Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  It’s the Domestic Spending; Stupid
Posted Under: Government • Research Reports • Spending • Taxes
Supporting Image for Blog Post

 
Supporting Image for Blog Post

 
Supporting Image for Blog Post

 
Washington DC is out of control.  In Orwellian Newspeak, we hear liberals say tax cuts, "cost too much," but deficit spending is an "investment."  If GOP politicians reduce spending growth from already inflated forecasts, they call it a "'conservative' spending cut."  And, politicians from both sides of the aisle pat themselves on the back for "working so hard" to reduce the deficit when it's really the US taxpayer that provided the muscle.  Surging tax receipts have lowered deficits in recent years, not fiscal discipline.

Insanely complicated budgetary rules, which favor spending, have permanently kept the US in deficit since the early 2000s, and have seemingly made it impossible to ever balance the budget again in our lifetimes.  The now infamous "London Whale" lost a few billion at a well-known bank, and that made headlines for months.  But government inefficiency and fraud cost taxpayers billions every week and no one seems to care.

Every time a GOP presidential hopeful talks about tax cuts, the revenue neutral, and static, budget models come out of the woodwork to attack them as money losers.  But, when spending goes higher and higher with each and every budget, it seems everyone forgets how to do simple math.

Many blame the Mideast wars for deficits, and the CBO estimates the cost was $1.6 trillion dollars.  But that's only a small part of the story.  Since 2000, non-defense government spending has been a total of $6.3 trillion higher than it would have been if it had only increased by population growth plus inflation.  In other words, for every dollar spent on the wars, the federal government increased domestic spending by $4.  Non-defense spending (primarily redistribution) has been the biggest cause of deficits.

Three charts tell the story.  The first shows total federal spending since 1990.  For comparison, the chart also plots what spending levels would have been if the budget had only increased at population growth plus inflation – the spending level necessary to keep inflation-adjusted, per capita spending constant.

As the chart shows, under the final two years of Bush 41 and the eight years of the Clinton presidency, total government spending tracked right along with population growth plus inflation.  But, under Bush 43 and President Obama, spending accelerated sharply.

Also shown on the chart is total federal tax receipts (the green line).  If government spending had grown at a rate that kept real per-capita spending steady, the US would have had a $384 billion dollar surplus in fiscal year 2015, rather than a $439 billion dollar deficit.

No matter how revealing those data are, they hide some important underlying trends.  President Clinton held down spending by cutting defense (the so-called peace dividend).  As can be seen in the chart above defense spending fell sharply below the level necessary to keep it tracking with population growth and inflation during the 1990s, then shot up after 9/11 (with wars in Afghanistan and Iraq), but has now fallen sharply again under President Obama.

In fact, since 1990, total defense spending has been $1.3 trillion less than it would have been if it had held steady on a real, per-capita basis.  In other words, even with the wars in the Middle East, there has been a peace dividend.  Unfortunately, the world has not cooperated and war with radical Islam has risen as the Cold War dissipated.  It seems fair to argue that as US defense spending slowed, the world has become a less safe place.

As can be seen in the final chart, the real culprit behind current large deficits is non-defense government spending.  This measures all entitlement spending, redistribution and the cost of government agencies.

Non-defense spending grew faster than population growth plus inflation from 1990 to 2000, but just slightly.  Then, after 2000, it accelerated sharply even before the Panic of 2008.  The trend was rising under President Clinton, but was offset by defense cuts.  But, under President Bush both domestic and military spending grew and then under President Obama domestic spending stayed high.

In other words, the US is spending a significantly larger amount (nominally and on an inflation-adjusted basis) per person today than it did in either 1990 or 2000.  Part of this was misguided bank bailouts under TARP, but as the chart clearly shows, even though TARP has been mostly paid back, government spending has not fallen back to previous levels.  So, not only have we spent the peace dividend, we've spent it five times over, even with interest costs falling to historic lows. As a result, in spite of a surge in tax receipts the US is still facing significant deficits.

From a political perspective, while some of this happened under President Bush with the passage of Medicare Part D, No Child Left Behind and other government programs, the biggest surge in spending came after 2008, with the $700 billion bailout of banks and auto companies.

We have said this many times in the past, but this "government to the rescue" philosophy has undermined the ability of politicians to push back on the size of government.  If Republican's believe in big government, then who is left to fight against it?  As a result, even though most of TARP has been paid back and the government has taken $188 billion of profits out of Fannie Mae and Freddie Mac in the past three years (which count as negative spending), total government spending set a new all-time record high in fiscal year 2015.
 
The bottom-line is that it is not defense and war spending that drove the US into massive deficits, but domestic spending and entitlements.  Unless the US gets those under control, deficits from this point forward will only get worse.

Brian S. Wesbury - Chief Economist


Click here for PDF version

Posted on Friday, November 13, 2015 @ 11:06 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
The Producer Price Index Dropped 0.4% in October
Retail Sales Increased 0.1% in October
The Rate Hike Huff
Higher Rates, Higher Stocks
M2 and C&I Loan Growth
Nonfarm Payrolls Increased 271,000 in October
Nonfarm Productivity Increased at a 1.6% Annual Rate in the Third Quarter
The ISM Non-Manufacturing Index Increased to 59.1 in October
The Trade Deficit in Goods and Services Came in at $40.8 Billion in September
Bias & the Markets
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.