Government spending will grow unless politicians get incentive to change. Pay bonuses for spending cuts, only collected if reelected.

The Federal government spent 3.7 times as much per person in 2011 as it did 50 years ago in 1961 when Democratic hero JFK was in office (adjusted for inflation). If Kennedy were around to propose his level of spending today he'd be denounced by the mainstream media as a radical extremist. State and local governments combined spent 4 times as much per capita.


Federal Spending rose from $3,410 to $12,729 (using 2012 dollars). State&local went from $1,848 to $7,414.

Unfortunately federal politicians discovered they could get votes by promising future benefits without the need to raise taxes to pay for them now. Projections  show federal spending will grow even faster as the "future" arrives:


The non-partisan CBO (Congressional Budget Office) creates long term forecasts for 2 different scenarios. The unrealistic baseline scenario assumes  laws aren't changed, which means for example that programs they always renew by passing a new law are assumed to disappear. Its  like doing a personal budget pretending  when your drivers license expires you won't  renew it so you won't have any transportation expenses, even though thats not realistic since your job is 50 miles from home. The "Alternative Fiscal Scenario" is based on current policies continuing, it assumes they will change laws to keep  promises they have made and renew  programs they've always kept.

If you put off saving for retirement or your children's college costs, you'll have to allocate even more money for it in a shorter amount of time. Similarly if government postpones dealing with future benefits its promised, costs will rise higher and faster in a future larger fiscal cliff. If  politicians are going to break promises to people, then postponing that difficult decision gives  the public less time to to prepare.
 
Federal revenue hasn't been rising as quickly and if the trend continues we'll get further into debt:


Its not clear that revenue can continue to grow even as fast as the green line despite the trend, it may be starting to level out. Politicians will spend as much money as you let them, but there is a limit to how much money the economy can provide to them. Federal revenue as a percentage of GDP (Gross Domestic Product), our yearly production, grew for a few decades after the  income tax was enacted in 1913:



After managing a short spike for World War 2 (when state&local governments spent less than they do now) it has been fluctuating in a narrow range no matter what the tax rates have been.The revenue trend is essentially flat in the post-war period , but spending has continued to rise even as a % of GDP and the CBO projects it to continue doing so:



Stopping spending growth would balance the budget even without cuts

The current proposals of political leaders won't realistically lead to a balanced budget anytime in the next 30 years even though federal debt hurts the economy. The graph below compares projected tax revenue (not inflation adjusted) in CBO's long term forecast  to various spending options. This is the "alternative" forecast which assumes the Bush tax cuts don't expire.  It starts with CBO's projection for 2012 spending and considers either: freezing it, growing it by the rate of inflation, or the rate of population growth and inflation.

Many programs like the defense budget don't need to vary based on the size of the population which is why population growth is broken out separately. The government has had decades of constant spending growth to build up waste which could be cut if spending were  simply frozen. Unfortunately CBO scenarios show government spending rising faster than inflation and population growth:


Politicians play a game where they start with a budget that is expected to increase indefinitely. Then if they propose  slowing the rate of growth they call it a "cut" and most of the media unfortunately goes along with confusing people. Much of the public doesn't even realize spending has on average grown steadily for decades.

If nothing is changed, the country's expenses will increase drastically just to cover already promised benefits . An expected future shortfall is called an "unfunded liability" or "unfunded obligation". Estimates based on government data for the total we need to pay federal IOUs (national debt + unfunded liabilities)  range from  $67 trillion to $238 trillion total, which is $512 thousand to over $1.8 million per household. Projections vary since  the CBO and US Treasury have different estimates of  economic growth and the impact of  future policies. All  forecasts are larger than a recent Federal Reserve estimate of $62.7 trillion for the total net worth of the entire population, which makes them the real "fiscal cliff" unless things are fixed. Forcing today's kids and future generations to eventually pay for the favors politicians hand out to get elected is labeled by some "fiscal child abuse".

Politicians have little motivation to controlling spending

Our government was designed around "checks and balances" that work to control many things, but not apparently not spending. Politicians win office through promising to spend money on favors for   special interest groups and the  public. There isn't enough  incentive for them to restrain spending, especially if they can borrow or find other ways to avoid raising taxes now to cover their handouts.

Future benefits are promised to the general public without  paying enough attention to whether there will be money to pay for them. Studies show the eventual cost of most major programs of any kind, whether public or private, is underestimated.  Most of the public is  naturally more focused on their own lives than on paying close enough attention to politics to realize this. They won't take time to learn much about topics  they aren't interested in  so "many studies show that most people are not financially literate and are unfamiliar with even the most basic economic concepts" yet  often don't realize they lack important knowledge. Unfortunately this means they often either vote for politicians who don't understand the topics either, or for candidates who know better but take advantage of a naive public to get elected. Many of these programs are actually a bad deal for the public even if we could afford them and policies should be re-examined.  Politicians often fear losing votes if they dare  consider changing  promises they've already made to the public and prefer to pretend things are fine.

At the moment a businessman  might go to a member of Congress and say "I'm in your district. You'll get votes  by getting them to fund $30/million a year in corporate welfare for my company for the next 10 years since it will create jobs. It only costs about a dime a year per person in this country, its microscopic compared to the federal budget".  Few voters ever hear of the vast majority of special interest groups given such favors. Each one may only cost them a small amount and there are too many of them for the media to cover. Its not worth the time of most voters to complain about their 10 cent share of spending on vast numbers of programs, while there is great motivation for a businessman to get a $300 million total gift. All these programs add up to the level of spending we have now.

 Legislative committees, and government departments compete to see who can get the largest slice of the budget. The budget is increased each year so most "win" a larger budget without anyone else's being cut. Even in the private sector managers are motivated to increase  budgets to gain status  by "empire building". They'd all rather hand out raises and perks to their staff and be liked than do the difficult work of finding ways to trim spending. The difference is companies counter balance those tendencies with bonuses and other  incentives which create cultures that reward increased efficiency. Its crucial for the public sector, regular employees as well as  elected officials,  to make use of  "checks and balances" that have  proven to work in the private sector.

Companies recognize  if they say spend $1 million in bonuses to inspire $10 million in budget cuts they've come out ahead. Its even a good deal to spend $10 million on one time bonuses if changes are made which reduce $10 million in spending for every year in the future.  In the public sector even a tiny percentage of any savings found could amount to large enough bonuses to inspire change. Even if we went overboard with $billions in bonuses to elected officials and employees  to cut spending it would  still save money if they were tied to $hundreds of billions or $trillions in cuts. Politicians could  use their bonuses personally, donate them to charity, or spend the money during election campaigns to teach the public about why change is needed.

A likely horrified reaction to this suggestion is: "they'd cut necessary spending just to make money". The answer is to allow politicians to only to collect bonuses if the public indicates their approval by re-electing them (or their designated successor if they are retiring). The exact details of such compensation would need to be carefully considered, which is beyond the scope of this essay. Elected officials should also design "pay for performance" programs for government employees that find  ways to reward them for  cutting spending while maintaining or improving quality People should  be horrified there is no incentive now to counteract the natural impulse   governments have shown throughout human history to grow

Its may seem a shame to need to "waste"   money to get them to do a better job, but it'd be  more of a shame to waste  money waiting for them to change when there is no reason to expect it to happen.  People wish to think voting selects the "best" candidate and that should be enough to lead to the best job possible being done. Most voters know far less about the people they elect than companies do about the presidents they hire. Businesses understand that rather than simply trusting they have hired the best person and telling them to "go do a great job", it makes sense to also tie compensation to results.
 

People in other countries have managed to make drastic changes in their societies such as abandoning communism when they finally recognized  that incentives in the private sector lead to better production of goods.   Americans  should be capable of making changes that are far less radical to address problems in our society. It will be necessary to get past the conservative reaction many people have to new ideas: "ick, its different than what I'm used to therefore it must be bad". In reality of course the basic idea is only  new to the political sector. Its time to make progress modernizing our government by finally applying ideas like "pay for performance" that are used throughout most of our society. Thomas Jefferson's rhetorical question regarding kings could be updated to ask whether we have "found angels in the form of politicians and bureaucrats" to govern us. If we haven't, they are likely to respond to rewards the way the rest of humanity does.

State&local governments can benefit from "pay for performance" approaches even more than the federal government through competing with each other. They should compare cost and performance data to reward those who do  best and learn from them. Although there are economies of scale which lead people to assume centralizing tasks in the federal government would be cheaper, in most cases even greater  diseconomies of scale arise for entities as large as the federal government, especially in non-competitive monopolies.

There is no reason to think we are getting our moneys worth

In the private sector competition and the desire for profit inspire people to constantly search for ways to be more efficient. Even when tax rates don't change, a growing economy brings in more  revenue to government each year so they are motivated to spend it rather than expend the extra effort to find ways to save money.  In the private sector productivity (the amount of work accomplished  for each hour of labor) has increased by a factor of 3 in the past 50 years:



The graph is scaled to use 100 as the starting value for 1960. Not every task lends itself to the same degree of productivity improvement so government might not be able to improve as fast Unfortunately partly due to counterbalancing "diseconomies of scale", in reality governments tend to become less productive over time. Milton Friedman, winner of a Nobel Prize in economics, described "Gamon's law" which is  “the theory of bureaucratic displacement”:

In his  words, in “a bureaucratic system … increase in expenditure will be matched by fall in  production. … Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted’ production.”

I have long been impressed by the operation of Gammon’s law in the U.S. school system: input,  however measured, has been going up for decades, and output, whether measured by number of  students, number of schools, or even more clearly, quality, has been going down.

A recent graph of government data illustrates the point:


Friedman suggests   a major  factor leading to rising medical expenses is the fact that most hospitals are no longer competitive for-profit entities. Heavy government intervention prevents   competition from keeping spending under control. Monopolies,  whether private or public, don't have enough incentive to contain costs. The media often covers concerns over medical inflation. They don't mention the price per person for government (all levels, top blue line) has risen even faster than medical prices (red, middle) and consumer prices (green):


All lines are scaled to start at 100 in 1960 for comparison. Note: that is the consumer price index for medical care,  not medical spending which has risen faster since we buy more of that higher priced care. We need an "Affordable Government Act"  to bring "pay for performance" to  politicians and government employees (in addition to a new *real* "Affordable Care Act"). 

State and local governments also suffer a shortfall

Although it isn't talked about as much, state and local governments combined currently have close to $3 trillion in debt in addition to estimates of over $3 trillion more in unfunded future  liabilities. This graph is total state&local credit market debt, inflation adjusted to 2012 dollars:



Spending for state and local governments has also grown faster than revenue, though not by as much.



People, and therefore the economy as a whole, respond differently to various types of taxes. The federal government collects most of the income tax in this country while states and local governments rely more on other methods. They managed to increase their take as a % of GDP for a while longer than the feds, but that appears to be leveling off also. This is state&local revenue as a % of GDP:



That  allowed total tax revenue from all governments combined to keep growing as % of GDP for a long time until it may have leveled off:



Total revenue for all governments combined seems to track the growth of personal income per capita, while spending rises faster (per person,adjusted for inflation). 

To compare  growth rates all data is scaled to start at 100 in 1960. Governments at all levels combined spend close to 4 times as much as they did then, while personal income and government revenue are around 3 times what they were.

Some pundits these days refer to goals for what the federal budget should be as a % of GDP. The economy usually grows, and grows faster than the population and inflation, so that is an attempt to build an automatic spending rise into budgets to avoid the need to debate increased spending. It makes it easier for them to waste money rather than giving them motivation to control spending. Just because the country produces more doesn't mean it needs to allocate more resources to government. If you get a 10% pay raise, that doesn't mean your electric bill should automatically be raised 10% or that you *need* to spend 10% more on toothpaste. Unfortunately many now propose spending at a level which is above the historic level % of GDP the federal government has received in taxes.

Its true that some other countries manage to take in more revenue as a % of GDP, but what is possible in any particular country varies  depending on cultural factors and the nature of the economy. A tiny country which mostly depends on easily exploited vast oil wealth can afford to spend a higher percentage on government than a country which depends on investment in the  constant creation of new products and businesses. JFK recognized that higher tax rates can reduce revenues when he said "the soundest way to raise revenues in the long run is to cut the rates now".  Politicians need to base plans on what seems to work in the US, not fantasize about whatever country they prefer. 

Detailed discussion of taxes is beyond the scope of this essay. However  simple examples illustrate the point that higher rates may not bring in more revenuer. Taxes impact whether $trillions of foreign dollars invested in the US remain here or leave  and slow economic growth which leads to less tax revenue. Some  wealthy people  are   willing to move to avoid high taxes.  The UK   discovered recently that  "Two-thirds of millionaires left Britain to avoid 50p tax rate". It seems likely some in the US take pride in a spirit of independence and dislike taxes, as indicated by the rise of a new "tea party" movement, and would have a similar reaction.

The first graph on this page showed spending for federal and for state&local governments per capita. Its important to note that total spending by governments at all levels is a little  less than the sum of the two since there is some overlap. The federal government gives some money to the states which they then spend (and is included in their revenue&spending). Here is per capita, 2012 dollars, spending&revenue for all levels of government combined. Although a line is show for the revenue trend it does appear it may be shifting to level off:


It grew from $5,016 in 1961 to $18,308 in 2011. (The graphs start at 1960 with the earliest data, 1961 was chosen to look at the  50 year growth figure).

Note: although the graphs on this page show  linear trends to illustrate the point, most government spending&revenue per capita trends unfortunately already grow slightly faster than that. They  match quadratic growth curves a trivial amount   better with the odd exception of federal revenue per capita which matches a linear trend better

Appendix A. Please spread the word!

Information the major media doesn't cover can only be spread by "word of mouth" virally so please use email and every other way you can to spread the word. Please pass around the "posters" below, you may even upload them to your own albums to be noticed. Advertising repeats since people may not notice it the first time so come back  again for more posters.

Share just the page:

Appendix B. Notes on data

The federal Bureau of Economic Analysis site was the source for data on federal and state&local spending and the GDP implicit price deflator used for inflation adjustment to 2012 dollars. The raw data from the BEA was collected in this spreadsheet along with the derivation of  per capita and per GDP figures.  Population data is from the US Census, but due to convenience was clipped indirectly from USGovernmentRevenue,com.

Note that many of the graphs on this page begin in 1960 since that is the earliest BEA data available for total government expenditures for the federal government instead of the incomplete "current expenditures" figures , as well as" total receipts" rather than just "current receipts". State&Local data begins earlier, in 1929 for those.  Other data sets often begin in 1947, which is a typical year to start postwar data to allow for a year of transition.

A Federal Reserve site has better interactive graphing abilities. It allows graphing of data on federal spending in 2012 dollars and state&local per capita spending in 2012 dollars. Although it has the BEA's "total expenditure" data, it  lacks "total receipt" figures and only has "current receipts". For most data there isn't much difference  (not as much as with expenditures) and the trends match.  Personal income data   came  from there.  The data for inflation vs. federal spending per person is also in a graph there. Its similar to the graph of total government spending per person given on this page so it was only used for a "poster" and not a large graph.

The CBO's "An Update to the Budget and Economic Outlook"  was used for forecast for the next several years, with longer range data coming from its "Long Term Budget Outlook" including estimates of future inflation and population. Data for graph of federal outlays and receipts as a % of GDP from 1947 on came from the Whitehouse budget's historical table: "Table 1.2—Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP: 1930–2017". This was created before switching to BEA for other data, and the trends match.

The Whitehouse's budget only went back to 1930 in its table of  historical federal spending, so data for federal spending as a % of GDP just for the graph of 1900 on came from the USGovernmentRevenue,com site. That site was also used for the graph of total government revenue. Even though the site  gives a total revenue figure for 1900, data for 1900-1901 seems to be federal only so data was retrieved only for 1902 onwards for the total government revenue graph.

Obama's proposed budget is here. Graphs not useful to post compared Obama's budget to CBO projections. To adjust to 2012 dollars using the same projection of inflation & population & economic growth, rather than use the nominal $ figures in the budget, the budget figures given as a % of GDP were used and combined with the CBO's projections of future  GDP in 2012 dollars to arrive at the budget in 2012 dollars.  That was combined with CBO's projected future population to derive per capita spending figures for the small graph which includes Obama's budget in one poster..