Budget myths

5 myths about the budget

Why most of the big things we argue about are wrong.

By Michael Grunwald

Washington is preparing for another partisan clash over federal spending. In fact, the Obama era has been a series of partisan clashes over federal spending—the stimulus battle in 2009, the debt-limit crisis in 2011, the “fiscal cliff” in 2012, the government shutdown in 2013. They are always noisy. They are always tense. And they are always confusing because Americans don’t really understand how their tax dollars are spent.

You don’t need to be a budget wonk to get the gist of the budget wars.

You don’t need to know about reconciliation or sequestration, outlays or out years, the trust fund or the doc fix. You just need to know a few basics so that you don’t think a quarter of all federal spending goes to foreign aid—which, incidentally, is exactly what the polls say most people think. As confusing as the budget can be, the broad strokes are pretty simple. You just have to get past a few common myths:

MYTH 1: The government pours your money into porky boondoggles and random programs.

The U.S. spent about $3.7 trillion in the fiscal year that just ended, about $12,000 for every American. The first thing to know about that spending is that about two-thirds of it, nearly $2.5 trillion, went to Social Security, Medicare and other health programs, and the military. The old joke about how the federal government is an insurance company with an army is not really a joke.

The next largest budget item was just $229 billion, the interest we paid on our national debt.

Everything else the U.S. government funded—farm subsidies, food stamps, flood control, the Federal Aviation Administration, the Fish and Wildlife Service, FBI investigations and FEMA disaster responses as well as foreign aid—took up less than 30 cents of every taxpayer dollar. Foreign aid actually took up less than one cent. Popular priorities like national parks and Head Start and the Border Patrol were basically rounding errors. It’s not like the bulk of your hard-earned cash is funding bridges to nowhere, rabbit massages, congressional junkets or Solyndra-style failures, either. The big money goes to the Pentagon and the elderly.

MYTH 2: “Spending” means the annual budget.

Another way to think about the vast gap between the spending we fight over and the spending we ignore is to see how much Congress appropriates through its annual budget process. For 2015, it was just $1.1 trillion. The rest of the spending was “mandatory,” a telling Beltway description of dollars that go out the door automatically unless Congress decides to stop them. This autopilot situation is definitely not an optimal way to run a multi-trillion-dollar spending operation, and when fiscal conservatives say they want to rein in "entitlements," they're talking about mandatory spending programs.

Mandatory spending includes some veteran benefits, unemployment benefits, food stamps, and even transportation dollars. But the vast majority of it is Social Security and Medicare, our beloved entitlement programs for senior citizens, along with Medicaid, our main health care entitlement for low-income families. Budget hawks freak out about these entitlements because U.S. demographics are skewing older, which means fewer workers will be financing benefits for more elderly retirees, and because health care costs have been increasing for years.

Hold that thought for a moment. For now, the key point is that the discretionary spending that inspires so much warfare in Washington is just a small chunk of federal spending—and more than half of it goes to the Pentagon. Just 13 percent of the 2015 budget was “non-defense discretionary,” a bucket including education, science, the environment, housing, energy, the National Weather Service, the National Endowment for the Arts, that porky local boondoggle named for your former congressman and just about anything else that doesn’t involve defense, health care or old-age pensions.

MYTH 3: The government is rapidly going bankrupt.

The government spent $439 billion more than it raised in taxes in 2015. That sounds bad, but that deficit was almost $1 trillion less than it was in 2009, when revenues plunged and spending spiked after the financial crisis. Back then, the deficit was a terrifying 9.8 percent of GDP; now it’s 2.5 percent, which is considered stable when the economy and the population are growing. Although budget hawks savaged President Barack Obama and congressional Republicans for failing to adopt the Simpson-Bowles deficit reduction plan, America has almost achieved the 2015 Simpson-Bowles target of 2.3 percent of GDP, anyway. The U.S. is not Greece, and is in no imminent danger of becoming Greece.

If Washington is so irresponsible, why is our fiscal position getting better? The biggest factor driving down the deficit has been the improving economy: Individuals and businesses pay more taxes when they have jobs and profits. Obama raised additional revenue through tax hikes on the wealthy in Obamacare and the “fiscal cliff” budget deal of 2013. On the spending side, the slow wind-down of wars in Iraq and Afghanistan has saved some money. And thanks to Republican threats to force the U.S. government into default in 2011 if Obama didn’t accept some austerity on the spending side, the Budget Control Act that resolved the standoff is slashing spending by a remarkable $2.5 trillion over a decade.

Higher taxes for high earners (Obama's victory) plus lower spending (a Republican victory) equals lower deficits. Now the only real short-term danger is that Washington dysfunction and brinksmanship could force the Treasury into default. Congress has two weeks to raise the federal debt ceiling so the government can pay for stuff it has already bought, but Republicans want to use the deadline as another opportunity to extract concessions. Obama has said he is done horse-trading over the full faith and credit of the United States. We’ll see. A default would be spectacularly catastrophic, but at a time when House Republicans can’t agree on a speaker or just about anything else, it’s not exactly unimaginable.

MYTH 4: The government is slowly going bankrupt.

The deficit is shrinking, but since outflow still exceeds inflow, we still have to borrow to make up the difference, and our $18 trillion debt is still growing. It has shrunk slightly as a portion of the economy, to about 74 percent of GDP, but that’s still an awful lot of money for a nation to owe; a century ago, the entire federal government spent just $1 billion a year. Meanwhile, the Congressional Budget Office has forecast that annual deficits will start growing again soon. And the retirement of the Baby Boomers (combined with the trend toward greater longevity) will put heavy pressure on entitlement spending in the coming decades.

That’s why fiscal Chicken Littles can produce alarming 75-year budget forecasts. Honestly, though, nobody has any clue what will happen to the country over the next 75 years. Abraham Lincoln didn’t budget for the Great Depression. FDR didn’t anticipate 9/11. That said, there has been one very significant piece of long-term budget news during the Obama era: The cost of health care, which was the most serious threat to fiscal sustainability, is no longer soaring. In 2009, the CBO expected Medicare spending to jump from 3 percent to 6 percent of GDP by 2030; it now expects much more limited growth to less than 4 percent of GDP. That is a huge difference, worth trillions of dollars over time.

Our fiscal position decades from now will depend on economic performance, interest rates, military entanglements and a bunch of stuff that would never occur to us today. It will depend on whether we want government to do more or less than it does now, and whether we’re willing to collect the taxes needed to pay for it. But it will also depend on the cost of health care. If Obamacare really does control costs, the well-armed insurance company we call the U.S. government will be a lot cheaper to maintain.

MYTH 5: Spending is just the stuff labeled “spending.”

That’s the budget in a nutshell. Most of the $3.7 trillion we spend gets funneled into the military-industrial and medical-industrial complexes. Most of the spending is virtually automatic. The deficit is shrinking. The debt is growing. We have a serious demographic problem. We had a serious health care problem, but it looks like it won’t be as bad as we thought.

Of course, it’s not really that simple. For example, that $3.7 trillion spending number doesn’t include another $1.3 trillion worth of “tax expenditures,” basically spending disguised as tax breaks. Predictably, the biggest one is the tax deduction for employer-paid health insurance, which cost the Treasury $150 billion in lost revenue last year, followed by tax-deductible contributions to pensions and retirement plans. But there are also sizable tax expenditures for mortgages, children, charitable donations, tuition and earned income for the working poor that don’t fit neatly into the general spending narrative.

Another twist: Sometimes the government loans money rather than spend it. Uncle Sam now has a $3.3 trillion credit portfolio, and the vagaries of federal accounting tend to hide its true cost. For example, the Department of Education loans students more than $100 billion a year and the Federal Housing Administration insures more than $100 billion worth of mortgages. But the government books a profit on those programs, so they don’t show up as spending. The nationalization of Fannie Mae and Freddie Mac is also artificially reducing the deficit since the government gets to keep their profits.

But nuance can be overrated. The budgetary forest may be less compelling than some of its individual trees, and in the coming weeks there’s sure to be heated debate about Planned Parenthood, the Export-Import Bank and the Highway Trust Fund. But the big picture still holds. Our fiscal picture might be kind of a mess, but it’s not really a disaster. If we don’t do something stupid like default on our obligations, we should be just fine.