US Federal Spending

The good news is that federal government spending has actually flattened out around $3.5 trillion at an annual rate since mid-2009. But that follows a big jump during the previous two years. Let’s have a closer look at the major spending categories:

(1) Income security and Medicaid. Much of the jump and subsequent flattening of federal spending was attributable to spending on “income security” programs such as unemployment benefits and food stamps. On a 12-month basis, this outlay peaked at a record $626 billion during November 2010 and fell to $557 billion last month. While this category should be counter-cyclical because it is a so-called "automatic stabilizer," it remains on a solid upward trend.

Federal spending on health, i.e., mostly Medicaid, actually dipped late last year and early this year, but it too remains on an upward trend. It totaled $350 billion over the past 12 months.

(2) Defense. Also edging down from last year’s record high is the 12-month pace of defense spending--from a $708 billion peak during September 2011 to $685 billion last month.

(3) Social Security and Medicare. Federal spending on income support and medical care for senior citizens remains on a solid uptrend. Together they totaled a record $1.3 trillion over the past 12 months, up 85% over the past 10 years, i.e., since November 2002. (Nominal GDP rose 47% over this same period.) Spending on the health care and income security needs of low-income individuals and households who aren’t old enough to be covered by Social Security and Medicare totaled $907 billion over the past 12 months.

We could balance the budget tomorrow if we kept a lid on federal spending and found roughly $1 trillion in additional revenues. Doing so by raising tax rates would crush the economy, depress revenues, and boost income support outlays. The best way to boost revenues is to stimulate economic growth. We’ve already tried to do it with a massive fiscal stimulus program during 2009 and 2010 and ultra-easy monetary policy.

Here’s another idea: Let’s postpone the fiscal cliff for a year and see if the economy might grow enough all by itself to meaningfully narrow the deficit. It has done so before. Maybe it can do so again.

Today's Morning Briefing: Perpetual Policies & Politics. (1) QE3 + QE4 = ?. (2) Bernanke’s open bar for fiscal drunks. (3) NZIRP now depends on unemployment rate. (4) Too much transparency? (5) The limits of unlimited QE. (6) Bernanke and Obama: Ceaseless campaigners. (7) Washington’s phony wrestling match. (8) BIS says central banks are out of control. (9) Can government spending continue to flatline? (10) Unintended consequences of entitlements. (More for subscribers.)