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.