The Federal budget; a look at our nation's finances

The Financial Empire

America has long been the world’s wealthiest nation, but that title is slipping further and further away as time goes on. With the national debt growing ever higher and the government posting record deficits year after year we have gone from creditor nation to debtor nation, and the debt is growing far beyond our ability to repay it. What are the causes of this financial decline and what can we do to forestall, or even avoid our nation going bankrupt?

            Issues dealing with the national debt are highly complex and require a vast amount of research in order to realize the full spectrum of what each of these issues mean. Some issues are so complicated that economists spend their entire careers on them. Social Security is one of these issues, and the intricacies of it go far beyond the realm of common public knowledge.

For example, many people have been making predictions about when the Social Security fund will go bankrupt. This is a pointless conversation, because there are no actual funds in a bank somewhere. The only money in Social Security right now is the money they take out of our paychecks every month. The surplus monies, that is the money that is not needed to meet the needs of those currently receiving benefits, is borrowed by the government and put into the general fund. This means that the surplus money that everyone is worried about being used up in twenty years has actually already been used for other things, and that money is now part of the national debt, to be paid back to the American people when the need arises. This changes the nature of the worry about Social Security in that maybe we shouldn’t be worried about when the money that should be in the fund will run out, but if the government can provide any of those funds at all.

The real question is how can the average American citizen find out where all of this money is going, and the answer is the Federal Budget. The numbers can be a bit scary to tackle, but they deal with each and every citizen of the United States. The budget is published every year after being argued about and fine tuned by members of Congress working in conjunction with the president and his staff, and then is used as a blueprint for the monies being spent by our government. The monies being spent are recorded and the fiscal report is made at the end of the year, Congress then ideally uses it to compare with the budget and make corrections in next year’s budget. These two reports are our database for telling where our tax dollars are going and why. On page 4 is a spreadsheet provided by www.federalbudget.com that shows where your tax dollars have gone and will go from 2002 through 2005.

As you can see from the graph, the Department of Defense is second only to Health and Human Services in all three fiscal reports and is scheduled to remain in the same place in this fiscal year. The white house website at www.whitehouse.gov tells us that the budget for the DOD includes the Departments of the Army, Navy and the Air Force as well as fifteen different defense agencies (not including the Department of Homeland Security which is a separate item in the 2005 budget) and the unified combatant commands. The Department of Defense employs 2.3 million uniformed military as well as almost 700,000 civilians. The current administration has increased the DoD budget from 296.8 billion dollars upon taking office to 422.2 billion dollars in the 2005 budget, an increase of 125.4 billion dollars.

It is important to note that the discrepancy from these figures and the above graph is the war in Iraq, the budget for which has been added to the DoD budget total. You will also notice that DoD spending for 2005 is scheduled to be less than 2004. This is because the numbers for 2005 are from the budget, while the 2004 numbers are actual fiscal numbers. Often times the DoD will ask congress to appropriate more money for discretionary spending throughout the year because of unforeseen costs not included in the budget. Most economists suspect the number will be much higher than budgeted after the fiscal 2005-year is finished.

            Many respected economists, including Robert Higgs, a Senior Fellow in Political Economy at The Independent Institute who is also a renowned author, think that this number, while extremely large, doesn’t show the full picture of the defense budget. He points out in his article to the San Francisco Chronicle “Lodged elsewhere in the budget, other lines identify funding that serves defense purposes just as surely as—sometimes even more surely than—the money allocated to the Department of Defense (DoD).” (www.independent.org)

            These “other lines” in the budget Higgs refers to are things such as the nuclear practices of the Department of Energy, portions of the budget for the Justice Department, the Department of Transportation, as well as the State Department, all of which spend money in the interests of homeland security. This is to say nothing of the Department of Homeland Security; itself being an amalgam of other smaller agencies, all of which were designed to protect the homeland, which one would hope is what the DoD is doing with their money. It is for this reason that some feel it should be included in the defense budget, instead of being separate items, which seems to be an effort on the part of the government to hide the total defense spending.

            Another major area where defense spending is counted separately from DoD totals are the past defense costs, which are split up into two main groups. The first of which is the Department of Veteran’s Affairs, responsible for the education, health, pensions, commemorations, and burials of veterans of the armed forces. All these things are normally associated with military and defense spending, but are held under a different department and therefore not listed in the total. The second is interest on previous military expenditures. Economists figure that defense spending accounts for about 81 percent of the interest we pay on the national debt, a number that has never been included in official defense spending totals. All of these things added together make the total defense spending nearly double than the DoD budget in recent years. But while all this is alarming to say the least, it is not what most economists say could bankrupt our nation.

            What some call the “sleeper” item on the federal budget, the Treasury Department budget includes the interest on the national debt, and it is this item that poses the most danger for us as taxpayers and citizens. The interest on the debt works like any common household credit card except on a massive scale. The interest for the fiscal year of 2004 alone was 321.5 billion dollars, and that number is constantly growing. With each dollar that the treasury department borrows to meet the needs of congressional appropriations more interest is tacked on, and while we do not normally pay the principle on that debt, or what you and I would think of as the actual national debt, we do pay the interest every year. Just like paying the minimum payment on your credit card, paying the interest on the debt does nothing to get rid of the debt; it only keeps the debt from compounding because of its existence.

            The reason this number scares economists far more than any other in the budget is the continuous deficits our federal budget posts. The Treasury Department has to borrow enough money to cover the deficit, and the money borrowed gets tacked on to the national debt. The larger this number gets the more interest we have to pay on it. This interest does nothing to serve the public and does not diminish the debt, making it a big bill for things we got in the past. Also, even if the government stops posting a deficit, which seems highly unlikely, this number will remain the same until the principle can be paid off. This is where things get complicated.

 According to the Congressional Budget Office at www.cbo.gov, since 1962 we have only had five years where the federal budget posted a surplus. Those years (1969, 98, 99, 2000, 2001) were not nearly enough to make up for the deficits of the other years, which is how we get the national debt. This means in the deficit years if congress doesn’t have enough money for the interest on the debt then the Treasury Department borrows the money to pay the debt. If the next year is another deficit, which it usually is, then the Treasury Department borrows more money to pay the interest for that year and so on and so forth. This means that continually posting deficits actually costs money in and of itself, until the government no longer has the ability to pay the interest on the debt alone, sending the government into bankruptcy. What scares economists is the fact that our deficit spending in recent years has grown to unprecedented levels, making the interest on the debt the highest it has ever been. In 2003 and 2004 alone the federal government posted deficits of 377.6 billion and 412.1 billion dollars respectively, for a total of 789.7 billion dollars, enough to cover all five years of surpluses and then some. 2004 is the highest deficit on record, and with the end of the war in Iraq nowhere in sight this number is unlikely to go down.

What does this mean for us as individual citizens? The very real situation of our government passing the point of no return financially and having to declare bankruptcy seems nearer than it ever has before, and were this to happen the value of the dollar would be next to nothing, sending not only our nation but most of the world into complete economic chaos. If this possibility came to pass we would experience massive unemployment reminiscent of the Great Depression coupled with skyrocketing inflation, and we would probably experience price hikes like that of post-WWI but pre WWII Germany, where at one point a loaf of bread was worth more than a wheelbarrow full of deutsche marks. The fact of the matter is if the federal budget does not start paying down the debt this is not just a possibility but an inevitable future, because the interest will keep growing and we will come to a point where we are unable to pay it and our creditors will call in their loans.

At this point I suspect that many of you are questioning how all this could have started. How did we get such a large national debt, and why do our elected leaders seem so oblivious to its monstrous proportions? After all, if they aren’t worried about it then why should we be? The answer to that question is simple. The national debt has always been there and has become just another branch of the federal budget, so it doesn’t seem to be that big of a problem to those people who deal with it every day. The problem with this thinking is that the instant we are unable to pay the interest on the debt we will have awoken the sleeping giant, one that has the potential to send us into economic chaos. Another reason for this carefree attitude towards our seven trillion dollar debt is the Keynesian theory of economics. While in its original form it is a work of economic genius, this theory has been used to create what has been called ‘trickle down’ economics. The thinking behind this theory is that if there are just a few rich people that they will spend money, benefiting the producers of the items, who will in turn spend their profits, and so one and so forth, so in truth we only need a few rich people. This means that the more the government spends to enrich its people the better off they are. This was the cause of quite a bit of deficit spending, and the problem with it is that the basic idea of it is set up like a pyramid scheme, something which our government has outlawed as a confidence scam. For example, if six people get rich, all they have to do for trickle down econ to work is to buy from six producers, making them financially stable. Those six need to then buy from six other suppliers each, making them financially stable. This goes on down the line, eventually affecting all of us. The problem is there is logistically not enough money to do this. First of all, people have a greater propensity to save than the federal government wants them to, and second of all, there are too many people for it to work. If we went from the six-person example, then by step eleven it would include more people than live in the United States. The idea of trickle down economics falls prey to the fallacy of composition, which is the thinking that what is good for one is good for the group. While it works on the small scale, the large-scale logistics make it literally impossible. Suffice it to say, the reasons that our elected leaders are not worried about the debt are varied and complex, but the point is they should be worried. If they do not begin to think about the debt in terms of how to pay it off, we may end up shouldering the burden by facing skyrocketing taxes, huge inflation, and eventually governmental collapse.

 What can be done to stop this from happening? There are many divergent opinions, but most economists agree that cutting defense spending is a must. The federal government spends more on defense than Russia, China, Iraq, Iran, North Korea, Libya, Cuba, and Syria combined. To get even near the total that is spent on defense you would have to take the top 21 defense spending nations besides America and combine them, and most of the nations on that list are our allies. There is no need for this type of standing army even in times of war, but especially not in times of peace. Chalmers Johnson, in his book The Sorrows of Empire, argued that the reason for this inordinate amount of defense spending is what he called an “empire of bases” spanning the globe. He claimed that the professionalization of the military was what had caused this situation, and that the only way to stop it was to severely cut back on defense spending. He pointed to financial collapse as but one of four sorrows of American imperialism, noting that “bankruptcy may not be as fatal to the Constitution as endless war, loss of liberty, or habitual official lying; but it is the only sorrow that will certainly lead to a crisis, regardless of how cowed, deeply in denial, or misinformed the public may be.” (Sorrows, 306) According to Johnson, severely cutting defense spending would not only save us money by eliminating American militarism but also reduce the amount of people trying to do us harm. His reasoning for this being that one of the major reasons that America is a target for foreign terrorism is the fact that we are illegally occupying the terrorists’ home countries with our base empire.

While drastically reducing federal defense spending would solve militarism and reduce ill will for us around the globe, it would also do two things for us financially. First, it would reduce the total of the national fiscal budget. This means that even with a deficit the Treasury Department would have to borrow less, reducing the amount added to the total national debt as well as slowing the rate of rise on the interest of the debt. Secondly, it would give our federal government a chance to actually run a surplus and possibly start paying down the national debt as it did in 1998-2001, thereby not only reducing the debt itself but also the interest paid on it. Unfortunately, this seems unlikely to happen under the present administration.

People who oppose cutting defense spending point out that the DoD creates jobs and lots of them. The army provides steady employment and is one of the few options for a better life for the less fortunate in our society, in addition to the private sector jobs created by Defense Department R&D. Manufacturers like Boeing and Lockheed Martin receive a significant portion of their business from the DoD, and without that business they could possibly go bankrupt, but at the very least they would have massive layoffs and plant closings.

This argument is often countered by pointing out that the DoD is a gargantuan bureaucracy in which funds are commonly misallocated, lost, spent on things the American people neither want nor need, and where American tax dollars are routinely wasted. It has also been said that the money used for defense spending could be used to create peaceful private sector jobs.

An idea put forth by the National Debt Awareness Campaign is the FairTax Plan. In their plan they detail a federal sales tax instead of the income tax we have now, which they argue would solve a variety of our nation’s ills as well as supplying our government with enough money to run itself. They advocate that Americans will take home more of their paychecks, thus increasing the amount of disposable income they have to put back into the economy.  One of the other claims that proponents of the FairTax plan put forth is that the repeal of an income tax would stop the exporting of jobs overseas by making our exported products more appealing because of their lower prices, increasing demand for those products which would, in turn, create more jobs in the manufacturing of those products. 

By far their biggest claim is that the sales tax would eliminate what economists today call “corporate welfare.” Many large corporations find loopholes in the tax code in order to make large deductions, some to the point that they pay no taxes at all. Proponents claim that by having a sales tax corporations could not escape taxation because they would be taxed on the goods needed to manufacture their product rather than being able to find ways around being taxed on their income. This would also apply to the black market for drugs in our country. While the sellers of drugs do not post their actual incomes for obvious reasons they still use their profits to purchase goods and services, all of which would be taxed under the sales tax. This way the government would actually receive monies from sources it never would under the income tax.

Opponents of the FairTax system point out that under a federal sales tax, the tax would have to be around thirty percent on the dollar to fund the government, a number far higher than any sales tax in existence now. This added to the sales tax that most states have could mean that states like California could have a sales tax as high as 37.5%. Even taking home more on their paychecks than before, most families living in poverty could never survive the rapid price increase from such a sales tax.

Some political leaders have called for a need to place a balanced budget amendment in the Constitution. This amendment would at least force Congress to only appropriate funds it actually makes in revenues, hopefully creating dome fiscal responsibility in the federal budget. This would require not only drastically cutting defense spending, but also reductions in Health and Human Services programs as well. Programs like Medicare, Medicaid, HUD, and the Department of Education would be badly under funded and some portions of these programs would have to be cut, if not eliminated altogether. Thirty-four states are needed to call a constitutional convention, and so far twenty-nine have called for it. This is a drastic move, but some argue that the situation calls for drastic action.

Whatever is to be done, it has to be done quickly. The federal government is fast approaching the point to which it can no longer pay its debts, and when it does ordinary citizens will be the ones that have to pay the price. 321.5 billion dollars is a small price compared to what it will be if our government keeps posting these record deficits. Hopefully our elected leaders will see the need for fundamental changes to be made in the federal government’s accounting system, and if unfortunately they cannot it falls upon us as citizens of this republic to elect people who can. 

       Annotated Bibliography

Bivens, Matt. “The Failsafe Point: Spending Ourselves to Death” The Nation. 22 November 2002 Accessed 28 January 2005 http://www.thenation.com/failsafe/index.mhtml?bid=2&pid=163

            The article was very explicit in the need to cut back on defense spending and why. It showed the absurdity of the size of our military and why there is no reason for it. I didn’t use a whole lot of it in my paper, but it did help me get a very good idea of the scope of our defense spending.

Bureau of The Public Debt. “Interest Expense on the Debt Outstanding” 6 January 2005

            29 January 2005. http://www.publicdebt.treas.gov/opd/opdint.htm

            This site shows a list of the amount of interest paid on the national debt from 1988-2004 and some of the fiscal projections for 2005. It was helpful because it comes from the government, making it a highly reputable source and gives real solid numbers that I used in my paper

Farrier, Jasmine. Passing the Buck: Congress, the budget, and deficits. Lexington: University Press of Kentucky, 2004.

            This book attempts to show how the separation of powers has become an excuse for each branch of the government to pass off responsibility for the federal deficits on other branches. It was helpful in that it attempted to explain the budget in simple terms, and succeeded to a point.

Goldstein, Joshua S. The Real Price of War: How You Pay for the War on Terror. New York: New York University Press, 2004.

            This book pointed out how tax dollars fund the war on terror, as well as how that personally affects all of us. It also points out how the DoD likes to hide a good deal of their defense spending in different areas in the budget. Actually advocated spending a great deal more on the war on terror so it could be won quickly, instead of drawing it out and paying more without the possibility of victory

Higgs, Robert. “The Defense Budget Is Bigger Than You Think” The San Francisco Chronicle.18 January 2004

28 January 2005 http://www.independent.org/newsroom/article.asp?id=1253

This article was as insightful as it was helpful to my paper. It pointed out the many things on the budget that were defense spending but were not counted as such. It also used real numbers to almost double the reported defense spending for 2002 fiscal year. It used layman’s terms to really show what the DoD was trying to hide financially.

Johnson, Chalmers. The Sorrows of Empire. Metropolitan Books: Henry Holt and Co., New York, 2004.

            This book focused mainly on American militarism and imperialism, but did spend some time on the financial aspects of our actions. It was especially helpful in figuring out where the DoD budget is being spent and how. I find the source to be quite scholarly and informative, if a bit dry at times.

National Debt Awareness Center “How Congress Spends Your Money” 24 January 2005

            28 January 2005. http://www.federalbudget.com/

            This site was extremely helpful and central to my paper. Covering a wide range of fiscal topics including social security and defense spending, it focuses in on the interest paid on the national debt. The site offers two solutions to the problems of rising national debt and encourages people to get involved by writing their elected officials. This is also the site where I obtained my federal budget table. I find this site to be trustworthy because StudyWeb, a group that advocates using the Internet as a valuable resource tool, backs it.

Odom, William E. and Dujarric, Robert. America’s Inadvertent Empire. New Haven: Yale University Press, 2004.

            The book focused on the many gaps in our society, including the economic gap as well as the military empire of America, pointing out some of the costs. It was helpful in getting an idea of just how much the military controls its own funding, as well as the reasons they use for needing such an exorbitant appropriation of funds.

Rivlin, Alice M. and Sawhill, Isabel. “Restoring Fiscal Sanity: How to Balance the Budget” Washington D.C.: Brookings Institution Press, 2004.

            This report was an amalgam of many different ideas, but the editors succeeded in driving home the fact that something had to be done soon because these weren’t just made up numbers. They offered a few different solutions as well as criticisms of those solutions. I thought it was hard to read from a layman’s standpoint, but once you broke through the language there was a wealth of information. This can also be looked up online at www.brookings.edu.

The Congressional Budget Office. “Historical Budget Data” 25 January 2005

            29 January 2005 http://www.cbo.gov/showdoc.cfm?index=1821&sequence=0

            This site had tables on the national debt, deficit spending, revenues, and just about anything else you could want to know about the federal budget from 1962 until 2004. Extremely helpful to my paper was the numbers on how much the deficit was for each year.

The Office of Management and Budget. “President’s FY05 Budget”

            29 January 2005 http://www.whitehouse.gov/omb/

This is the official white house website for the Office of Management and Budget, and it was helpful to look here so I could compare the facts that the opponents of the budget gave with the white house statements. I went here for almost all of my numbers for the 2005 FY budget. While the site was full of information it was hard to navigate with a slower computer.

Towe, Christopher and Muhleisen, Martin. “U.S. Fiscal Policies and Priorities for long-run Sustainability.” Occasional Paper, International Monetary Fund. #227 Washington D.C.: International Monetary Fund, 2004.

            Focused a great deal on the need for federal budget reform and the vicious cycle of deficit spending. Brought up a great deal of policy and the need for it to be changed. Seriously dense and hard to understand if you’re not an economist.