How to Optimize Federal Spending

This post is in reaction to a comment that was left yesterday. Besides, I think it’s helpful to remember every so often where the federal government is spending money.

As you can see almost 2/3s of all federal spending (Social Security, Medicare and Medicaid, Interest on the Debt, and Other Mandatory—mostly military pensions) consists of transfer payments. There’s nothing much to optimize there without changing the structure of those budget categories.

Where there is something to optimize and where an “ethic of cost containment” can have some effect is in the other two primary budget categories, Defense and Discretionary.

Right now our outlays exceed income by about 40%. That means that if you cut both defense and other discretionary spending to zero, we’ll still be borrowing to finance the federal government. Obviously, we’re not going to cut them to zero. That means we need to look to the mandatory spending categories, the ones that require structural changes, for real deficit reduction.

Social Security is the biggest slice of the pie but it isn’t Social Security that’s driving all of the spending beyond what we’re taking in. Last year Social Security paid out in benefits about 8% more than it took in. Nominally, that draws down the Social Security Trust Fund—the amount by which revenues from FICA have exceed the Social Security outlays over the years. That gap could be reduced by raising the retirement age, increasing FICA max, further graduating the schedule of benefits, or some combination of the above.

What’s really driving all of the spending beyond our means is healthcare spending and optimization isn’t the key there. Reducing costs is, whether by getting more for the money we’re spending (my preference) or reducing the benefits paid by any number of means, e.g. raising the Medicare eligibility age, graduating the reimbursement rate based on income, or any number of other schemes (which I believe will become decreasingly effective over time).

That pie chart is the reason I keep harping on defense spending and healthcare spending. It’s a fundamental principle of optimization that you optimize where there’s something to optimize and defense and healthcare spending are where the action is.

8 comments… add one
  • Icepick

    Good luck working out where the cuts will come from. Republicans generally don’t offer specifics, and Dems want more spending and confiscatory taxation. There aren’t going to be cuts until reality hits. And reality is like Paul Anka – when it moves, it slices like a fucking hammer. It won’t be Happy Fun Times.

  • jan

    I’ve seen charts like this before. But, no matter how many times I see them, a sense of futility kind of overwhelms me, as the visuals are so striking.

    Like Ice implies, I guess there’ll be no gain without pain. And, when I see all the democratic sequester squealing going on it seems like debt/deficit denial will go on for some time —- or until we simply run out of money and options.

    In the meantime I heard a ratio asserting that every dollar spend on younger demographics, four are spent on the senior population. And, of course that relates back to the federal spending pie chart, and the enormous portion of it allocated to benefits set in concrete to meet senior needs. And, once again it graphically depicts the inherent structural inequities of monetary considerations between age groups.

  • jan

    Just heard on the news that President Obama will be meeting separately with both the democratic and republican caucuses. This is the first time he has done that since 2010!

    How can a president negotiate or hammer out a deal without personally conferencing with his adversaries frequently, let alone letting years go by before he does this?????

  • Dead political horse Dave. I agree with you, but there is zero chance of this kind of thing happening. Do you really see this as being possible?

  • Icepick

    How can a president negotiate or hammer out a deal without personally conferencing with his adversaries frequently, let alone letting years go by before he does this?????

    Ignore words and look at actions. Actions suggest that he has had zero interest in hammering out deals, save for short-term deals to time crises for presumably more opportune times. I expect he planned on getting the House back in 2012 when the sequester deal was negotiated back in 2011.

  • steve

    Of the two areas, health care is projected to have much bigger increases. The path of Medicare spending has been evident for very many years. We now have some structure in place to help us address it if we wish. I think it is just a matter of time until we do.

    On the provider side, it is underway. We all assume the cuts are coming. The ACA is already imposing a number of cuts. Of note, my dyed in the wool, rock ribbed conservative co-workers on the management side have noted that the ACA is demanding cuts, but it is also demanding quality.


  • jan

    ACA is demanding cuts, but it is also demanding quality.

    That’s commendable if the costs seem too over the top and outrageous. However, top dollar and quality have long been linked, as in the the saying that “You get what you pay for.” I personally think that more discretion in services rendered, as well as my much repeated opinions on tort reform deal with actual abuses and misuses of medical care, rather than making cuts for the sake of cutting.

  • Drew

    Just because SS and Medicare have the label “entitlements” doesn’t mean savings are not available. I’ve just heard too many times in my career from incompetant management teams that “it can’t be done.”

    The real answer inevitably is that there is no will to get it done, and when a managment team wants to, they can and do.

Leave a Comment