National Center for Policy Analysis

MONTH IN REVIEW

Federal Spending and Budget
August, 1996

FACTORS BEHIND THE SHRINKING BUDGET DEFICIT

While the federal government is still spending more than it is taking in in revenues, it's not spending quite as much as it thought it was spending. In Washington, D.C., such a development is reason enough for a lot of self-congratulation.

The Office of Management and Budget now estimates the government will spend $117 billion more this fiscal year than it will garner in revenues, and $126 billion more next year.
That represents a reduction of $43 billion from earlier estimates.
The Congressional Budget Office will reportedly release its own budget outlook in mid-August, revising its previous estimates downward by about $96 billion.
The CBO had already said the deficit would be between $115 billion and $130 billion -- down from prior forecasts of $211 billion.

While the White House says the reductions are due to Clinton's economic policies and Republicans in Congress credit their own efforts to balance the budget and cut discretionary spending, economists credit a variety of factors.

The government's tax receipts this year are expected to be a whopping 33 percent higher than those in fiscal 1992 -- with collections in the current fiscal year expected to be $97 billion higher than projected by the CBO three and one-half years ago.
This is largely the result of a stronger than expected economy, higher corporate profits and increased investor gains (which the government can tax twice).
Annual growth of gross domestic product has averaged 2.4 percent since the start of 1993 -- slightly higher than the 2.2 percent originally assumed.
The Treasury estimates that tax increases in 1993 have brought in about $50 billion a year, although some critics contend the Clinton Administration used much of it for additional spending, not deficit reduction -- "sucking money out of the economy like crazy," as one analyst put it.

But higher tax revenues are not the only factor.

Increases in Medicare and Medicaid spending have not been quite as high as originally anticipated, which -- coupled with the fact that Clinton's enormously expensive health care reform program was defeated -- held down costs in the health care area.
The CBO in 1993 over-estimated costs for the final stages of the savings and loan bailout by about $80 billion.
Congressional cuts in defense spending and some domestic programs have contributed to the deficit reduction.
As both interest rates and the size of the annual budget deficits have fallen, the government's interest costs have been less than expected.

Heartening as the deficit news may be, economists warn that the long term picture remains bleak since nothing has been done to solve the Social Security problem just as a tidal wave of baby boomers sweeps toward retirement. And the rough political battles this year have made even deficit hawks shy away from reforming Medicare, Medicaid and Social Security.

Sources: Jackie Calmes, "Scary Deficit Forecasts for Clinton Years Fade as Tax Revenue Grows," Wall Street Journal and Adrienne Fox, "Who Gets Credit for Less Red Ink?" Investor's Business Daily, both August 1, 1996.

SO CAN ANYONE REALLY FORECAST DEFICITS?

Some are questioning the whole process of long-range deficit forecasting. Since the numbers-crunchers in Washington erred so greatly even as recently as last year in projecting this fiscal year's budget deficit (missing it by $43 billion), they say seven-year projections are virtually meaningless.

Here are some of their observations and arguments:

The private economy is so large, and so dynamic, that relatively small changes either way will overwhelm tinkering by budget planners.
If the auto industry does not know how many cars it will sell next year, they reason, neither does the Congressional Budget Office.
The recent good news is no reason for lessened vigilance -- since the economy will one day cool and the stock market does not produce outsized capital gains every year.
The good news on the deficit not withstanding, the entitlement problems remain unaddressed.

The ultimate proof that deficit-cutting still matters is the evidence of the harm done by previous deficits. This year government outlays for interest will be $240 billion -- enough to cover the deficit twice over.

Source: Roger Lowenstein, "Time For a Reality Check on the Deficit," Wall Street Journal, August 1, 1996.

ACCOMPLISHMENTS OF THE 104TH CONGRESS

Republicans chalked up some stunning achievements in the 104th Congress, political observers note. It eliminated 270 federal programs, agencies, offices and projects -- and deeply cut costs in hundreds of others.

The departed agencies and their annual costs include the Interstate Commerce Commission ($15.4 million), U.S. Travel and Tourism Administration ($14 million), Office of Technological Assessment ($18.4 million), and the Bureau of Mines ($30 million).
Then there was the demise of what many consider the greatest boondoggle of all: the $350 million per year program known as "highway demonstration projects."

Bureaucracies which survived, but saw substantial budget cuts:

The National Endowment for the Arts (a 38 percent budget cut); and the National Endowment for the Humanities (36 percent).
The Appalachian Regional Commission (39 percent); the Arms Control and Disarmament Agency (28 percent); the Legal Services Corporation (33 percent); and mass transit subsidies (43 percent).
The Department of Housing and Urban Development found itself 10 percent less affluent, and the Corporation for Public Broadcasting 15 percent.

Experts say that because of these and other cuts, freezes and terminations, Congress succeeded in cutting year-to-year discretionary spending -- as calculated in actual dollars rather than "baseline" figures -- for the first time since 1969.

Source: Ronald D. Utt (Heritage Foundation), "Congress Took a Whack at Big Government," Wall Street Journal, July 31, 1996.

GOVERNMENT RESEARCH LESS EFFECTIVE

Free market economists opposed to government funding for research and development in private industry have been bolstered by a General Accounting Office study that debunks a self-congratulatory report from the Department of Energy. The DOE had put out the report last year heralding "success stories" from its massive energy research and development program.

DOE claimed that its technologies are creating billions of dollars of gross sales and taxable income from high-wage U.S. jobs and productivity savings.

But the GAO found otherwise:

GAO scrutinized 15 of the projects touted by DOE and found flaws in economic claims in about 11 of them.
DOE had highlighted carefully selected programs and neglected to count tax money spent to create each of the technologies in the first place.
While the agency claimed benefits of $20 million per well from a technology to boost gas output, GAO put the figure at $294,000 at best.
In some cases, DOE claimed credit for creating new markets for products -- such as the electric car mandated by California laws -- when the market was actually created by California's mandates.

A GOA official said "that DOE needs to evaluate whether the private sector could or should be conducting this research." It appears, however, that DOE's R & D funding is intact for next year at least.

Source: Perspective, "A Waste of Energy?" Investor's Business Daily, August 5, 1996.

HAS FOREIGN AID BEEN ISRAEL'S CRUTCH?

By almost any measure, American foreign aid has failed its objectives, according to many international economists. In fact, U.S. assistance has actually been used to prop up socialist economies. Israel is a particularly apt illustration.

America sends Israel $3 billion annually, $1.2 billion of which is marked for economic assistance.
Of Israel's $55 billion government budget this year, 6 percent comes from foreign aid.
American aid constitutes over 3 percent of Israel's gross domestic product.
Although Prime Minister Benjamin Netanyahu has proposed $1.6 billion in budget cuts for next year, U.S. aid is still being used to pay for a large part of Israel's socialist programs.

The new Prime Minister suggested to a joint session of the U.S. Congress that his country no longer needs all of the aid it is getting from us, but Congress is poised to continue sending the full amount when it votes on the foreign operations appropriations bill in September. And pro-Israel lobbyists would actually like to see the level of aid increase.

Following his address to Congress, Mr. Netanyahu reportedly lost enthusiasm for the idea of cuts, saying in private meetings that Israel would not even submit a proposal for aid reduction until fiscal 1999 or 2000.

Critics of aid -- both within and outside Israel -- condemn it for a number of reasons.

Last month, the Jerusalem-based Institute for Advanced Political and Security Affairs published two reports concluding that U.S. aid to Israel promotes inefficiency and dependency, thereby undermining national security.
Experts say assistance should clearly be linked to economic deregulation, an end to wage indexing and subsidies to favored industries -- reforms the U.S. regularly demands of former communist countries.

Six years ago, Sen. Bob Dole questioned "whether Israel has in place the right kind of market-based policies to make the most effective use of our aid."

Source: E.V. Kontorovich, "Time to Cut Aid to Israel," Wall Street Journal, August 8, 1996.

FIGHTING FEDERAL "CONTRACT BUNDLING"

Legislation has been introduced in the House to combat unnecessary contract bundling by the federal government.

Contract bundling is the practice of putting many individual contracts into one bid request, a practice that small businesses claim favors larger companies.

The General Services Administration began bundling contracts recently, but has now abandoned the practice under pressure from Congress.
GSA counters that it is easier and more cost effective to manage one or two vendors rather than hundreds.
For example, the government pays Federal Express only $3.62 for a three pound overnight package, compared to the average private-sector price of $27.
But critics say it eliminates competition and leads to increased costs for goods and services paid for by taxpayers.

The federal government contracts out to private enterprises about $200 billion a year in business. In 1995, 25 percent of contract dollars went to small businesses according to the Office of Management and Budget.

Source: Adrienne Fox, "Federal Contract-Bundling May Exclude Small Business," Investor's Business Daily, August 8, 1996.

PLENTY OF ROOM FOR SPENDING CUTS

Critics say Bob Dole's tax cuts will reduce federal revenues and increase the federal deficit unless federal spending is cut. By some estimates, Dole's plan would reduce federal revenues by $550 billion over six years.

Budget analysts find plenty of places for savings, without even touching entitlements and military spending:

Save $20 billion by eliminating the Commerce Department and shifting the Census Bureau, the Patent and Trademark Office and a few other functions elsewhere.
Save $30 billion by terminating the Department of Energy, moving some atomic energy defense work to the Pentagon.
Realize $90 billion by slicing the Education Department's budget by at least one-half (even the liberal Washington Post noted in a 1994 editorial that America's schools aren't noticeably better because the department was created).
Although the Department of Housing and Urban Development could be completely eliminated, merely halving it would save $95 billion.

Killing HUD and Education outright would save $185 billion more.

These are certainly not the only areas ripe for reduction. We could save another $50 billion by bringing home and demobilizing just half of our 100,000 troops in Europe. Ending foreign aid would save $70 billion. In addition, we could:

Help restore a free market in agriculture and save $120 billion by eliminating at least the one-third of the Department of Agriculture's budget that goes for farm subsidies.
End corporate subsidy programs in the Department of Transportation and realize $70 billion in savings.
Sell $20 billion a year in federal assets -- including some of the one-third of all U.S. lands the government owns -- for $120 billion in six years.
Save $3 billion by eliminating the Small Business Administration, which benefits fewer than one-half of 1 percent of U.S. small businesses.

These savings do not include interest savings from lower deficits, nor any increased revenue from the supply-side effect of cuts in marginal tax rates.

Source: Dean Stansel (Cato Institute), "Can We Afford the Dole Tax-Cut Plan?" Investor's Business Daily, August 9, 1996.

SUBSIDIZED HOUSING UNDERCUTS THE WORKING POOR

Federal housing policy punishes the hard-working poor by denying them a way to socially distance themselves from those on welfare, according to Harvard University professor Howard Husock.

Building government housing in higher income neighborhoods or giving housing vouchers to poor families on welfare provides them with better housing than the working poor.
Such policies threaten to introduce the social problems of welfare families into other neighborhoods, while giving those families no incentives to solve them.
Providing quality housing with many amenities for the nonworking poor rewards need, not achievement.

The $8 billion spent annually on federal housing programs actually helps reduce the supply of cheaper, unsubsidized and privately owned housing for the working poor by encouraging demolition of older housing, stringent building codes and the rehabilitation of low-cost housing for rent-subsidized tenants.

Housing rehabilitation in programs using federal tax breaks or guaranteed rental income for owners costs about $100,000 per unit.
In contrast, City Homes, Inc., in Baltimore, using "minimal rehabilitation" that includes fewer amenities, renovated 243 row houses for an average of $12,000 each between 1987 and 1994.
By altering and relaxing housing regulations, San Diego has encouraged construction of new single room occupancy hotels over the past 10 years, with 2,400 new units and 370 substantially renovated units.

Only 29 percent of families eligible for housing subsidies actually receive them. The efforts of these lower-income working families to move up to better housing and protect the value of their housing investment helps maintain the social fabric of poorer neighborhoods.

Source: Howard Husock, "Repairing the Ladder: Toward a New Housing Policy Paradigm," Policy Study No. 207, July 1996, Reason Foundation, 3415 S. Sepulveda Blvd., Suite 400, Los Angeles, CA 90034, (310) 391-2245.

LESS THAN ZERO: FEDERAL NET WORTH

The net worth of the federal government was a negative $4 trillion as of September 30, 1994, according to the most recent annual report from the Treasury Department's Financial Management Service. Bruce Bartlett of the National Center for Policy Analysis says the U.S. government has a much higher negative worth if all its commitments and contingent liabilities are included.

On the assets side of the consolidated financial statements of the official report:

It lists federal assets of $1,356 billion, including $590 billion in property, plant and equipment (net of depreciation).
However, the report valued the assets of the federal government at historical cost, which is much less than their market value.
For instance, it arbitrarily assigned a value of just $1 per acre to more than 651 million acres of public land.

The financial report estimates total liabilities at $5,357 billion. Bartlett says the liabilities are also understated, with commitments and contingencies excluded altogether.

The largest liability is the federal debt, at $3,423 billion.
Social Security liabilities are left out, although the projected revenue shortfall is $2,838 billion over the next 75 years.
Also not included is the present value of expected Medicare (Part A) benefits over the next 75 years -- $3,759 billion.
Contingencies, mainly for insurance programs run by the federal government, are a staggering $5.2 trillion -- not including loan guarantees.

Between the end of 1993 and 1994, official federal liabilities increased by $125 billion.

Source: Bruce Bartlett, "Shrinking Value of National Assets," Washington Times, August 19, 1996.