THe Economy - Part V

Prior to getting into who pays what in taxes, it may be interesting to look at just where the money goes. In discussions on the economy, I still run into people who believe most of our tax dollars go to welfare and foreign aid. The following looks at federal tax dollars. Many welfare programs were either eliminated or pushed down to state responsibility during the welfare reform programs of the Clinton years. The information is taken from a no-partisan group: the Center on Budget and Policy Priorities, which may be found at http://www.cbpp.org/. Figures are for the 2007 budget.

Defense and Homeland Security related expenditures compose 22% of the $2.7 trillion dollar budget; that's $590 billion, with $125 billion of that total going toward the wars in Iraq and Afghanistan. Recently, Barney Frank suggested the defense budget could be cut by 25%. While I disagree with this, he probably is referring to ending the Iraq/Afghanistan expenses. I believe both wars have seriously deteriorated our armed forces and that we have probably not spent sufficiently on homeland defense (port, nuclear and chemical plant protection, etc.). Without a detailed study, I would guess defense spending could be held to roughly 20-25% of the total budget or about 5% of GDP.

Social Security takes 21% of the budget or $590 billion. This provides 34 million retirees with an average payment of roughly $1000/month. I don't foresee any immediate change in this, although due to shifting demographics, it is not a sustainable program over the long run. We may be forced to "means testing" down the road.

Medicare, Medicaid and SCHIP (State Children's Health Insurance Program - partially funded by the federal government, but administered through the states) claims another 21% of the federal budget, or $572 billion. With the political tide for some sort of universal health care program, I would not foresee any substantial reduction in this category, although increased efficiencies, elimination of corruption, etc. might improve costs by 10-20% (say $150 billion).

Safety Net Programs, such as the earned income and child tax rebates, school lunch programs, low-income housing assistance, food stamps and the various programs one would think of as "welfare," compose 9% of the budget or $254 billion. In a serious economic crisis, it will be difficult to hold spending to this level, without eliminating programs. Obama's tax plan increases the earned income credit, but for the sake of argument, let's assume this category could be cut in half, for a fifty percent savings (say $127 billion).

Interest on the national debt takes roughly the same amount of the budget, 9% or $237 billion. No much can be done here and as borrowing increases at a rate aster than income growth, this percentage will only rise.

Everything else comprises the remaining 18% of the federal budget. The 18% is divided roughly as follows: 6% for federal retirees and veterans benefits; 3% for for scientific and medical research; 2% for transportation and infrastructure; 2% for education; 1% for non-security related foreign aid; other miscellaneous 3%.

In terms of restoring the nation's basic infrastructure and encouraging new industries with new jobs, scientific and medical research, transportation and infrastructure and education probably all need increases in funding and a larger percentage of the total budget.

The point in reviewing these figures is, however, to show that if we hold defense spending and continue to fund entitlement programs, there is not a whole lot of discretionary spending available to reduce. If the above is even approximately correct, the best we could hope for is roughly $300 billion out of a $2.7 trillion dollar budget (approx. 10%). It is more likely that that savings would be shifted toward research, infrastructure and education.

According to the Center on Budget and Policy Priorities, in 2001, budget experts were projecting a $710 billion surplus in 2009; today we are instead expecting a $546 billion dollar deficit (and I believe these figures were prior to the recent bail-out of financial institutions). This means that during the Bush Administration the federal budget picture worsened by $1.3 trillion, not including the recent additional increases. The Center also studied where this money went: 42% in the Bush tax cuts; 40% in defense and security increases; 12% in entitlement increases; and 6% in discretionary spending increases.

My argument is that we do not resolve the overall budget problem with "tactical changes" such as getting rid of earmarks ($18 billion/year) or freezing discretionary spending to present levels and extending the Bush tax cuts and providing additional tax incentives to American corporations to enable them to better compete globally. In fact, policies designed to help us better compete globally have largely led to the destruction of the middle class and failed financial system.

Next: Who Pays the Taxes and How to Create Meaningful Employment