Entitlements Consume The Federal Budget, Not Defense

There is a misnomer out there about government budgets. They don’t work like a family budget. Politicians have used the family budget to try and illustrate how off the rails government budgets are. However, families can’t really sell bonds and tax the way governments can.

When you hear that someone “cut the budget”, most people assume that spending is going down. Usually with governments it means the rate of spending has gone down. It might have been budgeted to go up at a rate of 5% but now is only going up at 2%. The spending is still going up.

I remember seeing Mary Meeker’s slide deck on the future of the internet a few years ago. It’s always full of a lot of information that might help you build some correlations or opinions on things. One slide stood out to me. It was that entitlements consumed over 60% of the budget. Most people think the bulk of the budget is spent on defense but that is simply not true.  Sort of kills the whole “guns and butter” tradeoff you might have been taught incorrectly in high school economics.

Last year, her deck had these statistics in it.

The US federal budget in 2016 was about 3.85 trillion dollars.  Of that, 63%($2.4 trillion) goes to entitlement and mandatory spending (Social Security, Medicare, Medicaid, etc), 16% ($600 billion) to non-defense discretionary (education, law-enforcement, transportation, general government expenses), 15% ($584 billion) to defense, and 6% ($241 billion) to servicing the debt.  Entitlement spending accounts for almost two-thirds (63%) of all federal spending, up from 45 percent in 1991.

Now that interest rates are going up, the cost to service the debt is going up too.

Here is one way to frame federal entitlement spending:

We are starting to see the effect of the new tax system enacted last year.  The fact that citizens of high tax states now cannot deduct their state and local taxes off their federal income taxes is a game changer.  Even though I live in a high tax state, I agree with it.  Why should a person in a low tax state subsidize the largesse of a person in a high tax state?  It’s causing all kinds of stresses that we might not have seen previously.

I thought I would link to Russ Roberts and his excellent podcast to see what he and a guest would say about it. It’s worth a listen.