Another Look At Why Spending Cuts ALONE Will Simply NOT Work in Reducing the Debt or the Deficit 
In A Perfect World
I WAS putting together a hub on the Conservative Cut, Cap, and Balance plan and was working on the part about presenting a 50,000 foot look at this budget deficit issue. When doing this, it gave me an idea on a different approach at trying to explain why spending cuts alone simply cannot, in fact, will not be able to bring the deficit under control as Conservatives firmly believe it can.
Let me start with what began as a simple chart, but, grew a bit in "apparent" complexity. This chart, Chart 1, looks complex but is about as simple as it gets when you are talking about the Federal Budget. If you break the budget down, there are only three parts, the Revenue (on the left), the Expenditures (on the right), and the Government (in the center).
Revenue has two major and one minor components: personal taxes, corportate taxes, and all else. Expenditures also has three major components: discretionary spending, mandatory spending, and interest on the debt (right now small but projected to get very big). You will notice two more pieces at the center top and bottom; those are the revenues lost to tax credits, incentives, deductions and other reductions to the basic tax based on special circumstances such as personal or corporate welfare.
It is really that simple, seven basic parts; three revenue streams in, three expense out plus special tax code laws that effect the "inflow" but really looks and acts like "outflow". This is the perfect world where America has spent most of its history, in balance, e.g. expenses DO NOT exceed income and Insterest on the debt was zero.
The Real World
Chart 2 is only slightly more complicated when showing the budget as it actually is today where expenses do exceed income and Interest on the debt is not zero. Here, I just added another revenue stream made up of borrowed money, i.e., the Deficit.
All that was needed was to 1) add "Borrowed Money" on the left, the Revenue side, 2) add an Expense on the right side for Interest on the debt, and 3) make a note in the center that states that Expenses exceed Revenues and there you have it.
To put the chart into works, money is received by the government from taxes and fees; some is given back in deductions, incentives, and credits; the remaineder basically goes into the Treasury. Further, the Federal Reserve, as needed and when it has the authority from Congress to do so (which it does not have right now), sells bonds and puts those receipts into the Treasury as well. Bills come into the Treasury daily resulting from legislation previously passed by Congress which Treasury pays; that's it. Simple, isn't?
Now, let's look at a little more detail by putting some 2011 budget numbers to the charts.
What Are Some of the Parts and Amounts
IN CHART 3 you can see the only real complexity to the Revenue side involves Personal Taxes. As anyone who receives a paycheck knows, the government takes taxes for two reasons, one is withholding for incoming taxes and the other are deductions for Social Security and Medicare insurance.
There are three take aways, as I used to say in briefings from my previous life, from Chart 3 is that 1) decisions about Corporate taxes and revevue from Other tax and fees will not have any real affect on the deficit or the debt, 2) the amount of revunue from indiviual taxes and insurance taxes are roughly equal, and 3) the amount of revenue from personal taxes is roughly equal to the revenued raised from borrowing.
As you will see, these last two points will play major roles in the later anaysis. Now, what about the much more complex expenditure side of the house?
Regardless of the propaganda from the Left and the Right, the federal government spends money for only one reason, to support the needs of the American people as determined by the people through their Representatives.
(Sorry for the aside but this little bit of misdirection by the political propagandists always amazes me in how effectively it works. When I hear all of this hoopla about Congress doing this to the American people and doing that to the American people, it sounds like Congress is not part of America. What people forget behind all of the media blitz and sloganeering and finger-pointing Congress is doing exactly what it was elected to do because it is made of Americans who represent at least 51% of small, relatively speaking, segments of each states population who apparently agreed with the platform of the person or party of the guy or gal they elected. It wasn't some unknown alien who put the members of Congress in power, it was each and every American who took time or didn't take time (for that non-vote counted as well) to vote. Through their vote, the American People are the Captain of their own ship and, like it or not, bear final responsibility for the actions or lack of action of those they elect. I will expand on this idea in a future hub sometime.)
In its most basic sense, I guess, the government provides the American people a service of one sort or another. To provide those services, it needs a structure which most people understand as a bureaucracy. The Constitution is the lawful basis for this bureaucracy and starts it on its way by setting up three basic organizations to serve America, the Executive, Legislative, and Judicial branches. Sounds simple enough doesn't it. Well it is, at this point but from here on out, it quickly degenerates into so much complexity as to make your toes curl.
The bottom line, of course, is the structure that supports this bureaucracy, and the services it provides, must be funded somehow. This is done through Congressional action and executed by the Executive branch. From this we derive our two kinds of spending, discretionary spending and mandatory spending. The kinds of services we provide within these two types of spending is just like their names sound, services which we may or may not chose to fund in any given year and services which, by law, we have promised to provide each and every year.
With CHART 4 we will consider how government spends the money you give it.
Discretionary spending pays for the law says we don't have to provide, but want to; like National Defense, Congress, a national transportation system and the like. It is classified as into two major categories, Security (National Defense) and non-Security (Other governmental operations). Security is primarily the military and the State Department while non-Security is primarily made up of all of the Congressional, Judicial, and non-security related Executive departments, branches, offices, etc.
One important number to note is that National Defense related costs of accounts for almost two-thirds of discretionary spending while the remaining non-Security related discretionary spending, the money most Americans think of when talking about "cutting" spending amounts to only one-third. Another important number is that Discretionary Spending itself is a mere one-third of total spending. I will revisit these numbers later.
This is spending required by law and comes under many guises. The two outlays that count, however, are the Social Security and Medicare Insurance programs. The Medicaid program and other programs some consider "welfare" make up the remainder.
Again, take away numbers are that Social Security and Medicare account for about 56% and the remaining 44% is split between Medicaid and four or five other major programs. Mandatory Spending, however, is a whopping two-thirds of all federal spending now.
INTEREST ON THE DEBT
When the government borrows money it, like anybody else, must pay interest on any outstanding balance. This is nothing more than that.
CHART 5 puts these two pieces together using numbers from the 2011 Budget.
Narrowing Things Down
It helps in any analysis if you can eliminate the fluff, the distractions. CHART 6 attempts to do this looking at revenues and expenditures that are roughly of equal amounts.
In looking at CHART 6, you should notice something interesting; Social Security and Medicare show up on both sides of the chart, once as revenue on the left side and again as expenses on the right side. Mathematically speaking, those automatically and properly cancel each other.
Also, notice that "Other Taxes and Fees" is about the same size as "Interest on the Debt". We can let these cancel as well on the pretend assumption that we will use the "Other Taxes and Fees" to pay for the "Debt Interest"
This let's us reduce CHART 5 into CHART 7 where we can then apply another techinque called simplifying assumptions.
Simplifying assumptions can be used to get rid of obvious distractions in the data and help make the picture the clearer without affecting the analysis to any significant degree. In this case, I am going to make two assumptions to help make the differences between revenues and expenses even more stark.
One assumption is that at least 50% of the National Defense and Government Operations budgets must be spent, it can't be cut, period. Another assumption goes along the same lines is that you can't reduce "welfare" kind of programs more that 71%.
As you can see in CHART 8, the numbers I chose were no accident; when I trade off revenues against outlays the result is zero revenues; you will see why shortly. How can I do this and get away with it? Because the assumptions I chose are reasonable, more than reasonable actually.
Can anybody really challenge me on my assumptions that at least 50% of the discretionary budget MUST be spent, no ifs and or buts about it. We are talking about leaving half the defense and half the non-security budget available for cuts. Further does anybody else really think we would drive Medicaid, and food, education, agriculture, labor programs and the like to virtually nothing; which 29% is? I really don't think so.
If you except these simplifying assumptions, then you can build CHART 8.
We Have a Revenue Problem As Well!
So, what does CHART 8 tell us? Why did I take the trouble to make the Revenue side $0? Because it clearly highlights exactly how bad the problem is and how intractable it is to solve with spending cuts alone. Although I will point out the obvious with numbers, just by observation you should be able to see that the Conservatives cannot get what they want; they cannot get from here to there through spending cuts alone; to do so is like throwing the baby out with the bath water.
Let me, if you would, go into a little more explanation wth CHART 9. In this chart, I removed a few words, added a few percentages and rearranged things a bit so it is, I hope, a littlle clearer.
What this chart says is that AFTER you have accounted for ALL of the Revenue the government receives in the way of taxes and fees, less that piece which flies away in the from of corporate welfare, tax deductions for the poor and the wealthy, etc., this is what you have left to spend ... $1.6 Trillion a year for the status quo.
- Said another way, you need to borrow another $1.6 Trillion a year to pay for the program Congress has already authorized.
- Said a third way, you must cut spending by $1.6 Trillion per year to reduce the annual deficit to zero
- Said a final way, to balance the budget by spending cuts alone, given the simplifying assumptions I made earlier, you must:
- --- reduce the National Defense budget by 50%,
- --- reduce the government operations budget by 50%, and
- --- reduce Medicaid and similar programs by 71%
How Does This Analysis Play With Today?
What should be loud and clear to any sane person looking at CHART 9 is that if you wanted to balance the budget today with spending cuts alone today, or next year, or the year following is that you just Can't Do It! The hurt to the Nation would be incalculable and that should be patently obvious; you have to have increased revenues to pull a balancing act off no matter how much Tea they are serving.
What is less obvious is what happens if we look a bit longer, like the ten years under consideration by the White House and Congress today? The latest, reasonable proposal on the table at the moment is calling for about $3 trillion in deficit reductions over ten years, down from $4 trillion a week ago. That is about $300 billion per year.
UNDER CONSTRUCTION - I have one more section to write, but, because of other time contraints, I can't get to just quite yet. However, discussions in other hubs prompted me to make this premature release anyway.
- The Truth Behind The Debt Ceiling Debate
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- The Debt Ceiling Debate and Compromise: Who Won?
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