National Center for Policy Analysis

MONTH IN REVIEW

Federal Spending and Budget
July, 1996

AMERICA'S DEFENSES: SUFFICIENT OR NOT?

Some are concerned that in the post-Cold War world, the U. S. has cut too deeply into its defense budget at a time when threats to peace in North Korea, China, Bosnia and the Middle East still exist.

Defense spending is down more than 30 percent in real terms since 1989.
As a share of total federal spending, it's under 17 percent -- the lowest since just before World War II.

The stated defense goal of the Clinton administration shortly after coming to office was to maintain forces big enough to fight and win two Gulf War-type regional conflicts almost at the same time.

But according to the Heritage Foundation, Clinton's defense budget falls $130 billion short of his stated goals over the next six years.
The General Accounting Office set the shortfall at $150 billion from 1995 to 1999.
The Congressional Budget Office has estimated the gap at between $65 billion and $100 billion over the same time period.

The Center for Strategic and International Studies estimated the cost of meeting Clinton's defense goals at 4.5 percent of gross domestic product; but the administration is calling for spending amounting to just 3 percent of GDP over the next six years -- a gap of some $90 billion this year alone.

Others disagree with this grim picture, however, citing these factors.

At current levels, the U. S. accounts for almost 40 percent of the world's military spending.
Add in the resources of NATO and other friendly countries and the figure climbs to more than two-thirds.
They also question whether the U. S. would ever be involved in two wars at once, and claim that in any case the number of troops estimated to be necessary to fight in such a situation is vastly inflated.
Then they point out that the Pentagon is highly wasteful and that throwing more money at the military is not the answer.

Just about everyone, including the White House, agrees that spending for procurement has to increase.

Clinton's latest budget calls for a 42 percent boost in real procurement spending between now and 2002.
But critics say that, in fact, it calls for $19 billion less in procurement spending over the next four years than did last year's budget.

While some say that the Defense Department has been starved for procurement funds to upgrade its hardware -- subs, fighter planes and bombers -- its budget for non-military programs has exploded. Between 1990 and 1995, spending for things like environmental cleanup, dual-use technology, drug interdiction and humanitarian assistance tripled. It went from $3.5 billion in 1990 to $10.9 billion in 1995, according to a Congressional Research Service study.

Source: John Merline, "Stripping America's Defenses?" Investor's Business Daily, July 1, 1996.

PAYING FOR THE NATIONAL PARKS

In a move which some analysts say is long over-due, congress may soon pass two bills allowing national parks to raise their entrance fees and establishing official corporate sponsors of the National Park Service.

The annual budget for the parks -- adjusted for inflation -- has declined by $202 million from 1983 to 1996.
At the same time, the number of visitors has increased from 207 million to 270 million yearly.
The parks have an estimated backlog of more than $4 billion in maintenance and repairs.
The entrance fee for a carload of vacationers to Yellowstone is $10 per vehicle for one week's stay -- the same as it was in 1916, when the park service was established.

Under the corporate sponsorship plan, about ten companies a year would be selected -- limited in what they could do and say in advertisements and promotions -- for payment of a total of about $100 million a year. That would be the equivalent of about 8 percent of the National Park Service's $1.3 billion annual budget.

Some $250 million in new funds could be generated to subsidize up-keep of the parks over the next several years through higher user fees, according to the Congressional Budget Office.

Source. Timothy Egan, "Ailing U. S. Parks Look to Rescue, At a Price," New York Times, July 7, 1996.

THE CASE OF THE COPS WHO DIDN'T MATERIALIZE

In his 1994 State of the Union message, President Clinton pledged to put 100,000 more police officers on America's streets. But the number of new police on the beat falls way short of that goal. And critics are charging that some are being hired to patrol state parks and government offices.

At least $7.2 million in Community Oriented Policing Services (COPS) grants has been used to hire 86 officers for state parks, marinas and other areas removed from violent crime.
In Florida, 30 "enviro-cops" were added to the state Department of Environmental Protection to keep watch over a coral sanctuary off the Florida Keys -- at a cost of $3.5 million.
Florida also received a $1.8 million grant to hire 25 police officers for its state parks.

But Florida isn't the only area involved.

The Murfreesboro, Tennessee, Parks and Recreation Department got its hands on a $281,159 grant from the Department of Justice to hire five park rangers.
Shavano, Texas, won a similar grant of $275,865 to hire five park police.
And the Maryland Natural Resource police received two grants totaling $1 million to hire 19 park rangers.

While the president has claimed that 43,000 new cops have been put on the streets, Attorney General Janet Reno says the number is 17,000. Although Clinton initially promised to fund the officers by cutting 100,000 bureaucrats from federal payrolls, Congress in 1994 approved $8.8 billion over the next six years for the COPS program.

Critics say the original concept of the program -- to bring law, order and safety back to dangerous city streets -- has been subverted.

The House Subcommittee on Crime is starting an investigation of the grants.

Source: Adrienne Fox, "Clinton's Cops: A Shell Game?" Investor's Business Daily, July 16, 1996.

FEDERAL SUBSIDIES TO D.C.

The annual federal payment to the District of Columbia amounts to more than $710 million, and a host of federal programs pays the D.C. government hundreds of millions more. The rationale is that the federal government owns so much land in Washington that hefty annual payments are necessary to compensate the city for lost tax dollars.

But surprisingly, D.C. ranks 13th when compared with the 50 states in terms of the percentage of land owned by the federal government.

And state and local government in each of those 12 states receive far less revenue from the federal government on a per capita basis.

While the federal government owns 26.1 percent of D.C.'s land, it owns 82.9 percent of the land area of Nevada, paying state and local governments there $547 per capita, while dishing out $3,898 per capita to the government of the nation's capital.

Owning 67.9 percent of Alaska's lands, the feds pay governments there $1,755 in revenues per capita.
California gets $934 per capita in revenues for the 44.6 percent of the state owned by Uncle Sam.

Critics say these numbers completely discredit the long-held belief that D. C. deserves large amounts of federal money due to the federal government's presence.

Source Raymond J. Keating (Small Business Survival Foundation), "About that Federal Payment to the District," Wall Street Journal, July 16, 1996.

DEFICIT PROGRESS, BUT A LONG WAY TO GO

While the federal budget deficit has fallen to a projected $116.8 billion this year, economists warn that it is not yet time to break out the champagne.

The latest projections have the federal government still spending more than it takes in through the year 2000 -- with a deficit that year of $54.9 billion.
Over the next two fiscal years, 1997 and 1998, the deficit will be $125.7 billion for each year -- $8.9 billion above this year's amount.
Since 1982, the nation has run up $4 trillion of debt -- $16,000 for every person in the country.

It has helped that the Federal Reserve Board has deftly played with interest rates to sustain growth and keep inflation in check, and that the end of the Cold War has allowed a substantial drop in military spending -- cuts equal to a third of the deficit's decline.

Nevertheless, the deficit is actually much larger than the figures would indicate. Surplus revenues from programs like Social Security and military and civil service retirement are used to cover another $100 billion in federal government overspending.

Source: Editorial, "The Deficit Downturn," USA Today, July 18, 1996.

AN $18 BILLION BAILOUT LOOMS FOR GOVERNMENT-SUBSIDIZED HOUSING

Get ready for another expensive government bailout, experts warn.

This one centers on federally insured mortgages on subsidized housing for the poor -- with $18 billion of taxpayers' money at risk.

While 1.4 million poor families live in government-owned housing, another 700,000 rent apartments in privately owned buildings built with federal subsidies (called Section 8 housing).
Owners of the buildings negotiated "fair market rents" with the Department of Housing and Urban Development when the units were built in the 1970s and early 1980s.
Tenants pay 30 percent of their incomes to the landlords, with the government picking up the other 70 percent -- a "Soviet style system," according to one former top Clinton administration budget official.
Since the rents are not determined by competitive market forces, experts estimate that two-thirds of the apartments rent for premiums over the local competition.

It is widely agreed that landlords would default on the great majority of buildings if HUD allowed the rents to fall to competitive levels. And mortgages on the subsidized buildings are all federally insured.

Washington policymakers are trying to find a way out of this maimed-markets mess.

Options include foreclosing on hundreds of thousands of occupied units (price tag about $5 billion) and paying third parties (such as state and local housing authorities) to take over the federal mortgage liabilities and make the best deals they can with landlords losing their above-market-value rents.

Source: Peter Passell, "Another Government Bailout; a Mere $18 Billion at Risk," New York Times, July 18, 1996.

INCREASING FOREIGN OWNERSHIP OF FEDERAL DEBT

Foreigners now own well over one-fourth of our national debt. This removes some of the burden from our financial markets, according to NCPA Senior Fellow Bruce Bartlett, producing a short-run benefit from lower interest rates.

In fact, between March 1995 and March 1996, foreigners bought over $200 billion in Treasury securities -- more than total federal borrowing during this period.
This lowered interest rates that the government must pay.
Last year alone, foreigners received $58 billion in interest payments from the U. S. government.

The foreign-owned share of the debt has grown sharply from 19.1 percent in 1992 to 27.5 percent in March of this year -- by far the highest percentage in American history.

Most of the debt is purchased by foreign central banks. For example, when Japan wants to lower the value of the yen against the dollar, the Bank of Japan buys dollars with yen, investing the dollars in Treasury securities.

According to the Federal Reserve, in just the first 3 months of this year the Japanese bought over $8 billion worth of Treasury securities, compared to $17 billion for all of last year. This explains why the dollar has risen sharply against the yen.

Source: Op ed, Bruce Bartlett, Senior Fellow, National Center for Policy Analysis, July 29, 1996.

POINTLESS ENERGY PROGRAM JUST WON'T DIE

The Department of Energy's Advanced Light Water Reactor (ALWR) program lives on, much to the dismay of budget-cutters and deficit hawks. Yesterday it survived an attempt to eliminate its funding. Critics say it represents one of the most egregious examples of profligate government waste.

Authorized in 1992, the ALWR was originally intended as a five-year program to help develop advanced commercial nuclear reactors for the U.S. market.

Critics point out that there is no domestic market for nuclear reactors, and international sales opportunities are drying up as more governments turn their backs on this energy source.
Even after spending 60 percent of U.S. energy research and development money on nuclear power between 1948 and 1996, the U.S. realizes only 8 percent of its energy needs from this source today.
Nevertheless, yesterday the Senate killed an amendment which would have eliminated the $39 million budgeted for the ALWR program for fiscal 1997.

Those opposed to the program claim it is nothing but corporate welfare, and that even the nuclear industry is wavering on the ALWR's worth.

Source: Tom Schatz (Citizens Against Government Waste) and Scott Denman (Safe Energy Communication Council),"...But Pork Barreling Isn't Dead Yet," Wall Street Journal, July 31, 1996.