Balanced Federal Budgets

The federal government has a wide variety of responsibilities, most of which stem from programs that the government has created. Some of these outlays are discretionary, but many are not. The trade-offs for the federal government are usually not a question economics, but politics. The current federal budget for FY2016 shows a deficit of $474 billion. The largest outlays are for social security ($891 billion), other mandatory programs ($627), defense ($589), Medicare ($529) and non-defense discretionary, which covers a wide variety of different programs. Finding $474 billion to cut there — or some of that money in conjunction with tax increases — is inevitably going to be a challenge. Much of government spending in the budget is in the form of mandatory programs. Further, many of these are impossible, politically, to reduce. One does not simply cut Medicare payouts without losing a strong voting bloc, for example. The military is separated out from other discretionary items because it is only somewhat discretionary. The military is tied to the power and influence that the United States has in this world, and that power and influence is itself tied to economic opportunity, quality of life and other such issues. Thus, a reduction in military spending to some degree can be achieved, but there will come a point when the reduction reduces the effectiveness that the U.S. has in the world. This leaves non-defense discretionary spending at $563 billion for the 2016 fiscal year. To balance the budget would mean eliminating almost all this type of spending, so all agencies would be affected, and profoundly. The bare bones of federal government would be maintained only, with all other agencies — be they the FDA, the Park Service, HHS or anything else — would either cease to exist or would be gutted to the point of being non-functional in any way that we would recognize. The benefits of this are dubious at best – the pursuit of a balanced budget makes more sense by other means, like targeting major spending or revenue areas that have generally been spared.

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The reality is that given the current state of the budget, it would be impossible to balance it. The idea sounds good to an opposition party that does not have to actually do it, because actually balancing the federal budget at this point would mean dramatic cuts to defense, to Medicare, to Medicaid and to Social Security. Senior citizens vote, the military budget can be reduced a little bit but there is a point where such reductions will do more harm to America than good, and ultimately there is no genuine appetite among voters for reductions in the programs that make up the core of the federal budget. A tax increase could be passed to help balance the budget, but there are political limitations to how much taxes can be raised, and how quickly. Again, the politics of actually balancing the budget are only attractive to people who do not have to pay the political cost of doing it.

From an economic perspective, Keynes argued that federal government spending in a time of recession would put money into the economy, but this only works when the investments made with that money generate a greater return than the cost of that money. The U.S. borrows at very low rates today, and has done so for several years. Investments in the Department of Defense often have a positive payoff, either in terms of global influence or in terms of technological development. Defense-related jobs are often in fields like engineering and add a lot of value to the economy. Spending on Medicare, Social Security and Medicaid sometimes has benefits to the economy, but in many cases this is fairly inefficient spending — especially payouts to seniors who do not need the money and simply park those funds. Ultimately, however, Keynes was advocating for temporary increases in spending to put a government into deficit, not permanent deficit spending. It is therefore a false notion that any government with a permanent deficit is following Keynesian ideology.

At this point, the reasons for borrowing are fairly clear. To not borrow would mean dramatic restructuring of budget priorities. It makes no sense to dismantle the federal government when borrowing is at rock bottom rates. It makes no sense to dismantle the discretionary programs in order to maintain full current spending levels on entitlement programs simply because cuts to those programs is a non-starter politically. The quandary with the budget exists specifically because the cuts need to be made in areas that, if implemented, would be career suicide for any politician. At some point, however, if Keynesian ideology is followed, the deficit will need to be eliminated — this should have happened during the economically strong periods of the 1980s and mid-2000s, for example, but no attempt was made during those periods to close the gap. Those periods not only did not see the application of Keynesian economic theory, but also did not see the application of free market economic theory either, because a free market economist would not increasing government spending on things like Medicare Part D. It is the disregard for any budgetary principles whatsoever that has created and maintained the current deficit, and structured it in a way that will be politically difficult to address.


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