National Center for Policy Analysis

MONTH IN REVIEW

Federal Spending and Budget

January, 1996

FEDERAL SHUTDOWN: WHO GETS PAID, WHO DOESN'T?

In the third week of the partial government shutdown, most federal employees are working, but some are not. Some have been declared essential, others nonessential. So who's being or will be paid and who won't?

• Most federal workers -- 1.24 million -- are working with full pay.
• Some 280,000 have been furloughed, but will likely be paid when the budget dispute is resolved.
• An additional 480,000 are now working without pay, but also will likely be paid eventually.
• If they were not paid the taxpayers would save roughly $150 million for each week of the shutdown.

Source: Editorial, "Shut It Down & Lay 'Em Off?" Investor's Business Daily, January 2, 1996.

HOW COUNTRIES SPEND FOREIGN AID

In general, nonmilitary foreign aid ends up fattening the wallets of high-income political elites in foreign countries, according to a new study from the National Bureau of Economic Research.

The study examined the effects of aid to poor countries between 1971 and 1990, and divided the countries into three models: egalitarian, laissez-faire or elitist. If egalitarian, countries would use aid to help the poor; if laissez-faire, they would cut taxes; if elitist, they gave to political supporters.

Some of the findings:

• Most countries follow the elitist model, rather than the laissez-faire tax-cutting model.
• Aid doesn't cut tax rates and has no link to higher rates of investment or more economic growth, with two exceptions.
• The exceptions are small countries or ones where aid exceeds 15 percent of gross national product, where aid does boost investment.

Aside from these exceptions, foreign aid has an almost dollar-for-dollar link with more spending.

• About three-quarters of the increased spending is by government.
• If countries were following the equalitarian model, we would expect to see fewer infant deaths, longer life spans, and more primary schooling.
• But the only effect we see is a small decrease in infant deaths -- 2 percent over a ten year period if the aid is 10 percent of GNP.

The study demonstrated that by and large rich political elites get the aid money and keep themselves in power -- regardless of whether they are poor repressive countries or more open, democratic ones.

Source: Perspective, "Who Gets Aid?" Investor's Business Daily, January 8, 1996.

SPENDING KEEPS GROWING

Despite the hoopla over the Republicans' congressional budget proposal, it would only reduce projected spending over the next seven years from about $13 trillion to about $12 trillion, ending with a federal government spending $350 billion more in 2002 than in fiscal year 1995.

That level of federal spending is neither pitifully inadequate nor a revolutionary reversal in the growth of the nanny state. After World War II, for example, federal spending was actually cut in half, from $93 billion in 1945 to $42.4 billion in 1951. In contrast, the $12 trillion in proposed spending over seven years is enough to fight three World War IIs.

But military spending is not the growing area of the federal government:

• National security takes up a smaller share of the total budget than at any other time in American history.
• Defense spending in real dollars was only 11 percent higher in 1995 than in 1955.
• If non-defense spending had only risen at the same pace as defense spending over the past 40 years, total annual expenditures today would be $480 billion -- about $1 trillion less than actual spending.

The real growth in federal spending between 1955 and 1995 has been for social programs and entitlements, in such areas as:

• Education and social services, where spending has increased 2,117.4 percent.
• Science and technology, where expenditures have grown 3,937.8 percent.
• Health programs, on which spending has increased 16,374.2 percent.

The future explosive growth in spending for some of these programs is restrained by the GOP budget, but it falls far short of actually reducing the size of the federal government.

Source: Stephen Moore (Cato Institute), "The Nanny State Fights Back," National Review, December 25, 1995.

FUNDING FOR V.A. HOSPITALS INCREASES, AS NEED DECLINES

Government reports call the Veterans Health Administration -- the hospital arm of the Department of Veterans Affairs -- a bloated bureaucracy, while the Clinton administration proposes to increase its budget by more than $700 million.

With its network of 173 hospitals and more than 500 clinics, nursing homes and other facilities -- including about 20 golf courses -- Veterans Affairs (V.A.) runs the nation's largest health system.

According to General Accounting Office reports, and studies by the V.A. Inspector General:

• Since 1990, spending on health care for veterans has risen 43 percent -- four times the pace of other spending -- yet, one-quarter of the beds in V.A. hospitals stand empty.
• In a look at six hospitals in 1990, 21 of 131 surgeons "spent no time in the operating room at all during the year."
• Four years later, a study of three other hospitals revealed that 13 of 79 surgeons went a year without lifting a knife.
• The V.A.'s annual report for 1994 shows a 17 percent increase in outpatient visits since 1987 -- versus a 50 percent jump in such visits in the private sector.

By dwelling on building and renewing hospitals, V.A. resists the trend toward outpatient care and keeps patients in hospitals much longer than community hospitals do.

Observers say that the V.A. successfully resists attempts to control appropriations -- and, indeed, increases its budget regularly -- due to its political clout and the fact that it is considered something of a political sacred cow in Washington.

Source: Peter T. Kilborn, "Veterans Expand Hospital System in Face of Cuts," New York Times, January 14, 1996.

RUNNING GOVERNMENT 'LIKE A BUSINESS?'

One of the clichés of modern politics is the promise that government can be successful if it is "run more like a business." But there are fundamental differences between the two institutions, not the least of which is that businesses exist to make money -- government to tax it, print it and spend it.

• No business would survive if it ran out of money and had to shut its doors for more than two weeks while its directors tried to hammer out a difficult restructuring plan.
• While businesses which make shoddy economic forecasts suffer in the marketplace, four plans over the last 13 years to balance the federal budget have flopped.
• Whereas businesses have a built-in profit incentive to abandon wasteful practices so as to control costs, the nation is still waiting for reform of welfare, Medicare and Medicaid.

Evidence of bad business management can be found throughout the federal government. For example,

• When Amtrak was created in 1970, the goal was to eliminate federal support in only a few years -- but 25 years later "temporary" subsidies cost taxpayers some $390 million a year.
• The Federal Aviation Administration, trying for over a decade to upgrade its airport systems, is woefully behind schedule and over budget.
• The National Forest Service loses some $60 million a year on timber sales.
• Default rates on federally backed loans to students, farmers and small businesses are far higher than those in the private sector.
• And few would call Social Security anything other than "unsound" and a bad investment, compared to private pensions and insurance.

Everyone believes the federal government should be run more efficiently. But it is not a business, and when it takes on too many tasks it is bound to fail.

Source: John Merline, "Can Government Run Like a Business?" Investor's Business Daily, January 17, 1996.

CRITICS CLAIM FEDERAL BUDGET ACCOUNTING INVALID

Some of the dollar amounts used in the current budget debate are so misleading they should be tossed out, according to some certified public accountants. The figures are based on accounting principles that capture only a portion of the costs of federal activities.

• Using 1993 data to illustrate the overall problem, they observe that -- using the principles also being used today -- the federal government determined its actual operating deficit to be $225 billion.
• However, in its audited financial statement for 1993, the U.S. government, using "generally accepted accounting principles," reported a deficit of $386 billion -- a 51 percent discrepancy.
• The conventional measure of the federal debt holds that it was $3.2 trillion as of year-end 1993.
• This contrasts with $5.2 trillion as reported in the latest audited financial statements.

The difference exists because the budget is constructed on a cash basis, whereas the financial statements are prepared on a more meaningful "generally accepted accounting principles" basis.

While the higher federal debt figure incorporates accounts payable and accrued civil service and military pension obligations, it still does not include total unfunded actuarial liability for Social Security of $7.6 trillion and unrecorded Medicare obligations of $3.6 trillion. In addition, it excludes contingencies, such as loan and credit guarantees and potential obligations under insurance programs, that add up to another $5.9 trillion.

In a report on the 1993 statements, Arthur Anderson & Co. concluded that deficiencies in both accounting principles and information systems "make it likely that the (consolidated financial statements are) materially misstated."

Experts are demanding that the government hold itself to the same standards of accountability to which it holds officers of publicly-traded corporations and taxpayers.

Source: Former U.S. Congressman Joseph J. DioGuardi and Michael H. Granof (University of Texas), "Truth in Spending Needed for Budget to be Balanced," Washington Times, January 22, 1996.

THE COST OF NOT BALANCING THE BUDGET

Not balancing the federal budget could cost a typical American family $2,308 in the year 2000. Continued deficit spending financed by borrowing will add to the federal debt, push up interest rates and slow down economic growth. In addition, under the Republican balanced budget plan, the tax burden on families would be reduced.

Thus, if a balanced budget plan with tax relief isn't enacted into law, it could have the following effects on a typical family with one child in the 15 percent income tax bracket:

• By the year 2000, interest rates on a fixed home mortgage are expected to be 8.14 percent without a balanced budget, for a monthly payment on a $100,000 loan of $744.
• With a balanced budget, interest rates are expected to be 5.92 percent, saving a family $121 per month.
• Higher interest on a $11,000 student loan would cost $4 more a month and on a $15,000 car loan, $9 more a month.
• Without the $500 per child tax credit included in the budget plan, the family would face about $42 a month in higher taxes.

Finally, balancing the budget with capital gains tax cuts will create greater economic growth and higher personal income. A conservative estimate of the loss in income to a typical family due to slower growth is $194 a year.

Thus, for a typical family, not enacting a balanced budget plan would cost $192 per month, $2,308 a year in 2000 and more than $12,000 over a five-year period.

Source: Dan Miller, "The Price of Failure: The Costs of Not Balancing the Budget," December 1995, Policy Analysis, Joint Economic Committee of Congress, Washington, DC.

THE GOP'S BUDGET TRUMP CARD

Congressional Republicans can still reduce the 1996 budget deficit to well below $140 billion simply by refusing to appropriate money. But, so far, they have been loathe to take this path.

Just a few examples:

• Last week, Republicans agreed to yet another continuing resolution which threw a life-line to all but a few programs in agencies whose 1996 appropriations are still in dispute.
• It funded these programs at 75 percent or more of 1995 levels.
• But close to $200 billion of mostly low-priority spending programs still have not been appropriated for 1996.

Either the House or the Senate can veto a program simply by refusing to appropriate money for it -- and there is nothing anyone, including the president, can do about it.

Those advocating smaller government and reduced spending recommend:

• Fund the nonessential programs -- such as the National Endowment for the Arts, the Education Department's Women's Educational Equity Act and the Commerce Department's corporate-welfare subsidies -- at a maximum, not a minimum, 75 percent.
• Programs that were funded at less than 75 percent in the regular appropriations bills should be funded at the lesser of the House or Senate levels -- which would zero out many of them.

Source: Former Congressman Tim Penny and Stephen Moore (both of the Cato Institute), "Balance the Budget -- Unilaterally," Investor's Business Daily, January 29, 1996.