Minimizing the Pain

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Ever wonder where federal dollars are going? Chris Edwards of Cato Institute gives a good run down of the five major areas where the federal government spends its trillions of dollars.

Ever wonder where federal dollars are going? Chris Edwards of Cato Institute gives a good run down of the five major areas where the federal government spends its trillions of dollars. They are

1)      Paying federal workers,
2)      Purchases,
3)      State and local government aid,
4)      Wealth transfers (through subsidies and benefits), and
5)      Debt interest payments.

The next question is, was this an efficient use of the $3.9 trillion dollars the U.S. spent in 2013?

Edwards begs to differ, and two of the areas he mentions are of particular interest. He says,

“[N]ote that the U.S. Constitution does not create an open-ended role for the federal government to transfer wealth or aid the states. Yet today those two activities account for about two-thirds of federal spending even though they run counter to the government’s limited purposes under the Constitution.”

These are probably two of the most popular uses of federal government money, but they apparently were not on the minds of the Constitution’s writers.

Looking more closely at what these categories encompass, Edwards says wealth transfers (half of federal spending) include payments like Social Security, food stamps, tax credits, and unemployment insurance. These can be crucial resources for many individuals. That said, Edwards gives the reminder that these dollars don’t come out of thin air. They are either coming from taxpayers now, or they are coming from debt that taxpayers will have to pay back in the future. Another problem is that these payments don’t just fix the problem and that’s the end of it. Edwards says they can change behavior in a negative way.

“Keynesian economists claim that spending on transfer programs is good for the economy, but the reverse is true. Government spending causes distortions. It makes people change their behavior in ways that undermine growth.”

(Think, for example, of the possible cuts workers could potentially make to their hours in order to get an Obamacare subsidy.)

Edwards says federal aid to state and local governments also has negative side effects: more regulation, less innovation, more wasteful spending, and less government transparency. He believes that

“Americans would have more frugal, transparent, and responsible government if aid programs were eliminated.”

Encouraging growth and transparency sound like positive results, but would we really want to cut aid to individuals, businesses, state and local governments that society has come to depend on? Wouldn’t that hurt?

The answer is, yes. But that leads to the option of being hurt now, or being hurt even worse in the future.

The problem is that such massive spending is causing budget deficits and mounting national debt. Edwards explains:

“Without reforms, the non-stop red ink will undermine economic growth and reduce living standards. As such, policymakers should begin scouring the budget for programs to cut.”

This is not to say that no help should be given to those who really need it (perhaps given even more efficiently at lower levels of government). In any case, if spending does continue as it is, people will continue to see surface benefits—at least for now. But what happens when payday comes someday for all that’s been bought on the credit of the future? Will the people who most need help get it then? Will everyone be worse off with no one to back them up? In the process, will society miss out on side benefits like economic growth and government transparency that might have come had policymakers exercised responsibility sooner?

>> Source: Edwards, Chris. “How to Spend $3.9 Trillion.” Tax & Budget Bulletin, No. 69. Cato Institute. February 2014.

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