Asymmetrical Information

Jane,

I don't buy the argument that military spending is a fair target just because it is a large part of the budget. Though I am sure many would disagree, I believe that the strength of the US military is a major contributing factor to what is for the most part a stable and peaceful world. What is the economic value to us of a stable and peaceful world? Enough, I think, to justify a very large military budget.

I see we are paying less (percentage wise) towards interest now than in recent years, but is that because our normal payments have remained low in relationship to our GDP? Or are we just paying the debt off at a slower rate? Currently I am paying less of my income towards my personal debt, but I have also slowed the rate at which I am getting it paid off.

I ask because this runs contrary to most of the rhetoric I’ve heard.

I would guess that the low interest payments are largely due to low interest rates and to economic growth (our economy is growing faster than our debt). None of it should be due to paying off the debt at a slower rate, since we're not paying it off. Even under Clinton we still ran deficits every year - all that changes from year to year is how much we increase the debt.

On the drop in military spending under Clinton, remember all the fun politicians had spending the Peace Dividend? The idea was that, with the Cold War over, we could dramatically slash the military and spend that money (10 times over) on other things. Perhaps that last burst of excess spending from the Peace Dividend was what led to the 1994 Gringrich backlash and to temporary, relative fiscal discipline.

We do not pay off debt.

Beautiful. Thanks for the correction.

The average maturity of US government is rather short, so the low level of rates explains the drop in interest payments. Also, the chart does not include interest payments to the SS and other trust funds, so this measure of interest payment is artifically low.

the interesting point the chart does not show is that the Reagan military budget was smaller then every other cold war president but carter.

The reason the chart doesn't show that Reagan's military budget(s) were smaller than ever other Cold War president save Carter is that it isnt' true. Looking at the chart, its pretty clear that some of Reagan's late 80's military budgets were larger than some of the later ones in the Nixon/Ford administrations. Also, Reagan's budgets were larger than Bush 41's, for the period that he was a Cold War president.

Too late for health care after Bush's Medicare plan. Really, the only two lines that are worth comparing are discretionary spending and defense spending. Any administration has a very limited ability to control the other categories (although Bush could at least have refrained from expanding Medicare).

Seems like the intent of the graph seems to be to downplay the increase in discretionary spending by increasing the scale of the graph to include the other larger factors that are less controllable.

So if we're not going to cut spending, why are we cutting taxes?

Also, I'd like to follow up on Spencer's point: as he says, part of the decline in share for interest payments is explained by the fall in rates. The other part of the explanation is that this Treasury has steadily reduced our average maturity, which increases the volatility of our interest payments. So far, that's been a good thing, since the direction of movement has been downward, but we're also more vulnerable to a future upswing in rates.

whaa:

the treasury is in the process of increasing our duration by reissuing 30 year t-bills. They aren't stupid... cutting maturity up till now was a good idea, and so is lengthening it now.

Cutting taxes helps grow the GDP at a faster rate, while also crowding out additional spending. Excess cash usually gets spent on ongoing spending programs, rather than paying off debt. Reducing revenue in reduces the ability to demand new programs. Unfortunately W isn't half the conservative brute he's reputed to be. Us out on the fringe have a long list of things to cut, but thanks to RINOs we get bullied into increasing spending when we have a supposed majority. OY!

At least you recognize that you're on the fringe, hey. Starve the beast won't work because the concept of not simply limited government, but hyperlimited government is nothing that the majority of the American public wants anything to do with. Why? Because they understand the limits of the free market far better than the libertarian ideologues.

" . . . hyperlimited government is nothing that the majority of the American public wants anything to do with. Why? Because they understand the limits of the free market far better than the libertarian ideologues."

That is absurd. The American public wants nothing to do with limited government because 20% of the people pay 80% of the taxes, so 80% of the people get a great deal. Oh, payroll taxes you say? We have Social Security and Medicare because the underage and the unborn don't vote, and current and soon-to-be retirees on the dole outvote struggling young middle class families.

1. "Defense" includes DHS... Department of Homeland Security. Lots & lots of pork in there. Plasma TV's, business trips, conferences, etc.

2. Just about every department has waste up the wazoo. I just got back from Vegas, where there was an EPA-sponsored conference at Mandalay Bay. Pricey.

3. Even holding government size constant as a % of GDP.... It's growing fast. GDP is growing faster than inflation and population (a lot faster). Ostensibly, the economy is provided new & better goods & services with a much higher value. The government, then, is either charging more money to do the same work (inflation), or its doing more & more things (growing via scope creep).

4. Higher interest rates and aging baby boomers will make the chart look VERY different in about 5 or 10 years. Total government debt as a percentage of GDP is still quite high. Once we have to pay another 2% on it, that'll drastically raise the yellow line. Moreover, Social Security and Medicare outlays will balloon (barring an unforeseen change in the laws). On the revenue side (not shown) those recipients will stop paying into the related payroll tax pools.

5. In a nutshell, Bush's spending is masked by rapid post-recession GDP growth, low interest rates, and boomer demographics which will soon transition from peak earnings years to peak taking years.

whaa, because interest rates are low.

The question is, do the programs the money is being spent on generate economic value? Will the programs the government is spending on generate future tax revenue that will justify the spending??

There was an excellent post on this very topic on Obsidian Wings in September. The analysis there is a bit different and I recommend you all check it out.

The Party Of Fiscal Conservatism

I'm suspicious of the conclusions stated by Angry Bear. This link to a Cato Institute paper has a good table showing annualized growth in real dollars by each President since LBJ by spending category. Bush comes out terrible in this comparison, while Angry Bear says he's doing pretty good. Angry Bear stated in %GDP instead of real dollar growth, but could that make the difference?

http://www.cato.org/pubs/tbb/tbb-0510-26.pdf

So...who's right?

Larry,
If the economy had been a bit weaker then the numbers cited by Angry Bear would have been signifignatly different while CATO's would have been identical. Taking credit for a smaller % of spending due to economic prosperity (that you can't directly control) sounds like a fascile argument to me.

Hey -

What you said is not right.

1) The treasury isn't lengthening the average maturity of our debt right now. Our average maturity has been steady since the reissuance of the 30-year bond

2) Shortening the average maturity of debt makes no sense at a time of historically low interest rates, unless you're only considering the short term. Shortening the maturity of the debt means that we pay less interest in 2005, but likely more over the next, say, 100 years. That's a stupid trade unless all you care about is minimzing the appearance of problems for the moment.
Loser: taxpayers
Winner: current administration

Chris,

You make a very good point about different GDP growth changing the perceived results of Angry Bear's, but not CATO's. For that reason alone, the CATO results seem more credible.

The other thing I noted was that Angry Bear put Homeland Security spending in the same bucket as defense, while this is really domestic spending that is growing very quickly. He also pulled out an "Other" category that is growing under Bush after 30 years of decline. This looks like a bucket of domestic spending too. My hunch is that when all this is restated into total defense and total domestic discretionary, you'd come to the CATO numbers.

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