Sunday, July 16, 2017

Loss of Control: Just Enough Left

Enough for the hoopla

Much to-do about nothing?

There is always a reason

Previous postings discussed the degree to which mandated expenditures constrain currently-elected officials. One can debate the details, but it's clear that about 70% of federal expenditures aren't discretionary. Further, that phenomena is going to grow as all of the mandated expenditures will consume more resources. But, our currently-elected officials still have some discretion. This posting addresses that discretion.

It seems there is enough discretion left to justify threatening to shut down the government when the administration made its initial budget proposals. If that isn’t extreme enough, on Mayday the obligatory left-wing riots took on a weird look. The anti-Trump signs gave them the flavor of a childish effort to achieve a political voice. Not to be one-sided, it should be noted that the same tactics have been used by the other side, although the slogans were different and violent street demonstrations were absent. On the other hand, the differences of opinion actually resulted in government shutdowns.

Hoopla about the Budget

It seems reasonable to ask whether the discretion that is available justifies the response, or whether there are other factors at work. There is discretion: after all 30% of the expenditures are not mandated. However, that doesn't explain why people ignore the fact that a monthly change in one of the mandated expenses can be three times the annual net change proposed by a new administration. Perhaps, the discretion is in the detail rather than the net.

Fortunately, the WALL STREET JOURNAL (5/2/2017) included a very convenient way to look at the amount of change being considered. It summarized the proposed budget as it stood on May 2 in the House of Representatives Appropriations Committee. It compared that to the 2016 budget, and for convenience had notes regarding some of the changes. It is unlikely that I could improve upon their presentation so it is reproduced below. It does a very good job of summarizing the expenditures that might be considered discretionary. There are other budgeted expenditures, but they are budgeted to meet mandates. Further, one has to keep in mind that most federal expenditures are not even included in the budget because they are theoretically funded from trust funds and dedicated taxes.

Much to-do about nothing?

Visually the graph conveys an important point to note about discretionary expenditures. Comparing 2016 to the budget proposal for 2017 shows how little change there is in comparison to the levels of expenditures. Comparing the different categories makes it clear that any shift in emphasis still leaves the basic mix of budgetary expenditures unchanged. The ranks are not changed. One might quibble that within the detail of some of the categories that have been grouped together there are important changes within the category. However, that only emphasizes and reinforces the point: the categories were added together because individually they are insignificant.

Every individual can make his or her own decision about the importance of the individual changes reflected in the graph, but the graph makes clear that even in the discretionary expenditures, there isn't that much discretion. The changes are not that great. For example, take defense, the largest category of expenditures, one that accounts for more than half of discretionary spending. The total change is only $20 billion. That is a change of only 3.5% of the expenditures. The proposed change is over a full year of operations. To put it in perspective, one month’s year-over-year change in interest expense cited in the first posting on loss of control was about $7 billion. So, a year’s change in defense expenditures is equivalent to a few months’ change in the debt service interest payments. Three or four months of interest payments could increase expenditures more than a full year’s change in the defense expenditures.

However, one is forced to ask why there is much to-do about the discretionary expenditures to the point of people taking to the street and threatening to close the government. It could be that they have personal interests involved, but that would hardly explain the vehemence of opinions or their frequency within the population. So, it may be productive to look beyond the actual content of the discretionary expenditures to other forces that may explain reactions.

Below is a different way of looking at the data presented in the graph above.  The table focuses just on the change. It shows the size of the change between 2016 in 2017 in billions of dollars. It then shows that change as a percent of the level in 2016.    

Transportation, HUD
State/Fioriegn Operations
Homeland security
Financial services
Legislative branch

Ignoring defense, which is by order of magnitude different from all the other categories, the table highlights curious phenomena. The two categories with the most change both in dollar terms and as a percentage, are agriculture and financial services. A legitimate initial reaction might be a big yawn, but that's the point. Compared to news coverage or the highlighted controversial areas shown in the graph from the WALL STREET JOURNAL, the real changes occurred in areas that are not hot button issues. The hoopla is about items that in dollar terms are trivial. Put seriously, they are rounding errors on the estimates of growth in many of the mandated categories. Further, the growth in agriculture is largely due to mandated increases in the food stamps program.

One could argue that all the hoopla associated with the budget is associated with trivial monetary changes.  But, at this level of disaggregation the absolute value of the change in the remaining categories is $5 billion. Five billion dollars seems like a lot of money.  To put the $5 billion in perspective, over the past 12 months, the deficit stood at $651.5 billion, compared to $460.6 billion a year ago. That's a change of about $191 billion or almost 40 times as much as the $5 billion that is the source of the hoopla.

Undoubtedly, part of the hoopla and wacky reaction is due to the confusion associated with big numbers. The WALL STREET JOURNAL had an article entitled “When Big Numbers Need Bringing Down to Size.” It is quoted below because it does a very good job of illustrating the problems associated with large numbers:

“Here’s a brainteaser. Take a sheet of paper, and draw a line with the endpoints 0 and 1 billion. Then place a tick mark on the line where 1 million should appear. A typical person will place the mark too close to the middle. But that’s where 500 million should go. ‘About 40% to 50% of the people tested get it terribly wrong, and when they get it terribly wrong, they get it terribly wrong pretty much all of the time,’ said David Landy, a cognitive scientist at Indiana University who studies mathematical perception and numerical reasoning.”

“To visualize where 1 million should go in the number-line test, imagine a meter stick with each of its 1,000 millimeters representing a million units. At that scale, the tick mark for 1 million would align with the first millimeter. The final millimeter would represent 1 billion.  Placing 1 trillion at the appropriate spot would require extending the line to the length of a kilometer, with a trillion falling at the end.” (For those who aren't familiar with the metric system, lay a yardstick down and with a pencil mark each end. One ended zero; the other end is 1 billion. Now mark the end at zero with a felt tip pen. The thickness of that felt tip pen mark is one million. To get to 1 trillion you have to go out about half a mile).

“Big numbers befuddle us, and our lack of comprehension compromises our ability to judge information about government budgets, scientific findings, the economy and other topics that convey meaning with abstract figures, like millions, billions and trillions.”

“The president’s 2018 preliminary budget, for example, proposes to cut $2.7 billion from $1.068 trillion in discretionary spending.”

The table below treats that $5 billion in the absolute value of the change as a source of the hoopla. It is then compared to a number of other measures of government activity and the economy. It shows the $5 billion as a percent of the other measures of government and economic activity. In order to illustrate the point of the table, hoopla (i.e., the $5 billion in the absolute value of changes) is shown as a percent of the other measures calculated in two ways. The first shows the percent if whole percentages are the level of accuracy desired. It shows that other than in terms of the annual deficit, the hoopla doesn't even show up. It's irrelevant with respect to total outlays, total discretionary spending, the federal debt, or GDP. It's only when hoopla is shown to the hundredths of a percent that it even shows up in a comparison to the national debt or gross domestic product.

Hoopla Hoopla
Uniform Rounded at the
Item Convenient Units to a hundredth
Description Billions Percent of of a % of
the Item the Item
Source of the Hoopla  $       5.00 100% 100.00%
Total Federal Outlays:  $3.85 trillion  $      3,850 0% 0.13%
Discretionary Spending $1.068 trillion  $      1,068 0% 0.47%
Federal Deficit:  $587 billion   $         587 1% 0.85%
Total Federal Debt:  $19.5 trillion  $    19,500 0% 0.03%
US Current $ GDP $16.66 trillion  $    16,662 0% 0.03%

One might argue that treating the $5 billion in absolute value of the changes as the source of the hoopla is unfair. After all, by leaving out the change in defense, agriculture, and financial services one has biased the analysis. However, if one considers those categories as a source of hoopla, it's easy enough to add them back in and recalculate. Nevertheless, the results will be the same: by showing the portions as hundredths of the percent it should be quite apparent that with respect to the national debt or GDP, the changes in the budget categories remain irrelevant. Further, the absolute value of all changes in discretionary spending is still less than 1% of total spending and really only shows up with respect to discretionary spending where it still only a couple of percent of discretionary spending. It's hard to believe that confusion regarding large numbers isn't responsible for much of the reaction to the budget.

Confusion, however, might be only part of the problem. It may well be that crossing scales and reacting to federal budget numbers as if they could be related directly to family budgets is intentional. One might argue that defense, agriculture, and financial services are too remote to react to in the same way. Similarly, the failure to provide for Social Security and Medicare are too remote in time because reaching 65 is too remote, or dedicated taxes and the fiction of a trust fund conceal those expenditures from consideration.

Thus, the public may be is reacting to the only expenditures which they perceive as immediate and easily identifiable. However, if that's the case, they’re being deceived because clearly the mandated 70% of all expenditures are immediate and identifiable. They will be spent in the same year; revenue has to be raised or the debt increased in the same year. They are no less immediate, and they are clearly identifiable.

There is always a reason

In the discussion above there is the comment: “It could be that they have personal interests involved, but that would hardly explain the vehemence of opinions or their frequency within the population.” There just aren't that many people who are really affected by what's been changed in the budget. However, it may well be that those who feel they are affected are in a position to influence others, perhaps even deceive others, into believing that they are also affected by the changes. It could also be that people who are not affected see it as in their interest for a large segment of the population to believe that they are affected.

There are two groups that have a vested interest in encouraging a large portion of the population into believing that the budget embodies major change. The first is the media. Their interest is commercial. Portraying current events as major news items increases their viewership, and thus it allows them to sell more advertising at higher rates. They can portray the change as good or bad; it doesn't matter. 

What matters is that they portray it as being very important, something everyone should know about. The unfortunate consequence is that they cannot report honestly if it really isn't that important.

The second group with an obvious interest is also pursuing its own self-interest, but in this case it's political. Both political parties have every incentive to exaggerate the impact of anything the other party proposes. By so doing, as the media says, they energize their base. That's just another way to say they get people worked up about nothing. It doesn't matter what the issue is as long as it can be betrayed as important. 

The consequence is that each political party has an incentive to portray the other political party as extreme. It also gives each political party the incentive to characterize any compromise made by the other political party as if it were a major accomplishment.

The combination of the incentives for the media to portray every issue as dramatic and the political parties to portray each decision as major, feed on each other. The media instead of being a filter that separates news and facts from noise, rumor and innuendo becomes a megaphone. Reporting an outlandish rumor becomes more valuable than reporting facts, even if the source is the political opposition or a source known to be unreliable. 

It has degenerated to the point where the more outlandish the statement the more coverage it gets. That in turn feeds back to discourage the political parties from serious factual discussion. Factual discussions get no coverage, and politicians need the coverage.

The consequence seems to be that each issue is portrayed as if it was a matter of principle. One illustration is the wall that Trump proposed between the US and Mexico. During his campaign he portrayed it as defining a difference in attitudes between him and his opponent. The Democrats picked up and carried the torch of exaggerating the importance of the issue. They exaggerated it to the point where they threatened to close down government if it was included in the budget proposal. 

Now, regardless of how you feel about a wall, there is no doubt that whether we spend millions of dollars, even $1 billion, on the wall, it pales by comparison to the trillions of dollars that we will spend on mandated programs. Perhaps, it is the impotency we've imposed upon current elected officials that leads to the bizarre intransigence we witness.

Regardless, what is apparent is the current changes in budgeted expenditures hardly justify the reaction of either the media or politicians. Further, it is quite apparent that given the constraints under which politicians operate, they have incentives to exaggerate the importance of the budget, and the media has an incentive to go along with the charade. The unfortunate consequence is that the voting public has their attention turned away from the important consequences of decisions made by previous politicians.

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