A good talking point contains the following three attributes. First, it must be repeated often enough to embed itself into the conversation. Second, it must close off an alternative, and undesirable, policy response to the issue that it addresses. And third, to maintain credibility, it must contain a kernel of truth. The Republican “it’s a spending problem, not a revenue problem” mantra fulfills all three objectives. But it is also severely misleading.
Republicans often refer to President Obama as the Spender-in-Chief. “He’s fixated on what may fund the government for seven days a year,” said Sen. John Barrasso (R-Wyo.) in December. “The president is doing nothing about the addiction that his administration and he has done to spending – he’s the spender-in-chief.” But if Washington does have a “spending problem,” it has nothing to do with a spending binge by the Obama administration.
The key is fiscal year (FY) 2009, which, by any measure, saw a substantial increase in federal spending. In raw dollars, the federal budget rose by $535 billion. However, the problem with attributing this budget to Obama is that it was passed by Congress and signed into law by President Bush in 2008, four months before Obama even took office. The federal fiscal year stretches from October to September, so the FY 2009 budget was the last budget of the prior, Republican administration. Even the conservative Cato Institute recognized this salient fact:
Listening to a talk radio program yesterday, the host asserted that Obama tripled the budget deficit in his first year. This assertion is understandable . . . [chart] . . . But there is one rather important detail that makes a big difference. The chart is based on the assumption that the current administration should be blamed for the 2009 fiscal year. While this makes sense to a casual observer, it is largely untrue. The 2009 fiscal year began October 1, 2008, nearly four months before Obama took office. The budget for the entire fiscal year was largely set in place while Bush was in the White House.
If you attribute most of FY 2009 to George W. Bush, after adjusting for inflation, federal spending has actually decreased under Obama. After checking the numbers, PolitiFact agreed: “Using raw dollars, Obama did oversee the lowest annual increases in spending of any President in 60 years.” It needs to be pointed out, however, that this entire conversation is nonsense. The entire debate fails to recognize the only fact that really matters, which is that the economy completely collapsed in late-2008 and much of 2009.
This once-in-a-generation recession is also responsible for the current elevated levels of federal spending. Simply stated, the events and policies that created the budget deficit were largely outside of the administration’s control. Indeed, as noted by the Center on Budget and Policy Priorities, “Together with the economic downturn, the Bush tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years.” In other words, without the Great Recession, the tax cuts enacted under George W. Bush that Congress did not pay for, and the cost of the wars in Iraq and Afghanistan, we would not have the budget deficit we face today.
None of this exculpates the Obama Administration from the responsibility of proposing policies to address our fiscal imbalances, but caricaturing the President as a Big-Spending Liberal is factually incorrect, disingenuous, and counterproductive.
The fact remains, however, that the federal government continues to run budget deficits, and that a continuation of current policies is unsustainable. Therefore, the key question is: “where should spending be now?” Republicans approach to tackling our fiscal problems often focus on discretionary spending, while leaving funding for defense, Social Security, or Medicare out of the discussion. But the federal government’s “spending problem” is a particular type of spending problem, one that has little to do with discretionary spending. Simply put, there is a fundamental disconnect between the Republican talking points and reality.
The federal government’s finances are complicated and not always easy to understand. But to illustrate this disconnect let’s look at a key breakdown of the federal budget’s major components, utilizing data compiled by the Congressional Budget Office (CBO) for FY 2011 as an example.
In 2011, the federal government received $2.3 trillion in revenues (or 15.4 percent as a share of gross domestic product (GDP)). Federal spending (outlays) totaled $3.6 trillion, exceeding 24 percent of GDP, the third-highest level in the past 40 years. The result? The federal government ran a deficit of $1.3 trillion, or 8.7% of GDP. Here is where the spending went:
- Mandatory Spending (i.e., spending that is mandated by existing law; e.g., Social Security, Medicare, Medicaid, etc.). Accounted for $2.0 trillion, or 56 percent of all federal outlays. Social Security cost $725 billion (4.8% of GDP); Medicaid cost $275 billion (1.8% of GDP); Medicare cost $480 billion (3.2% of GDP); and other costs (e.g., spending on unemployment compensation, veterans’ benefits, food stamps, etc.) accounted for $545 billion (3.6% of GDP).
- Discretionary Spending (i.e., spending that is governed by annual appropriation acts). Accounted for $1.6 trillion, or 37 percent of all federal outlays. Defense spending cost $700 billion (4.7% of GDP); Nondefense spending cost $646 billion (4.3% of GDP; note: it is currently at 3.8% of GDP). Nondefense spending refers to funding for nearly every other federal program that is not considered mandatory spending or defense (e.g., homeland security, nuclear weapons, safety net programs like housing vouchers and nutrition assistance, environmental protection, financial regulation, infrastructure, education, training, research and development, etc.).
- Net Interest. Accounted for $227 billion (1.5% of GDP).
The federal government’s budget for FY 2011, as a share of GDP, was higher than the historical average. Over the past 40 years, federal spending has averaged 21 percent as a share of GDP. In 2011, that number exceeded 24 percent.
When looking to trim the budget, discretionary spending presents some relatively easy targets for cutting. This overlooks the fact, however, that the federal government’s “spending problem” has little to do with discretionary spending. Indeed, since 1991, discretionary spending as a share of GDP has actually decreased. In 1991, discretionary spending as a share of GDP was 9.0 percent; in 2011, excluding outlays stemming from the American Recovery and Reinvestment Act of 2009, that number was 8.5 percent (9.0 percent, or no change, if you include spending from the Act). The sequestration that occurred on March 1 decreased the discretionary budget even further.
Rather, the increase in federal spending as a share of GDP is almost entirely attributable to increases in mandatory spending. In 1991, mandatory spending as a share of GDP was 10.1 percent. But in 2011, that number had increased to 13.6 percent. Much of that increase, moreover, is attributable to the rising costs of health care.
The simple, central fact behind our long-term budget problem is that health-care costs have grown faster than the rest of the economy. Or, as House Budget Chairmen Paul Ryan (R-WI) put it, “You cannot preempt a debt crisis, get this fiscal house in order without dealing with health care.”
As the graph to the right illustrates, spending growth over the next two decades will be largely driven by higher health care spending alone. Social security is projected to stabilize in the coming decades; discretionary and other mandatory spending is declining now and will stabilize. Health care spending, on the other hand, will continue to grow.
“Unless the laws governing these programs are changed – or the increased spending is accompanied by corresponding reductions in other spending, sufficiently higher tax revenues, or a combination of the two – debt will rise sharply relative to [the U.S. Economy] after 2023,” the CBO warned.
Containing the rising cost of health care, therefore, is essential to put the debt on a sustainable fiscal path. This does not mean, however, that we need to abandon our seniors and take a hatchet to Medicare in the name of “fiscal responsibility.” Indeed, as the Congressional Research Service noted, “In the long term, reducing the growth rate of health care costs below the growth rate of the economy would have the largest impact on the budget deficit; however, the effects of health care cost growth on the deficit are very gradual, and play little role in the sustainability of the deficit in the near term.”
On March 28, 1982, Ronald Reagan gave a speech to the National Association of Realtors. In that speech, Reagan said, “We don’t have a trillion-dollar debt because we have not taxed enough . . . we have a trillion dollar debt because we spend too much.” The politics of 2013 are nearly a mirror image of the politics of 1982.
At the time Reagan made that statement to the National Association of Realtors, the United States had a divided government. Republicans controlled the White House and the Senate; Democrats controlled the House. The tax code was broken into 12 brackets: the bottom rate was 12 percent; the top marginal tax rate was 50 percent. And the deficit? The “trillion-dollar debt” Reagan was referring to was $994 billion when he took office. As Democrats like to point out, when Reagan left office the deficit had increased to $2.87 trillion.
That is, “nearly” a mirror image.
When Reagan spoke to the National Association of Realtors, there was no furor in Washington over “out of control” government spending. There was no panic about the debt or the deficit, and Washington was not yet willing to bring the country to the brink of economic disaster just to prove to America how concerned they were about it.
The “It’s a spending problem, not a revenue problem” fulfills all three objectives of a good talking point. First, Republicans have repeated it so many times that it has become embedded into the discussion about debt and deficits. Second, the assertion closes off another response to the deficit; that is, raising taxes. And third, it contains a kernel of truth. The United States does have a “spending problem.” But it is a particular type of spending problem. One that is materially different from the problem Republicans have focused on.
But perhaps the bigger problem with the mantra is that it distracts us from the more pressing issue: the jobs crisis. Although current tax and spending problems will lead to an unsustainable path of the national debt, as the Congressional Research Service noted, tackling the federal deficit involves a significant “trade-off between the benefits of starting to address the debt problem earlier versus risking damage to a still-fragile economy by engaging in contractionary fiscal policy, or a failure to continue with expansionary fiscal policy.”