Understanding the federal budget

Note: Although I try to keep GRS a politics-free zone, today’s topic is inherently political. I’ve stayed as neutral as possible in the article, but I know that there’ll be some political discussion in the comments. Please keep conversation civil, as always.

Recently at The Simple Dollar, Trent posed the question, “How much do taxes matter to you?” As might be expected, his readers responded with passionate comments from both sides of the political spectrum. The discussion frustrated me, though. There’s just too much misinformation, and people offer their opinions as if they were facts.

I’m as guilty as anyone else.

Because my own education on this subject is weak, and because I want GRS readers to be informed, I spent twelve hours last week researching a variety of tax topics. From this research, I’ve written two articles: this one about the U.S. budget, and a second part about taxes, which I’ll publish next week.

These posts are meant simply to be educational. There’s no takeaway other than knowledge. We cannot have informed discussions about taxes and government spending if we don’t have the baseline information. These two articles record my attempts to discover that baseline information.

Note: Though I’ve done my best to be accurate, I’m sure there are errors in this post. As they’re caught, I’ll make corrections.

To begin our discussion of taxes, let’s examine the state of the U.S. budget.

The U.S. Budget

The U.S. budget is complex, and it’s the source of much political debate. Some argue that we should cut our military spending and use the money to fund a national health care system. Others argue that nationalized health care is the road to socialism, and that we should reduce our current government health programs. Others simply want to cut all government spending. But how much is actually spent where?

The U.S. Office of Management and Budget (OMB) provides a website devoted to the budget of the United States government. You can download the entire budget in PDF form (~2mb file), or browse only for the sections that interest you. There are a variety of supplementary materials available, too.

All of this information is overwhelming. To make the numbers easier to understand, Jess Bachman produces an annual Death and Taxes poster, which attempts to visualize the entirety of the federal budget. The poster contains over 500 programs and departments. The size of each item on the poster is proportional its budgeted amount.

 

The Death and Taxes page allows you to zoom around and look at sections of the poster from within your web browser. There’s even a “quick find” feature that allows users to look up the sections that interest them.

You can also order the poster, of course. It’s $24. When I asked Bachman for permission to use excerpts of the poster in this article, he went above and beyond for GRS readers: Order two or more posters and get 50% off when you use the code ‘slowly’ at checkout. Yes, that’s essentially a “buy one, get one free” deal. Order one for yourself, and give the other to your local high school history department.

From the “Death and Taxes” poster, here’s a glimpse of the total U.S. national budget:

Although this says “2008 federal budget”, it’s actually for 2010.

Even though this image simplifies things, it still took me a couple of minutes to understand it. The penny in the middle represents receipts — from taxes and other sources. The big black chunk missing from the penny is the budget deficit. The government has to borrow this money to stay afloat. The colored circles around the outside edge represent where the government is spending money. Again, the area of each circle is proportional to the expense. (I have no idea why the equation [Outlays = Receipts + Deficit] doesn’t balance. Can someone explain?)

Looking over the budget, here are some datapoints that interested me:

  • The Department of Defense has a budget of $534 Billion, which is 37.5% of the overall $1421 Billion discretionary budget. (What does “discretionary budget” mean? See the next section of this article.)
  • I’ve always thought the Department of Homeland Security was a sort of boondoggle. Looking at its $41.383 Billion budget, however, I see that it was basically created by shuffling agencies from other departments. Customs and the Coast Guard are a part of Homeland Security now, for example.
  • The Department of the Interior, which is home to programs like the National Park Service, etc., has a budget of only $12.007 Billion. That seems really low compared to some other parts of the budget.
  • NASA’s budget seems low, too. Is $18.686 Billion per year really going to provide a manned mission to Mars in my lifetime? We’ll need to raise that budget if this geek is going to have a chance of dying happy. (I can dream, can’t I?)
  • The United States Postal Service has outlays of $78 Billion, most of which are covered by fees. About 5% ($3.776 Billion) of the agency’s budget comes from tax dollars. This is much less than I would have guessed.
  • The Department of Education has a $46.69 Billion budget. Of this, $29.64 Billion (63.4%) is for Special Education and Education for the Disadvantaged.
  • The Financial Literacy and Education Commission (which falls under the auspices of the U.S. Treasury) is far, far too small to be listed here.

If looking at the budget poster online is overwhelming, you can scan the spending on various departments in this data-only list of budget spending (it’s just a blog post, so it’s not too daunting).

As someone who has served on a small-town budget committee, I guarantee you that each of these government organizations — both the ones you support and the ones you don’t — can provide rationalization for every penny they receive. In fact, they probably wish they had more money to work with.

But as a taxpayer, I wish I had more money to work with, too.

There’s a balance to be found here. And it’s arguments over this balance that create divisions among our political parties and lead to tirades about taxes.

Discretionary Spending

You may have noticed that the U.S. budget is divided into discretionary spending and non-discretionary spending. What’s the difference? In my personal budget, non-discretionary spending (or mandatory spending) includes things like the mortgage and utilities and essential food. Discretionary spending includes videogames and comic books and restaurant meals. But what does it mean for the government?

  • Mandatory spending (or “direct spending”) is required by law. Social Security, Medicare, Medicaid, and other federal programs (such as Unemployment Compensation, Food Stamps, Student Loans, etc.) are mandated by law. Our elected officials must change the laws before they can change spending on these items. These programs are sometimes referred to as “entitlements”. If you meet the requirements for a particular program, you’re entitled to receive benefits.
  • Each year, as a part of the budgeting process, the President and Congress negotiate discretionary spending. Whereas entitlement programs are ongoing, most discretionary expenses require annual renewal. Requests for discretionary spending are made via an annual appropriation bill, which authorizes the government to spend money. Discretionary spending covers programs like the U.S. Forest Service, the Department of Agriculture, the Food and Drug Administration, the Peace Corps — and the military.

Using data from the Congressional Budget Office, I was able to create a graph that shows that discretionary spending as a percentage of the U.S. GDP (gross domestic product) peaked in 1982, and then fell under Presidents Reagan, Bush, and Clinton. It jumped under President George W. Bush:

 

The Congressional Budget Office data breaks discretionary spending down further. In this chart, I’ve retained the mandatory spending line, but split discretionary spending into three categories: defense spending, domestic spending, and international spending. Again, these numbers are graphed as a percentage of GDP:

 

Both defense and domestic spending increased under President Bush. I suspect they’ll both increase under President Obama, as well. How much of this is due to each man’s political philosophy? How much is due to the political and economic exigencies of their time? I don’t know.

“That’s great,” my wife said when I showed her these charts. “But what about total spending. You need a chart for that.” Right. Here’s some info about all government spending (including state, local, and federal). What we want, though, is this data from the U.S. Office of Management and Budget.

Here are total U.S. government budget outlays as a percentage of GDP over the past 80 years:

To me, it looks like President Clinton is the only one to systematically reduce spending.
But as several commenters have noted, there are other factors to the 1990s reduction.

Despite fiery rhetoric from both sides, no one political party can honestly claim to be anti-spending. I think that most of us understand that some government spending is necessary — we just worry about the degree of spending that occurs.

It’s a fine thing that citizens want to keep government spending in check, but it’s important to note that just because you don’t want or need a program doesn’t mean that there aren’t other citizens who want or need it. (I was raised in a “peace church”, for example, and so am naturally opposed to military spending. Yet I recognize that for most U.S. citizens, this is a high priority. I’ve learned to temper my upbringing with the knowledge that mine is not the majority opinion.)

Although this is a long article, it provides only a cursory glimpse of the U.S. budget. It doesn’t even begin to touch the subject of where this money comes from! Tune in next week for the second half of my research, in which I try to uncover the truth about taxes.

Postscript: Here’s a new New York Times editorial from Warren Buffett, in which he writes that recent deficit spending was justified to save the economy, but cautions that government needs to be prepared to pull back on spending or risk making things even worse. In order to ward off inflation, Buffett says, “Once recovery is gained…Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.”

Update #1: Several people have requested info about the relationship between national debt and GDP. In the comments, Joshua points to this national debt graph. He also suggests cross-referencing these graphs with info on party divisions of the U.S. Congress.

Update #2: I amended my Bill Clinton statement. As several commenters have noted, there are other factors to the spending decline during the 1990s, including an expanding economy and a Republican-controlled legislative branch. Also, Ginger-Kathleen sent e-mail asking about government salaries. The President makes $400,000 per year and has a huge expense account. Members of both houses receive $174,000 per year.

Graphs courtesy of me. Images courtesy of Jess Bachman, creator of the Death and Taxes poster. Bachman is generously offering a deal for GRS readers. Order two or more posters and get 50% off when you use the code ‘slowly’ at checkout. “It’s basically buy-one, get-one-free,” Bachman says. Thanks, Jess!

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