Tuesday, July 11, 2017

Loss of Control: The Current Situation

The growing budgetary impotency of elected officials

The previous posting, discussed the CBO's estimates for the deficit over the next 10 years. It pointed out that past politicians have accumulated debt and interest obligations that severely constrain currently-elected officials, and it noted how the debt and interest payments are going to grow. This posting expands upon that theme by looking at the constraints in their entirety.  It focuses on the current constraints. The next few postings will look at how those constraints will behave in the future.

A review of how the federal government spends money shows that previous legislation and executive actions have placed severe and growing constraints on elected officials and, indirectly, voters. Obviously those constraints are from laws that could be changed, but an appreciation of their extent highlights the challenge faced by current and future elected officials.

Many of those constraints take the form of removing control of expenditures from the annual budgetary process. The loss of budgetary control also raises questions about proper functioning of a democracy. Governments are formed in order to constrain behavior. In the US Constitution, considerable emphasis was placed on forming a government where the actions of the government are constrained by other branches of government (e.g., the federal system, the delegation of powers between the three branches of government, the two houses of Congress, the Bill of Rights).

Government constraining future governments is not unusual. Problems arise when there is an imbalance between what is required in order to create the constraint and what is required in order to adjust or eliminate that constraint. When there are such imbalances, a natural response is to avoid adjusting or eliminating the constraint. Workarounds are always possible.

For example, as mentioned in the posting on debt, when the constraints are on the budget, a potential response is to just increase the debt. Making debt an easier solution ultimately turns the budget process into a fiction. Unfunded mandates, accumulated debt, mandatory expenditures written into laws become the game politicians play rather than a realistic planning process. Consequently, examining the constraints placed on the budgetary process is important. It shows just how far we've drifted from being able to rationally approach resource allocation decisions on an annual basis.

Current Budgetary Constraints

Right now it appears that about 70% of the government expenses are mandated by programmatic entitlements written into existing laws. Consequently, our elected officials are budgeting only 30% of federal revenue. The current constraints can be seen by reviewing how the government spends money and then examining which expenditures are controlled by currently-elected officials through the budget process. That's the starting point.

Social Security currently accounts for just over a quarter of federal expenditures. Medicare absorbs another 15-16%. So, those two programs alone take about 40-42% of federal expenditures out of the budgetary process. Interest on the national debt accounts is about 6.25% of the federal government's expenses. When you add in tax credits at 2.2%, it comes close to half of all expenditures that are clearly and totally obligated without any budgetary process.

Medicaid represents about a 10th of the federal expenditures (9.55%) and Veterans’ benefits are about 4.6%. Those two are also largely determined outside of the budgetary process as are civilian federal employees’ retirement benefits at the 2.6%. 

In summary, seven programs where expenditures are mandated account for approximately 65% of federal expenditures. There are also mandated expenses in some of the remaining programs for example, food stamps. So, is it any wonder that many independent analysts have concluded that 70% of all government expenditures are not under budgetary control?

This review tells us where we are but not where we're going. So, to understand the severity of the problem, one has to look at the outlook for different categories of expenditures and especially those that are not controlled by the annual budget process. In many respects, the outlook for these programs is more important than their current impact. It will be the topic of the next few postings.

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