It is high time that conservatives reform the budget process.[i] In theory, Congress should prioritize expenditures to achieve the greatest public good with the available funds taxpayers and lenders provide. But in practice, not only are tradeoffs not made, there is no visible mechanism for identifying levels of priority.

The absence of such an analytical tool seems to have bullied President Trump into an unnecessary fear of defaulting on the debt. So much so that he has made a devil’s deal with Nancy Pelosi and Chuck Schumer. Doesn’t he know that they hate him and want him to fail or even die?  Perhaps he did what he thought was necessary for the good of the country facing the aftermath of two killer hurricanes. The pathetic Republican Senators could have saved him from dealing with Nancy and Chuck, but the GOP Senators couldn’t pass a stand-alone disaster relief bill. President Trump looked like a statesman among a bunch of petty politicians. Time will tell how costly this episode will prove to be.

In previous versions of the phony default scare tactics, I and many others have pointed out that every month there are ample federal receipts to cover the interest on the debt (well under 10% of the annual budget), as well as other high priority outlays. Yet the fear mongers seem to carry the day every time. Maybe some politicians are just lying about their commitment to balanced budgets.

To be fair, the way the budget is designed, it is difficult to prioritize spending. The federal budget is divided into overlapping categories. The various categories and sub-categories often obscure clear understanding. This article contains a proposal to simplify and regroup the spending categories and suggest how to prioritize them. It is not a proposal on how to change any actual line item expenditures.  It doesn’t even require an Act of Congress or an Executive Order to accomplish this. Indeed, I do it for them in this article just by labelling and grouping some categories of expenditures.

Instead of a unified federal budget, divide it into two or more tiers. Call the top tier “Tier 1 Spending.” Think of these as the outlays which must be made before any others. They need not be 100% of any program. Some programs might be funded with multiple tiers. The categories suggested here seem likely to be part of anyone’s top tier, but politics will surely play a big role. That would require legislation, but absent that, they still make it easier to understand the budget. Just regard tier definitions as informational. Table 1 gives the broadest categories of two tiers of spending for FY 2015 (actual) and FY 2021 (projected).

The data sources are OMB Tables 3.1, 3.2 and 2.1: https://obamawhitehouse.archives.gov/omb/budget/Historicals

The numbers in parenthesis next to various spending categories refer to the federal accounting system. The column labelled “Mean %” is the implied annual compounded rate of growth for each line.

Table 1: Tiered Spending (Billions of Dollars)

Tier 1 outlays account for around 70% of current annual spending. Two major sub-categories, interest and earned benefits, are contractual liabilities. Defense and Primary Functions are necessary core functions of any government. There may be other priorities that deserve Tier 1 funding. If I had more detail, some of Tier 2 spending on children’s health and nutrition could be transferred to Tier 1. Part of the Medicaid budget goes to recipients of Medicare. I would transfer these to the Medicare budget on Tier 1.

Table 2 is an expanded version of Table 1. It contains more detailed categories and more years.

I had to infer some of the details from overlapping information and I rounded off liberally. There is no separate category for Homeland Security because the outlays are spread out over multiple categories. The expenditure called “Miscellaneous ACA Outlays” under Tier 2 health is an estimate reflecting the need to reconcile multiple federal sources.

It would be helpful if there were a single document published by the federal government that contained clear and unambiguous non-overlapping categories. Perhaps there is, but I haven’t found it. The OMB tables I refer to are as close as I have found to that ideal. The main classifications these OMB tables use are by “function” and “superfunction.”  This is a more informative way to look at outlays rather than by agency or even by federal accounting system numbers.

With the exception of 2015, all the numbers in Table 2 are subject to uncertainty. Anyway, for purposes of discussion, the numbers are probably close enough to reality to give a fair picture. Only by looking at actual numbers can one get an idea of what is at stake in governing.

It is especially distressing when highly educated citizens shun the math. Simply trusting bureaucrats to do the math for us is a step on the road to tyranny. Yes, it is that important. So please be patient with the numbers. Many discussions of the budget employ pie charts. I have chosen to display the raw numbers so that actual calculations can be made.

Table 2: Tiered Spending (Billions of Dollars)

Prioritizing Spending with Tiers

Unlike just defining tiers and spending categories, a suggestion to use the Tiers to prioritize outlays requires legislation.  Any time there is a delay in passing a new budget, or in raising the debt ceiling, all current revenue would be allocated to Tier 1 outlays for the next quarter before anything can be spent on lower tier spending. Granted, that would create a significant hardship among the poor. Instead of those vague “government shutdowns,” which amount to little more than closing a few parks and monuments, it would create a crisis that could force meaningful spending cuts in order to pass a new budget or borrow new money. It is likely that some revenue would be available for Tier 2 spending, but any shortfall should be enough to encourage a deal.

This is not as revolutionary an approach as one might think. What do you think happens if FICA revenue plus trust fund assets are insufficient to cover current outlays for Social Security benefits? Current law specifies that no other Treasury funds can be used and that benefits be cut to avoid a deficit in the trust fund. Thank Congress in the 1930s for that. In reality, we know the law would be changed before the sacred Social Security benefits actually got cut. Presumably, something similar would happen under the tiered priority system proposed here.

Note that interest on the debt is in Tier 1 and would never be endangered by a failure to raise the debt ceiling.  If that is not adequate assurance, we could create a Tier 0 to include just the interest, and pay it before the rest of Tier 1. Probably overkill, but I have no objection.

The threats of default and government shutdowns during Congressional standoffs would be eliminated. Only duly authorized outlays could be made but if there is a revenue shortfall, and no borrowing authority, the tiers would prioritize spending.

Balancing the Budget

Honest observers long ago correctly concluded that there is no long-term solution to ever more serious budget deficits without slowing the growth of entitlements. The tiered approach highlights that fact. There is no politically realistic way to cut Tier 1 spending without gutting the defense budget. Even cutting defense spending by a third would barely offset a few years of natural growth in Social Security and Medicare outlays.

Tier 2 spending currently accounts for some 30% of the budget. Most of that goes to subsidize citizens and non-citizens who cannot or do not support themselves. But Medicaid was expanded by the ACA to subsidize many healthy young men. At least change the name of that subsidy! Cuts in subsidies are not necessarily “on the backs of the poor.” Unearned entitlements are the only category where politically plausible cuts in spending or even just in the rate of increase of spending can be made. To put the charge of shortchanging the poor in some perspective, look at the following table of national GDP around the world in 2015.

Table 3: National GDP for 2015 in Trillions of Dollars

The U.S. Federal Government spends more every year than the entire national GDP of every nation except for the United States itself and China, and just barely Japan. Even with its trillion dollar deficits, it collects more tax revenue than the entire GDP of every nation except for same three. American spending on entitlements alone is barely under the GDP of the UK.

It is ludicrous to argue that we are not wildly generous to the needy among us. Sensible cuts or freezes would not amount to balancing the budget “on the backs of the poor.”

The political constituency for Tier 2 unearned entitlement spending is enormous and growing. Each year the economy needs fewer workers to supply all the economic needs of the full population. The situation in agriculture is compelling. Where once, 80% or more of the population was engaged in food production, it is now more like 2%. This has led to great prosperity as most people have been able to find productive, demand-driven work. It remains to be seen if that will continue, but there are troubling signs that education and ability will never be adequate. Imagine a society with only 25% of the population providing 100% of the economic goods and services. Substantial income would have to be transferred to the 75%, who will all be resentful voters. It sounds like a script for a sci-fi movie with an unhappy ending.

The strains on unearned entitlements are enormous. Is that a self-serving lie told by the 1% or is it economic reality? Between earned and unearned entitlements, it is clear that the ever-shrinking productive class has its hands full. I know of no compelling historical precedent but it would be a severe test for any democracy.

The focus of this article is spending. Just for reference, Table 4 is a summary of seven-year revenue projections from OMB. Compared to spending, revenue projections are far more questionable, depending as they do on uncertain economic predictions. But Table 4 is adequate for rough calculations of deficits or surpluses.

Table 4: Revenue Projections (Billions of Dollars)

The Sobering Truth

For anyone interested in serious budget analysis, Table 2 and Table 4 should be required reading. The government ought to compile them every year. All the bloviating about waste and fraud or other easy spending cuts just obscures what all serious analysts know:

1. The spending in Tier 1 is politically untouchable. Perhaps minor cuts in the growth of future benefits could be made, but it would require a true bipartisan consensus.
2. Small cuts could be made in the categories I called “Secondary Spending,” but they would have negligible impact. That is not a value judgment. Just math.
3. The truth is that the budget deficits are driven by the category “Unearned Benefits.” It is the inexorable growth in these programs that negates all plans to cut spending. Even if the ACA were repealed and never replaced, it would only dent the problem.
4. Optimistic conservatives look to tax rate cuts and supply side economics to increase the revenue projections in Table 4.  I share that optimism to a point, but without cutting increases in spending on unearned benefits including Medicaid, no serious progress can be made.
5. While waste and fraud should be cut whenever possible, it is hard to see much impact on deficits. Gimmicks like the Penny Plan are just not possible without cutting politically popular middle class earned benefits.