federal spending and social impact

Steve Verdon is a good man, and I've had many interesting email conversations with him in the past. We also have completely opposite politics, in the sense that he subscribes to the "government social spending axiomatically bad" meme and I believe that government spending, under suitable reforms, can actually lead to a net positive effect on the economy - and more importantly, the social fabric of the country.

So it's with keen interest that I've been following the debate between Matthew Yglesias and Steve about spending cuts. It started with Matt, who made the obvious observation that if we need a bigger military (an assertion supported by conservative blogger Tacitus), we are going to need to actually pay for it.

Steve (predictably) responded that we could pay for our imperial adventurism in Iraq by cutting social spending, and points to the US Department of Agriculture, the Department of Housing and Urban Development, and the Department of Education as likely targets.

I'm not a fan of farm subsidies either, but I hope Steven isn't trying to imply that subsidy support is a unique affliction to the Democrats in Congress. And Matt does a great job in his response of explaining the HUD funding of Section 8 vouchers, and putting the argument about the Department of Education in its proper context. But Matt's main point is that this kind of social spending is a trivial fraction of the budget.

That's a point that deserves further detailed examination. Bush has asked for $87 biliion dollars in additional spending for Iraq. This graphic from the Washington Post puts that figure into perspective:

The graphic takes its data from the submitted budget for fiscal year 2004, which is available online. The Department of Education has a budget of $53.1b, of which $12.7b is for Pell Grants, $9.5b in state grants, and $12.3b in Title I grants to local educational authorities (funding increase as part of No Child Left Behind, Bush's signature program co-sponsored by Ted Kennedy). The Department of Housing and Urban Development has a budget of $31b, of which $12.5b is housing vouchers. The US Department of Agriculture has a budget of $53b, of which $37b is for food safety and nutrition. It would be an interesting debate to take a more detailed look at the spending breakdown and discuss the line items. However it's also clear that the budget-busting items are not social spending, it's actually the war in Iraq ($87b), Bush's enormous tax cuts ($107.8b), and paying interest on the national debt ($173b).

Steve directly addresses the incongruity between arguing for responsible federal spending and looking the other way on the mounting federal debt:

The problem with balancing the budget is that it is unreasonable to expect it to be balanced from year-to-year. This is one reason why many states are in trouble. They have a balanced budget requirement that forces them to either cut programs, raise taxes or both. The problem is that in times of recession these things tend to prolong recessions. The ideal that one is introduced too in introductory macroeconomics is to cut taxes and/or increase spending during the recessions (i.e., run one of those super evil deficits) and then raise taxes and/or cut spending during the expansions. The problems is that when you run a deficit during the recession you get that reeking political opportunism from the other side.

Steve's example of state budgets is especially salient - every state except Vermont has a constitutional requirement for balanced budgets - and every state except Vermont has a budget deficit. Curiously, the GOP national platform still echoes Newt Gingrich's Contract with America, however, "[reaffirming] our support for a constitutional amendment to require a balanced budget." Go figure.

Steve's second point is also valid in that running a (temporary) deficit is a valid component of an economic strategy to combat a recession. However, his example doesn't quite address the reality of today's situation. First, we aren't in a recession. Second, the Bush deficit is not a temporary economic stimulus, but are intended to be permanent.

Finally, Steve decries "reeking political opportunism" as "THE problem" when the government tries to combat recession by running deficits, but makes no mention of the fact that there is a pretty strong whiff of the same when things are going well and it's time to raise taxes, from conservatives who equate government spending with Communism in their rhetoric and who breathlessly rage about "the gummint spending YOUR MONEY!!" So there's plenty of blame to go around.

Matt's final point really gets to the heart of why I'll never be able to support the Steve's a priori assumption that government spending is bad - that conservatives, by (selectively!!!) focusing on dollar amounts, fail to take into account the actual real-world results of that spending. Or it's lack:

[Steve] also states, however, that he resents it when liberals depict conservatives as "mean jerk[s]" who "want to throw people on the street." I appreciate conservative consternation at this characterization, since most of the conservatives I know are very nice people who never say things like "we should throw those people out on the street." On the other hand, they are inclined to say things like "we should cap expansion of Section 8 voucher spending at 5% per year." For the reasons I explained above, however, the effect of limiting Section 8 growth in this manner (and especially of freezing it at '01 levels) would be to throw people on the streets.

UPDATE: Dwight Meredith's essay "Choose Wisely" (Google cache) is essential reading in this context. From the OMB's Mid-Session Review, he did the following calculation:

$1.8 trillion: OMB�s estimate of FY 2004 receipts of the Federal Government
- $165b (interest on the national debt)
- $409b (military)
- $492b (Social Security)
- $164b (off-budget SS surplus)
- $259b (Medicare)
- $187b (Medicaid)
= $121b remaining to fund the rest of the federal government. Look at the chart above and consider the Bush tax cuts in that perspective.

Dwight concludes with a simple question:

When Ronald Reagan faced huge budget deficits and the fiscal challenges of the retirement of the baby boomers, he raised taxes. When George H.W. Bush faced large structural deficits, he raised taxes as part of deal that also restrained spending. Bill Clinton faced down the deficits and turned them into surpluses in part by raising taxes on the wealthy and restraining spending growth.

George W. Bush promised to keep the operating budget in balance and pay down all publicly held debt to prepare for the retirement of the boomers. Instead he has reacted to a deteriorating fiscal situation by cutting taxes and going on a spending spree.

We have several choices. We can retract some of the tax cuts. We can make cuts in popular and effective programs like Social Security and Medicare. We can do a little bit of both. Alternatively, we can hide our head in the sand and pass the pain down to the next administration. Mr. Bush has chosen the last alternative. Is that a wise choice?

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