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WHERE ON EARTH IS ALL THE MONEY GOING? Kitchen Table Math Part II

by TheFalcon on August 31, 2009

BudgetINTRO

In the last essay, entitled “THE STATE OF OUR FINANCES – SOME KITCHEN TABLE MATH” we took a look at the family finances, that is to say the state of U.S. Government finances.  I know it’s not the sexiest topic in the world as the results of such a review are disturbing, unsettling, depressing and any other discouraging adjective you can think of.  These are the kinds of feelings one often has when going over their own finances, which helps explain why we avoid the exercise and the painful truth that emerges for so long.  Of course the problem with putting it off is that it makes a bad situation much worse than it otherwise would have been.  As time passes and no changes in course are made, the opportunity to rescue the situation slips away.

Since ultimately the U.S. governments finances are the responsibility of “We the People” and since these finances seem to be running amok with our elected officials proving financially and economically incompetent, perhaps we need to weigh in on the matter, regardless of how painful.  This essay, along with Part I were written in support of this process, to help “We the People” get a handle on the family finances and hopefully begin to develop some common sense notions of what needs to be done.  Like pulling dead skin off of a burn victim, it is excruciatingly painful but necessary if you want to save the patient.

So lets summon up a little courage and take a closer look at U.S. government spending.  We won’t get into too much detail here but the first step to getting control of ones budget is to have some idea of what the money is being spent on.  Then we can take the painful but necessary step of figuring out what we need to cut to live within our $2.1 Trillion or so in tax receipts.  It will be a significant and eye-opening first step just to look at how the U.S. government is spending money.  For those of you who haven’t read the first essay on Kitchen Table Math I, it may be helpful to set the stage for the discussion below.  Since a picture is worth a thousand words, there will be a few images to go along with the commentary.  Before we dive into the spending picture, lets take a quick peek at where the governments money is coming from.

(click to enlarge)

US Government Income Pie Chart - FY 2009

U.S. Government Sources of Funds - FY 2009

Note in the above chart that approximately 46% of the money needed to cover 2009 U.S. Government expenditures comes from borrowing and the printing press.  It may be useful to click the following link to get a good idea of what one trillion dollars looks like.  What Does One Trillion Dollars Look Like? Now let’s examine how these trillions are being spent.

U.S. GOVERNMENT EXPENDITURES

As some of you may know, the U.S. fiscal year runs from October to September instead of January to December.  So the 2009 fiscal year will soon end on September 30, 2009.  It is estimated that once the final numbers are in, the U.S. government will have spent approximately $4 Trillion and collected only $2.2 Trillion in tax receipts.  To cover the record setting shortfall of approximately $1.8 trillion the government has borrowed and begun printing the money.  They have recently revised their budget shortfall estimate down to about $1.6 Trillion.  However, for the purposes of this essay, I’m going to stick with the higher figure because the actual monthly figures reported by the Treasury seem to support it and because the U.S. government is notorious for underestating the damage.  The Federal Reserve also printed $300 billion to buy a portion of this years treasury debt  because buyers haven’t been showing up at the auctions.  The fancy name they use these days for printing money in this fashion is Quantitative Easing (QE), so when you hear this term in the media, you know what they are talking about.  The following graph is a pie chart that shows how this years $4 Trillion was spent.

Fiscal Year 2009 US Government Budget Pie Chart

Fiscal Year 2009 U.S. Government Expenditures

There are actually about 34 line items in the monthly U.S. Treasuries report which lists all the different government departments and amounts spent on each.  I have greatly simplified this for the chart above by grouping these line items into 6 categories in order to highlight the basic types of payments the government makes.  Here are the six categories listed from most costly to least.

  1. $818 Billion to The Department of Health and Human Services (DHHS) – The most expensive activity this department covers by far are the Medicare and Medicaid programs accounting for about 90% of the total.  It is these programs that the Government Accountability Office (GAO) and others have indicated are programs that are out of control and will bankrupt the U.S. Government  if something isn’t done to curb these escalating costs.  The DHHS also includes the Food & Drug Administration (FDA), the Center for Disease Control (CDC), the National Institute of Health (NIH), among many others.
  2. $725 Billion to the Social Security Administration (SSA) – This one needs no introduction.
  3. $714 Billion to the Department of Defense (DoD) and for Other Defense Civil Programs – This includes the activities of the Army, Navy, Airforce and Marines among other related programs and of course a large part of this expense goes to fund the wars in Iraq and Afghanistan along with maintaining 700+ bases in about 140 countries around the world.
  4. $709 Billion to all other government Departments – This category is a catch-all for the remaining  government departments such as the executive, legislative and judicial branches of government as well as the departments of Agriculture, Commerce, Education, Energy, Homeland Security, FEMA, HUD, Interior, Justice, Labor, State, Transportation, Veterans Affairs, EPA, Corp of Engineers, GSA, NASA and a few others.  This is the real business of government.
  5. $392 Billion in Interest on The Public Debt – This is somewhat self explanatory.   It is the interest the government pays on the various Treasury Bills, Notes & Bonds they have issued to the Public to borrow money.  The maturities on this debt range from 0 to 1 year for Bills, 1 to 10 years for Notes, and 10+ years for Bonds.  A large portion of this, or about $5.561 Trillion is of the 0 to 10 year variety.  The current amount of debt in the Publics hands (this includes China and other foreign countries) is approximately $7.336 Trillion.  The Government itself holds another $4.334 Trillion for a total of about $11.719 Trillion in outstanding debt.
  6. $640 Billion to the Treasury Department – This number has mushroomed to 10 times its previous levels since the economic crisis began from approximately $61 Billion in 2007.  I have not researched the use of these funds yet, but I suspect it is money related to stimulus, bailout and government loan guarantee programs.

There is your $4 Trillion spending for 2009 in a nutshell.  Since we are borrowing almost half of this money, it is an interesting thought exercise to imagine which of these budget categories the borrowed money is paying for.   It is all the more interesting since foreign governments, banks and institutions have loaned the government a third to a half of the borrowed funds (see Treasury TIC Report).  Are these borrowed funds from foreign countries financing our wars, our social welfare programs, our government operations or all of the above?  It is interesting to think about.

The next chart stacks these 6 categories and spreads them out over the last 12 years so you can see the trend.

U.S. Government Budget 1998-2009

U.S. Government Budget 1998-2009

Over the period between 1998 and 2007, government expenditures have grown by approximately $1.1 Trillion and over just the last 2 years they have added another $1.3 Trillion for a total of approximately $2.4 Trillion total in the last 12 years.  The trend is unmistakeably up and dramatically so over the last 2 years.  The Government has almost always spent more money than the previous year in each of the 6 categories.  In absolute terms, it is the Treasury expenditures that have grown the most at about $614 Billion over the last year alone.  This is most likely related  to the current crisis.  What is really interesting, in my view, is that all 6 of the above categories have risen dramatically over the last two years when compared to previous years.  This is surprising because one might be tempted to think that most of the increase in spending is tied to economic stimulus and bailouts.  However, government spending appears to be increasing dramatically across the board on everything over the last two years.   For example:

  • Department of Defense – Over the the years from 2005 to 2007 the DoD typically increased its spending in the $25 Billion to $40 Billion range.  However, in 2008 and 2009 their spending increased by $64B and $73B respectively.  What explains this dramatic increase in spending?  In addition, the 2010 defense budget projects an increase in defense spending of approximately $55B or 8% despite presidential campaign rhetoric that spending at this rate was inherently unwise and unsustainable.  The same report fromm the Office of Management and Budget (OMB) indicates that defense budgets will decrease slightly but remain near these levels  every year thereafter through at least  2019.  This suggests that our government is planning to be at war for at least the next 10 years. It is stunning what digging into the numbers can reveal.
  • Social Welfare Programs – This primarily consists of Social Security, Medicare and Medicaid programs.  Since 1998 the Social Security program has grown on average about 5% per year through 2008.  These are large and unsustainable increases by themselves but take note that the expenditures for 2009 increased by almost 10.2% from 2008.  That is a frightening 2 fold increase.  Even more dramatic, the Medicare and Medicaid programs averaged about 7% annual increases between 1998 and 2008, but shot up 16% through 2009.  These dramatic increases  are primarily due to the large numbers of Baby Boomers that have begun to reach retirement age and are beginning to claim benefits under these programs in addition to the rising costs of healthcare. According to the government, these numbers, based on statutory commitments to the public, are scheduled to increase exponentially in the years to come and pose a significant threat to the governments ability to finance them.  There has been wide acknowledgment of this fact in the halls of government for many years but very little, if anything, has been done to address the problem.
  • Government – This represents all of the other Government departments other than the Department of Defense, Social Welfare programs, and Treasury operations.  In simple terms these are the actual costs to run the government and all of its various activities.  As indicated in the above pie chart, the business of actually running the government is only 18% of the total budget.  Nevertheless, it increased by 16% in 2008 and a whopping 64% in 2009 from $431 Billion to $709 Billion.  This is an approximate $280 Billion increase.  Almost $110 Billion of this increased expenditure is described as “Other Independent Agencies” and I have yet to explore just what these agencies are.  But this is alarming considering the lack of detail in the report as to just what these “Other Departments” are. Another $62 Billion of the increase can be attributed to the Department of Labor which is responsible for Unemployment Insurance among other things.  That leaves $108 Billion of increase that was distributed among the other Departments.  I don’t know how to explain these increases in light of rapidly declining tax receipts.  As you may recall from the prior essay, personal income tax receipts are down approximately 22% and corporate income taxes are down 58% from the previous year and still falling.
  • Treasury – Interest paid by the government on the Public Debt actually fell by 13% in 2009 from the previous year.  This is not because the government has reduced its debt obviously, but is primarily due to efforts by the Federal Reserve and Treasury to keep interests rates low.  They hope to encourage lending (so far not working) and more importantly to keep government interest payments low.  However, the budget category called “Department of the Treasury – Other” grew by a whopping 61% in 2008 and then an eye-popping 555% in 2009.  In dollar terms this line item grew from $61 Billion to $98 Billion in 2008 and then mushroomed to $640 Billion in 2009. Undoubtedly, this is related to stimulus and bailout activity.  Nevertheless, this is huge considering that there are no tax receipts available to cover these amounts.

By breaking the spending into these four categories, it highlights the fact that the U.S. has clearly evolved into a the proverbial Welfare/Warfare state.  This is a situation where the vast majority of our expenditures are for Welfare and Warfare programs rather than for the business of government.  This is not an argument as to the wisdom or lunacy of the state going to war or providing for social welfare.  The focus here is whether we can afford it.  Some may argue that we need to go to war to defend our liberty and way of life or to spread democracy.  Others may argue that we need to fight a perpetual war on the tactic of terrorism.  Some may argue that every citizen has a right to social well being and thus social welfare (or Entitlement programs as they are often called).  The question is not whether these arguments are valid in an ideological or humanitarian sense, but whether the economic and financial resources of the citizens can support these agendas. I think it is fairly clear from the above information that we can’t.

What is peculiar, to put it mildly,  is that our politicians (and by extension “We the People”) seem to take no thought as to where the money will come from when these programs are written into law.  We appear to be making financial commitments without any regard for ability to pay for them.  What is fascinating to me is that we spend far more money on warfare, social welfare, interest on debt and now bailouts and stimulus than we actually do on the business of government.  Note the green sliver in the chart above.  Those are the costs of the government which amount to $709 Billion.  Now there is a number we can afford based on the amount of tax receipts collected.  Its all the other stuff that is driving us as a nation towards insolvency and the dramatic decline in our standard of living that this will bring about.  That light at the end of the tunnel we are hearing about in the news these days is not from the sun but a freight train.

Here is another chart that shows the spending in these four areas since 1998 graphically.

U.S. Government Spending In A Nutshell

Click to Enlarge

A GLANCE AT GOVERNMENT TAX RECEIPT & BORROWING TRENDS

So, as stated before, the government response to a shrinking economy, increasing unemployment, and thus falling tax receipts is to increase its borrowing and spending dramatically.  I have included the debt and tax receipts charts below from the previous essay.  They are handy for reference.

U.S. Government Tax Receipts

U.S. Government Tax Receipts

U.S. Government Debt

U.S. Government Debt

FINAL COMMENTS & CONCLUSIONS

We have entered an economic perfect storm.  On the military front, we are fighting wars in Iraq and Afghanistan, while at the same time maintaining over 700 military bases in approximately 140 countries around the world.   These costs are escalating.  On the social welfare front we have social security, medicare and medicaid programs that have begun to hit the steep part of their exponential growth curves as the baby boomers have begun to retire.  Our leaders have acknowledged this problem for at least the last decade without reform.  Now, the current administration would like to add the cost of universal health care to these sky rocketing costs.  Finally, as a result of the cost of these programs our debts are also rising exponentially, which will take large chunks out of future budgets to have to pay for the principal and interest in addition to meeting expenses.  Over time debt payments will take up a larger and larger portion of the spending pie.

All three of these forces combine to overwhelm our ability to pay for them and are propelling us to debt levels that defy logic in terms of our ability to ever repay them.  At this pace, default and insolvency are all but a mathematical certainty.  One way or another our troops are coming home, social welfare programs are going to shrink and this borrowing binge is going to end.

Either we will make some critical decision about what to cut or the decision will be made for us.  Our political leaders have shown no inclination to be financially or economically responsible.  In fact they talk as though borrowing money is the equivalent of real income and a permanent way to finance governmental activities.  You can see this clearly when we hear talk of preserving and/or extending tax cuts because the government is able to make up the difference by borrowing.  Not that I want to see taxes increased but is this a rational way to discuss and conceive of ones finances?

Alright, so who does that leave?  The American people have yet to weigh in on this matter in any significant way.  This is a watershed moment in the history of the U.S. and within a few years we will know whether this will be a part of a proud or pathetic chapter in that story.

“We the People” have some important questions to answer if we want to turn this around.  Some of these questions might go as follows.  As a practical matter, if the government is going to live within its means, what should be cut to get this budget down from $4 Trillion, to our actual level of income at $2.1 Trillion?  What is government for?  What should the Government be doing?  Do our current financially excessive welfare and warfare programs promote economic stability, prosperity or liberty?  I would like to suggest that the founders of the country had strong feelings about such matters, that this isn’t a new subject, and it might be worth our while to revisit these ideas as they were based on a keen awareness of the dynamics that led to liberty and prosperity and those that lead the other way.

Armed with just the basic information presented in this essay and some of the more detailed information provided in the links you are no longer a spectator in this discussion.   You can do your own thinking, craft an informed opinion and weigh in on the discussion whether with friends, family colleagues or…maybe a letter to a congressman, or senator, the president.  Just a thought.

In closing, I haven’t decided yet but I’m toying with topics for the next essay, the role and necessity of credit deflation to flush out the excesses of the credit expansion, or perhaps a closer examination into the minds of Ben Bernanke and his venerable predecessor, the great vague Alan Greenspan.  You’ll know soon.  In the meantime, these are my thoughts and I am very interested to know yours.

You play an important role in this discussion and your feedback is valued.  If this post has been of value, I encourage you to share it.  Feel free to use the social networking links below.

Highest regards,

– The Falcon

Copyright © 2009 The Falcon Post – All Rights Reserved

{ 8 comments… read them below or add one }

1 EM Lyles September 2, 2009 at 6:23 pm

Wow! From 1998 – 2007, the previous administration’s term, $1.1 Trillion was added to the federal government’s budget | and from 2007 – 2009, again the previous administration’s term, we added another $1.3 Trillion. Why is that? Weren’t paying attention during the 8 – 10 year time span? Were we just not paying attention?

Well, NOW that we’ve got your attention. What are WE going to do about it | hopefully we won’t fall back to sleep and doze off into another mode of denial.

We’re angry, but with whom? The government or ourselves for allowing 8 – 10 years of chaos to reign free to now wake up to the nightmare that is unfolding. 8 – 10 years is a lot of time with which “We The People,” could have done something. We had an opportunity somewhere in the middle, but did nothing. Wow! Amazing!

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2 Silence Dogood September 6, 2009 at 1:26 pm

Thoughtful and well organized. And correct – “we the people” cannot allow the paid stooges of the big corporations (i.e., the politicians) to continually run the USA as if there is no reason to stay on a budget.

Looking forward to your next post, Falcon.

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3 Glynda September 25, 2009 at 4:26 pm

I blame Wallstreet’s greed and George Bush’s unnecessary wars. Healthcare reform is needed to reduce debt in the system, jump start and improve small business, help industy and most of all it’s a morale issue. Our country out to be ashamed of this healthcare system. The other day, I heard about a poor country with an average income of $13k whose able to provide universal healthcare, so why can’t we? I disagree with Pres. Obama on not wanting to raise taxes on the middle class. I’m middle class and there’s only one thing I’d agree to have my taxes raised for and that’s healthcare. I don’t want to pay a dime more on these unnecessary wars. Wars never sovled anything. Maybe if we spent as much money on love instead of hate this world would be better. Further, in my opinion greedy insurance companies and Wallstreet should be taxed more to pay for some of this stuff. They’ve been ripping us off for years with their Ponzi schemes and as far as I’m concerned they are not paying enough. That’s my two cents worth. Thanks for asking.

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4 Ty Klip April 7, 2010 at 11:19 pm

Just dropping a comment as a thanks for compiling the above info. It is laid out well and is clear. I also appreciate you containing your bias as much as possible (though I’m pretty sure I know where you stand). Well done. Thanks again.

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5 Ahlywog August 6, 2010 at 4:07 pm

http://www.youtube.com/watch?v=m8xmLCGzuVI

I thought this was a very appropriate, self explanatory, video.

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6 apov November 17, 2010 at 12:09 pm

Thanks for your article and graphs.

To solve our nation’s financial ills, government revenues need to increase and government expenditures need to decrease.

It seems to me that Social Security and Medicare expenditures can be covered easily by removing the cap on earnings. That would easily solve paying for these programs and not add to the national debt. These programs are funded by payroll taxes and not income taxes. There would be a surplus of funds. Perhaps the surplus could be used to reduce the national debt.

Income taxes pay for the remainder of government expenses. We obviously can’t afford 46% of what we as a nation are spending. That should instruct us as to how much the expenditures of the Department of Defense, Department of Treasury and all other departments of government need to be reduced.

One item that stands out in sources of revenue is the percentage of revenue that comes from corporations. How out of balance is that?

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7 Mike June 5, 2011 at 7:23 pm

Reforms are coming. Sooner or later people are going to stop loaning the US money and we will be forced to live with in our means or tax everyone (by printing more dollars) holding a dollar. I don’t blame GW Bush or Obama, despite that fact neither of them did much to get spending under control. I don’t even blame Wall St. for all of it. It’s our culture of borrowing (pulling out the credit card or housing equity ATM) for want’s and needs and lack of saving/investing in productive assets (things other than IPODs and large screen TVs).

We the people must change how we view debt and credit before the politicians will fall in line behind us. I’m afraid it’s going to be too late if politicians wait for us to change before taking real action. A lot of pain is coming and in a very uncontrolled manner if the political will is not there to make the tough choices soon. The reforms are definitely coming. They just won’t be our’s or the politicians terms and it’s going to be very painful for so many.

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8 Billy T August 23, 2012 at 8:59 am

Boy you guys are screwed. The reality is there will be no solution to the problem until one is forced on you and that unfortuantly will make the greek crisis look like nothing at all. US mismanagement and martial idiocy will screw the pooch for the rest of us. I would think that its time the international community begin to seriously isolate the US and effectively treat you as if you were carrying a disease pathogen. Perhaps if we take preemptive action it will limit the damage to us in the future. Reduce reliance on the US for our products, find new sources of supply and build a fiscal wall between us. Up here in Canada that makes the pacific pipeline very important and the construction of a new port on the west coast so that we can begin to move our resource sales to asia as opposed to the south. Of course this will hasten the US collapse as we move much of US supply needs to other countries but the sooner the US collapse comes perhaps the better for them and us.

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