10 October 2010

The Federal Budget Game

Recently this article by scholars at Harvard Business School and Duke University has been getting a lot of attention.  Its not a long article, so by all means, read it in its entirety.  The gist of the article is that, based on a survey of a representative sample of over 5,000 Americans, Americans have no clue about the present state of wealth (not income) inequality in this country, but also that their desired distribution of wealth differs vastly from reality (in fact, Americans would find the distribution of wealth in Sweden to be most agreeable).  While the first conclusion is worrying, the second is generally heartening.  The fact that more people approve of a more equal distribution of wealth ought to be celebrated.  However, survey results cannot confer on any distribution of wealth the status of "true," "fair," or "right."  More robust ethical reflection is necessary to determine such things.  Nevertheless, studies like these are not without utility.  They show us what people believe, but more helpfully, suggest why they may act in certain ways or promote certain policies.  This is particularly interesting when a group's erroneous views may contribute to a lack of support for rational policymaking.

I thought that it might be a useful experiment to apply similar techniques to government spending, and in particular the U.S. budget.  What I have laid out below are two quizzes, or rather one quiz and one survey.  The quiz asks how much of the federal budget is allocated to specific programs.  The survey asks, if you had total budgetary discretion, how much of the federal budget you would allocate to those same programs.  Please take both but follow the instructions carefully and complete both the quiz and the survey before looking at the answers to the quiz itself.  The effect is ruined if you see the answers before taking the survey.

First, the basics.  President Obama's requested federal budget for Fiscal Year 2011 is estimated to be $1.415 trillion dollars.  This includes only discretionary spending, meaning that the President and/or Congress can change the amount allocated for each program or department from year to year.  That figure does not include mandatory spending, or programs which must be paid out (i.e. entitlements), which consists primarily of Medicare/Medicaid, Social Security, other income security programs (unemployment, food stamps), interest on the national debt, etc.  Many of these mandatory programs are not paid for through general income taxes, but through other forms of taxation.  With those categories included, the federal budget is $3.69 trillion.  The estimated deficit appears to be nearly the size of the entire discretionary budget; or about $1.3 trillion dollars.  I have not included every category of discretionary spending, so you should not expect the numbers to add up to 100%.  Please don't cheat by looking these numbers up elsewhere.  The point is not to test what you know, but to see what you think.

The answers to the quiz are embedded in the post itself.  However, the text is blacked out so you have to highlight it in order to see it.  Obviously, this is not a real research study.  It is mostly for fun, but also to make a point, which will be discussed below.  If you want to share, feel free to leave your answers in a comment below. 

1.  What percentage of the federal discretionary budget do you believe is spent in the following discretionary categories?

a.  Defense/national security (Overseas operations, soldiers, equipment, etc.)- 63%
b.  Foreign aid - <1%
c.  Housing/Urban Development- 4.5%
d.  Education (includes grants to states) - 9.9%
e.  Federally funded research and development* - 10.4%
f.  Transportation (highways, rail)- 7%
g.  Governmental salaries- 1.4%

* This number includes some defense-related research; therefore, there may be some overlap between this category and the defense/national security category.

2.  What percentage of the overall federal (discretionary and mandatory) budget do you believe is spent in the following mandatory categories?

a.  Medicare- 13.5%
b.  Medicaid grants to states 7%
c.  Unemployment - 2%
d.  Food stamps- 2%
e.  Social Security retirement/disability - 20%

3.  What percentage of the discretionary federal budget do you believe should be allocated to the following priorities?

a.  Defense/homeland security
b.  Foreign aid
c.  Housing/Community Development
d.  Education
e.  R&D
f.  Transportation
g.  Government salaries

4.  What percentage of the overall federal budget do you believe should be allocated to the following priorities?

a.  Medicare
b.  Medicaid grants to states
c.  Unemployment
d.  Food stamps
e.  Social Security retirement/disability
Please leave your answers before reading below.
Simply put, the point of this post is that anybody who tells you that they want to eliminate or significantly reduce the deficit by cutting non-defense discretionary spending is a know-nothing hack.  Nearly 60% of the overall federal budget comes from four areas: Medicare, Medicaid, Social Security, and defense-related programs.  Of course, the reason that these budget line items were allowed to get so big in the first place is because there are interested parties and lobbyists pushing for more spending in these areas.  And so cutting them is more difficult than budget cuts in many other areas which are not quite so large.  Nevertheless, it is plainly foolhardy to believe that we can eliminate a deficit of the size of nearly the entire discretionary budget (more than 33% of the overall budget) by attacking only 40% of the overall budget.  (And at the same time when we maintain a military that spends more than all of the other militaries of the world combined.)

Also, Americans' favorite choice for significantly reducing federal spending? Foreign aid.  Of course, it is hard to see how we could spend less on this, and even have it show up in the budget.  The Economist survey to which I linked does not list government salaries (particularly those of the legislative branch) as an option for spending cuts, though I am certain that if it were, it would come in a close second, if not first.

As I pointed out in my initial paragraph, none of this information, nor your answers to the above questions, can tell us what is the "right" or "perfect" federal budget.  It is likely that many fair allocations exist.  Nevertheless, it is even more likely, if not practically certain, that the current allocation is suboptimal, and not simply for the fact of spending too much on everything.  My greater purpose here was to see if people could imagine more useful and prudent spending if they were provided with sufficiently complete and objective information about how our money is currently spent.

Some links- Death and Taxes; NYT Budget Graph
Note: I gathered budget data from several different sources.  If there are problems in the way I have calculated percentages, I will gladly correct them if pointed to a better source.  It is not easy to get simply, straight-forward information about this subject, which of course, is part of the problem in the first place.  One of the chief problems is that different sources define spending categories differently, and some calculate percentages based on overall budget, while a few look at the discretionary budget.  I have tried at the very least to be internally consistent, but I cannot claim infallibility.

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