a perceived rise in default risk. Waiting 119  x

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until investor confidence has fallen would require larger policy changes because higher interest rates would cause debt service costs to rise.

Evidence from Abroad A frequent question is whether one can predict when the United States will reach a “tipping point” where investors become unwilling to finance it. One way to answer that question is to look at whether there is a specific level of public debt that has become problematic for other countries. Different countries have different reputations, so an acceptable debt level is likely to vary from country to country. Because more developing countries have defaulted on their debt in recent decades, advanced economies are generally seen as more able to sustain higher debt levels than developing ones. Thus, in gauging how much higher the US public debt could get before it faces sustainability concerns, it is more useful to compare the United States to other advanced economies. All of the advanced countries that have experienced fiscal and financial crises (Greece, Iceland, Ireland, Italy, Portugal, and Spain) in recent years have high government debt levels in 2012. This would appear to offer evidence that high debt levels cause fiscal and financial crises, but for some of these countries, causality ran in the opposite direction—Iceland, Ireland, and Spain all had extremely low government debt levels (much lower than the United States) and were running budget surpluses before the crisis. Those three countries have high government debt levels only as a result of the crisis, notably as a result of declining revenue bases, higher social insurance outlays, and their governments taking on liabilities to shore up the banking system. In other words, looking at high public debt levels before the crisis would not have helped predict that those three countries would experience crises. Italy and Greece had unusually high debt levels before the crisis, supporting the idea that high debt can sometimes lead to crisis. On the other hand, Japan’s public debt level was by far the highest among advanced countries in 2007, and its borrowing costs have remained unusually x 120

Debt Runs High in Many Countries, Not Just the United States

low. Japan’s ability to finance debt at this level at low interest rates has been attributed to Japan’s high overall rate of national saving, despite its large budget deficits, and its near-zero inflation rates. A comparison of the United States to other advanced economies reveals that the US debt level was higher than average as a share of GDP in 2007, but there were six countries in the sample with debt levels that were higher still. In 2012, the US debt to GDP ratio was higher than most other countries, but well below the ratio in the highest debt countries. The levels of debt to GDP in the United States and many other countries are higher today than any country in 2007 except Greece and Japan. The concept of a debt spiral is well illustrated by the experience of the eurozone crisis countries. Before the crisis, none of these European countries paid significantly more than Germany to finance government debt. All except Iceland joined the euro area, and their interest rate differentials with Germany fell significantly after joining. This pattern of interest rates implies that markets perceived them as having little more sovereign risk than Germany until the financial crisis, but significantly more afterward. The experience of these countries demonstrates that a loss of confidence quickly leads to a vicious cycle—investors demand higher yields on government debt to compensate against the perceived higher risk of default, but these higher yields cause the deficit to spike suddenly, thereby undermining a government’s ability to continue to service its debt. This dynamic causes a country to swing from stability to crisis relatively quickly. Restoring stability has been difficult, and since 2008 GDP has shrunk for three or more years for most of the countries. Falling GDP exacerbates the budget deficit, and vice versa. These countries that have required assistance to finance their deficits have some commonalities with the United States— projections of unsustainably large budget deficits under current policy, a large net foreign debt (with the exception of Italy), asset price bubbles that led to large losses in the financial sector, and large subsequent government outlays to cope with financial sector 121  x

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turmoil. On the other hand, several factors differentiate the United States from most of these countries—a reputation of fiscal solvency based on a history of non-default, a large economy, a flexible exchange rate, and a status as the world’s “reserve currency” and “safe haven.” The fact that Treasury securities are considered the riskless, “safe haven” asset internationally could mean that investors continue financing unsustainable deficits longer than they would for other countries, but it could also mean that if confidence were lost, the shift out of Treasury securities would be greater than in other countries since the original rationale for holding them was no longer valid. […]

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Organizations to Contact The editors have compiled the following list of organizations concerned with the issues debated in this book. The descriptions are derived from materials provided by the organizations. All have publications or information available for interested readers. The list was compiled on the date of publication of the present volume; the information provided here may change. Be aware that many organizations take several weeks or longer to respond to inquiries, so allow as much time as possible. American Enterprise Institute (AEI) 1789 Massachusetts Ave. NW Washington, DC 20036 phone: (202) 862-5800 website: http://www.aei.org As a public policy think tank, the AEI dedicates itself to building a free and safe world by defending human dignity and human potential. The staff and scholars at the AEI see their work as extensions of democracy, free enterprise, and the strength and global leadership of America. Brookings Institution 1775 Massachusetts Ave. NW Washington, DC 20036 phone: (202) 797-6000 website: https://www.brookings.edu The Brookings Institution is a nonprofit public policy organization dedicated to solving problems through research. With over three hundred active scholars, the organization conducts research into topics of economics, foreign policy, development, and governance.

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Cato Institute 1000 Massachusetts Ave. NW Washington, DC 20001-5403 phone: (202) 842-0200 website: https://www.cato.org As a public policy research organization, the Cato Institute accepts no government funding. The agency’s scholars and analysts conduct research focused on individual liberty, peace, free markets, and limited government. Center for American Progress 1333 H St. NW, 10th Floor Washington, DC 20005 phone: (202) 682-1611 website: https://www.americanprogress.org The Center for American Progress is a progressive, independent, nonpartisan policy institute. The organization aims to im­ prove the lives of all Americans by promoting innovation and economic mobility. Center on Budget and Policy Priorities (CBPP) 820 First St. NE, Suite 510 Washington, DC 20002 phone: (202) 408-1080 email: [email protected] website: https://www.cbpp.org The CBPP was founded in 1981 as a nonpartisan research institute. The agency’s main focus is to analyze federal budget priorities and determine the effects of policy on low-income Americans. The institute seeks to reduce inequality and poverty through federal and state policy.

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Organizations to Contact

Congressional Budget Office (CBO) Ford House Office Building, 4th Floor Second and D Streets SW Washington, DC 20515-6295 phone: (202) 226-2602 email: [email protected] website: https://www.cbo.gov Since 1975 the CBO has been involved in the analysis of budgetary and economic issues with the aim of supporting the congressional budget process. The agency’s economists produce reports and cost estimates as information for proposed budgetary legislation. Government Accountability Office (GAO) 441 G St. NW Washington, DC 20548 phone: (202) 512-3000 email: [email protected] website: https://www.gao.gov The GAO works for Congress and is the “congressional watchdog” that investigates how the government spends taxpayer money. To carry out its mission, the GAO supports Congress to ensure that the government is accountable to the American people. Heritage Foundation 214 Massachusetts Ave. NE Washington, DC 20002-4999 phone: (202) 546-4400 email: [email protected] website: https://www.heritage.org The Heritage Foundation’s mission is to promote conservative public policies. Through research, communications, and advocacy, the Heritage Foundation promotes the ideas of individual freedom, free enterprise, limited government, strong defense, and traditional American values. 125  x

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National Priorities Project (NPP) 351 Pleasant St., Suite B #442 Northampton, MA 01060 phone: (413) 584-9556 email: [email protected] website: https://www.nationalpriorities.org As its main focus, the NPP aims to make the federal budget understandable to the American public. It is the only nonprofit, nonpartisan federal budget research organization to take on this task. Pew Research Center 1615 L St. NW, Suite 800 Washington, DC 20036 phone: (202) 419-4300 email: [email protected] website: http://www.pewresearch.org The Pew Research Center is a nonpartisan fact tank. The center conducts opinion polling, data analysis, and social science research with the intent of informing the public about issues, attitudes, and trends that are shaping the country and the world. The center promotes the consideration of facts for sound decision making.

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Bibliography Books

Scott Bittle and Jean Johnson, Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis. New York, NY: Harper Business, 2011. John Burke, 12 Simple Solutions to Save America. Mineral Point, WI: Little Creek Press, 2017. Menzie D. Chinn and Jeffry A. Frieden, Lost Decades: The Making of America’s Debt Crisis and the Long Recovery. New York, NY: W. W. Norton & Company, 2011. Tom A. Coburn, The Debt Bomb: A Bold Plan to Stop Washington from Bankrupting America. Nashville, TN: Thomas Nelson, 2012. Carlo Cottarelli, What We Owe: Truths, Myths, and Lies About Public Debt. Washington, DC: Brookings Institution Press, 2017. Amanda Hiber, The Federal Budget. Farmington Hills, MI: Greenhaven Press/Gale Cengage Learning, 2010. Kathy Jennings and Lynn M. Zott, The US Deficit. Farmington Hills, MI: Greenhaven Press, 2013. Simon Johnson and James Kwak, White House Burning: The Founding Fathers, Our National Debt and Why It Matters to You. New York, NY: Pantheon Books, 2012. Bryan D. Jones, The Politics of Bad Ideas: The Great Tax Cut Delusion and the Decline of Good Government in America. New York, NY: Pearson Longman, 2008. Mattea Kramer, A People’s Guide to the Federal Budget: National Priorities Project. Northampton, MA: Interlink Books, 2012.

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Anja Manuel, This Brave New World: India, China and the United States. New York, NY: Simon & Schuster, 2016. Peter G. Peterson, Steering Clear: How to Avoid a Debt Crisis and Secure Our Economic Future. New York, NY: Portfolio/ Penguin, 2015. Robert B. Reich, Beyond Outrage: What Has Gone Wrong with Our Economy and Our Democracy and How to Fix It. New York, NY: Vintage Books, 2012. Irene S. Rubin, Balancing the Federal Budget: Eating the Seed Corn or Trimming the Herds? New York, NY: Chatham House Publishers/Seven Bridges Press, 2003. Jeffrey Sachs, Building the New American Economy: Smart, Fair and Sustainable. New York, NY: Columbia University Press, 2017. Allen Schick, The Federal Budget: Politics, Policy, Process. Washington, DC: Brookings Institution Press, 2000. David Wessel, Red Ink: Inside the High-Stake Politics of the Federal Budget. New York, NY: Crown Business, 2012. William Whitem, America’s Fiscal Constitution: Its Triumph and Collapse. New York, NY: Public Affairs, 2014.

Periodicals and Internet Sources John Bridgeland and Peter Orszag, “Can Government Play Moneyball?,” Atlantic, 2013. https://www.theatlantic .com/magazine/archive/2013/07/can-government-play -moneyball/309389/. Karen Campbell, “The Economic Role of Government: Focus on Stability, Not Spending,” Heritage Foundation, 2009. https://www.heritage.org/monetary-policy/report/the -economic-role-government-focus-stability-not-spending. Kevin Clarke, “Church Leaders Scrutinize Budget and Health Care Priorities,” America, June 12, 2017. x 128

Bibliography

Dan Crippen, “Clarifying the Arcane Federal Budget Process,” NACD Directorship, 2017. Jen DiMascio, “The Budget Is Out: Now Congress Can Rework It,” Aviation Week & Space Technology, May 29, 2017. http:// aviationweek.com/defense/budget-out-now-congress-can -rework-it. Jen DiMascio, “U.S. Government Shutdown Averted, but 2018 Budget Battles Loom,” Aviation Week & Space Technology, May 8, 2017. http://aviationweek.com/defense/us -government-shutdown-averted-2018-budget-battles-loom. Rick Docksai, “Five Economies That Work: Global Success Stories,” Futurist, March–April 2013. William Glasgall, “Six Principles of Better Budgeting,” Capitol Ideas, 2017. http://www.csg.org/pubs/capitolideas/2017 _mar_apr/evidence_budgeting%20.aspx. Matt Hourihan and David Parkes, “Trump Budget Proposal: Gloomy, but Just a Proposal,” Issues in Science & Technology, June 22, 2017. Stuart Roy Kasdin, “When Will New Programs Be Mandatory? Determinants of the Decision Between the Mandatory and Discretionary Budget Designs,” Congress & the Presidency, January 31, 2017. Tal Kopan, “Here’s What Trump’s Budget Proposes to Cut,” CNN Politics, March 16, 2017. http://www.cnn.com /2017/03/16/politics/trump-budget-cuts/index.html. Heather Krause, “Budget Issues: Budget Uncertainty and Disruptions Affect Timing of Agency Spending,” GAO Reports, September 20, 2017. Nicole Ogrysko, “Trump Releases Final 2018 Budget Proposal, Touts $3.6T in Spending Cuts over 10 Years,” Federal News Radio, 2017. https://federalnewsradio.com/budget/2017/05

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/trump-releases-final-2018-budget-proposal-touts-3-6t-in -spending-cuts-over-10-years/. Susan Percy, “A Focus on the Federal Budget,” GeorgiaTrend, April 2016. http://www.georgiatrend.com/April-2016/A -Focus-On-The-Federal-Budget/. Ross Pomeroy and Willaim Handke, “The Most Entitled Generation Isn’t Millennials. It’s Baby Boomers,” Real Clear Politics, January 8, 2015. https://www.realclearpolitics.com /articles/2015/01/08/the_most_entitled_generation_isnt _millennials_its_baby_boomers_125184.html. Dennis Sadowski, “Faith Leaders Challenge Morality of U.S. Budget Priorities,” America, June 26, 2017. https://www .americamagazine.org/politics-society/2017/06/26/faith -leaders-challenge-morality-us-budget-priorities. Anthony Stokes, “The Economics of the 2016–17 Federal Budget,” Ecodate, July 2016. Armstrong Williams, “Time for a Value Renaissance in Government Spending,” Amsterdam News, June 1, 2017. http://amsterdamnews.com/news/2017/jun/01/time-value -renaissance-government-spending/.

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Index A American Recovery and Reinvestment Act (2009), 27–29

B Barrosso, John, 85 Bartlett, Bruce, 84 Bergsten, C. Fred, 72, 73–74 Bernanke, Ben, 82 Blinder, Alan, 29 Boccia, Romina, 87, 90, 91 Boushey, Heather, 24 Budget and Accounting Act (1921), 33 Budget Control Act (1974), 8 Budget Control Act (2011), 18, 50, 80–81 budget process, 8 appropriations, 33–34 government data sources, 37–38 president and OMB, 33 budget reconciliation, 34–35 “budget resolutions,” 33–34 Build America Bonds, 27

C Cato Institute proposed cuts to defense, 61–62

proposed cuts to health care, 62–63 Center for Geoeconomic Studies, 75 Center for Strategic and International Studies, 110 China, stake in US debt, 110–111, 113–114, 115 Clinton administration, 43 Committee for a Responsible Federal Budget, 35 Congressional Budget and Impoundment Control Act (1974), 34 Congressional Budget Office (CBO), 18, 29, 34, 37, 54, 55, 71, 90 proposed spending cuts, 56–59 Congressional Research Service, 37, 83–84 “continuing resolution” (2016), 35 corporate welfare, 19 Craig, John, 93

D Davies, Antony, 14 debt ceiling, 80 debt crisis, Canada (1990s), 54–55 debt spiral, 121 131  x

The Federal Budget and Government Spending

defense spending debate actual, 50–52 ideal, 48–49 deficit spending, 8–9 Department of Defense, US lack of audit, 44 overspending on routine items by, 42–43 reasons for waste, 45 discretionary spending, 8, 9, 33 federal assistance, 35–36

E Economic Stimulus Act, 31 Edwards, Chris, 53 Ettlinger, Michael, 24

F federal borrowing, 13 federal debt as highest since World War II, 17–18 as unsustainable, 117–122 federal deficit, recent history of, 116–117 Federal Highway Administration, 26 Federal Insurance Contributions Act (FICA), 12–13 federal spending in 2013, 88–89 Fitch Ratings, 83 Fitzgerald, Ernest, 40 foreign sovereign debt, 111–113

x 132

G Geithner, Timothy, 82 General Accounting Office, 67 gold standard, 15 Government Accountability Office, 37, 83, 84 government default impact of, potential, 82–83 preventing, 81–82 and US dollar, 83–84 government shutdown (2013), 34, 85–86 grants-in-aid, 60–61 Great Recession, consequences of, 26 gross domestic product (GDP), 17

H Hartung, William, 39, 40 Herblock (Washington Post), 42 Heritage Foundation, 17, 50–51 facts and figures, 23 Index of US Military Strength, 50 suggestions, to reform spending, 20–22

I Index of US Military Strength, 50 inflation tax, 15–16

Index

International Monetary Fund (IMF), 74 Ip, Greg, 72, 77–78

New York Times, 41 No Budget, No Pay Act (2013), 81

J

O

Johnson, Justin T., 47

Obama, Barack, 24, 37, 50, 80, 81, 88 Obama administration, 35, 50 Obamacare, 18, 21, 35, 89 Office of Management and Budget (OMB), 33, 37 operating budget, 67–68

K Korb, Lawrence, 43

L Labonte, Marc, 116 Lew, Jacob, 81 Lockheed/Lockheed Martin, 40–41, 42

M MacGuineas, Maya, 71–72, 73 Madland, David, 93 Mallaby, Sebastian, 72, 74–75 mandatory spending, 8, 9, 18–19, 33 Masters, Jonathan, 71, 79 McKinsey Global Institute, 85 Medicare, cost in 2017, 9 Metcalf, Lee, 41 Mitchell, Daniel, 72, 75–77

N National Conference of State Legislatures, 33, 35, 66 National Defense Panel, 50 National Priorities Project, 10 New Deal, 25

P Pentagon. See Department of Defense, US privatization, 63–64 Project on Government Oversight, 44 Pro Publica, 44 Proxmire, William, 41

R Reagan administration, 42–43 rent-seeking, 94 economic concerns, 96–97 studies on effects of, 95 Reuters, 36 Rural Development Fund (USDA), 29

S Sanders, Bernie, 43 Second Liberty Bond Act (1917), 80 133  x

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sequestration, 89 Sixteenth Amendment, 11 Smaghi, Lorenzo Bini, 87 Social Security, 12–13 cost in 2017, 9 Special Inspector General for Afghan Reconstruction (SIGAR), 44 state balanced budget requirements, 66–67 enforcement of, 68–69 practice, 69–70 Stiglitz, Joseph, 94 subsidies, 59–60 supply-side economics, as wrong strategy for current economy, 30–31

T taxes, 36 corporate, 12 expenditures, 37 payroll, 12–13 as a progressive system, 11 as revenue, 8, 10–11, 14 temporary fiscal expansion, 24, 25 Tenth Amendment, 60 Treasury bonds, 8–9, 13, 36, 110, 116 Treasury Department, US, 10, 13, 28, 37, 79–86, 114–115 Trilling, David, 32 Trump, Donald, 35 Trump administration, 35 x 134

U United Nations, 98 US Constitution, Article 1, 7, 11 US debt, amount owned by domestic institutions, 114–115

V Vroman, Wayne, 29

W World Economic Situation and Prospects (WESP) 2017, 98–99 developed economies, 101–104 developing economies, 99–100, 105–109 policy measures proposed by, 100–101 slow economic growth, 99 transitioning economies, 104–105

Z Zandi, Mark, 29

at issue

The Federal Budget and Government Spending

Greenhaven Publishing’s At Issue series provides a wide range of opinions on individual social issues. Each volume focuses on a specific issue and offers a variety of perspectives—eyewitness accounts, governmental views, scientific analysis, newspaper and magazine accounts, and many more—to illuminate the issue. Extensive bibliographies and annotated lists of relevant organizations point to sources for further research. Enhancing critical-thinking skills, each At Issue volume is an excellent research tool to help readers understand current social issues and prepare reports.

The Federal Budget and Government Spending

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ECONOMICS