In the past 40 years, there have only been four years where our Federal government didn’t spend more than it took in. Those were the years from 1998 to 2001. Yes, that was due to the dot.com, high tech bubble. The average yearly deficit 1970 to 2008 was $124 billion. Revenues grew over that period by a compounded rate of 7.0%, which was just slightly higher than growth in Gross Domestic Product GDP), while expenditures grew at a rate of 7.4%. This small difference was enough to accumulate a deficit, or increase in debt, of $5.1 trillion. Coincidently, interest on the Federal debt during this period came to about the same amount, $5.4 trillion. These numbers include Social Security receipts and outlays. During those years, that program took in $2.3 trillion more that it paid. If you take out this surplus, there were really only two years we didn’t have deficit spending. In my crazy world, this money should actually be set aside for Social Security.
Medicare and Medicaid costs have grown much faster than any other costs. The government’s cost for these programs went up from $25 billion in 1970 to $677 billion in 2008. These costs grew at a compounded rate of 11.5%, much higher than GDP or overall spending. Medicare and Medicaid accounted for 23% of Federal outlays in 2008 compared to only 5.5% in 1970. One major item that decreased as a percentage of outlays during that period was Defense, which fell from 42% to 15%. The Peace Dividend obviously wasn’t used to reduce yearly deficits.
These trends of Federal government spending from 1970 to 2008 clearly show the financial management strategy used by our best and brightest Congress. The strategy can be summarized as “Let’s spend everything we can get our hands on now and who cares about the future!” The basic strategy is to take whatever taxes the economy will allow, cover promises for Medicare and Social Security, spend whatever is needed for Medicaid, and divide up the rest of the money for the other discretionary costs. Just borrow more money to cover interest on the debt. Spend when the economy is good, and spend when the economy is bad. No need to consider long term promises and the unfunded liabilities that go with them. Hey, this financial management stuff is easy!
The primary reason our representatives have followed this strategy for the last 40 years is because they could. There have always been people, companies, and other countries willing to invest in our Treasury notes and bonds. Investors have effectively served as a national credit card with no payment requirements. However, the costs of our Federal government’s promises now look to be unsustainable, and the credit card bill may eventually have to be cut up, so to speak. I have not included discussion of spending for 2009, 2010, and beyond because these years do not follow the historical trend due the current financial crisis. The country’s financial situation has gone from chronic mismanagement to “Are you kidding me?” I will cover recent and projected spending in my next post.