Societal Allocation of Resources

With the proposed FY 2023 federal budget, government expenditures will grow to roughly 23% of the $26 trillion US Gross Domestic Product. Even with the proposed substantial annual tax increases on high-earners’ incomes, the offsetting tax revenues are insufficient to avoid a perpetual trillion dollar deficit each year, amounting to 5% of US GDP. This will drive the current $26 trillion of US National Debt to $40 trillion by 2030 or so, amounting to well over 100% of US GDP. 

The higher a country’s debt-to-GDP ratio climbs, the higher its risk of default becomes.  The US ratio is among the highest of OECD countries, exceeded by only Japan, Greece, and Italy.  A ratio over 100% indicates that a country may have difficulty paying its debts.  This may lead to reluctance among investors and their abandoning dependence on the dollar.

How is the government budget spent.  Considering the $7 trillion budget, with $4 trillion revenues, in FY 2021, the allocation was as follows.

  • Income supplements 24%
  • Healthcare 12%
  • Social Security 17%
  • Defense 11%
  • Medicare 10%
  • Interest 5%
  • Commerce & housing 4%
  • Education, training, & social services 4%
  • General government 4%
  • Veterans benefits & services 3%

Note that income supplements include stimulus payments in response to the coronavirus and child tax credits

Is this an appropriate allocation of societal resources?  Roughly half goes to people who are not prepared to fend for themselves.  The issue is not their preparation, or lack there of, but the fact that expenses have completely outstripped peoples’ abilities to pay.  It seems to me that too many people are making too much money for providing services that are prohibitively costly.

About one third goes to services provided by federal agencies.  Are those services worth the price?  There is much variation here, but non-defense is overshadowed by defense.  It is difficult to argue that leading-edge defense capabilities are not critical.  However, continuing to acquire yesterday’s capabilities supported by Congressionally mandated expenditures are very much of questionable value.

Is society seeing good returns on its investments?  I think the answer is a resounding, “No,” unless we view a primary purpose of government to be redistribution of incomes to the less fortunate and those at the head of the line for government contracts.  We are spending enormous amounts to sustain “rice bowls,” many of which are no longer warranted.  We need to pay much more attention to where societal investments make sense.  We all need to be much more savvy investors in the future of our society.

Consider how we got into this situation.  I saw in a recent commentary that the projected NIH budget includes a 0.6% increase. The commentators said that this was “grossly insufficient funding.”  In contrast, the President’s budget proposes strong increases to the budgets of CDC (27%), FDA (11 %), and NSF (19%).  What is the “right” amount for the NIH budget?  Would 50%, 100%, or 200% increases be sufficient?  Might that warrant substantial decreases of the budgets for Social Security, Medicare and Medicaid?  The evidence base for such advocacy is often slight at best.  It is all just pontifications.

At an extreme, I have encountered arguments that the portion of the Federal budget focused on disabilities should be focused on improving wheelchairs, nothing else.  No prosthetics, training, job aids, etc.  I confronted those advocating this position saying, “This is a ridiculous position.  No one will ever agree to this.”  Their response was, “We know it is ridiculous, but we always get a bit more when we take an extreme position.”  The difficulty, of course, is that most advocacy groups do this. 

Advocacy determines the federal budget, driven by lobbyists, campaign contributions, and ultimately voters.  One might think that tradeoffs are determined by, for example, the marginal returns of an additional dollar spent on health, education, or defense.  One might expect attractive returns on investments from long-term savings due to near-term expenditures.  However, the budget process is more like horse trading – really vote trading — than careful, broadly based analysis.

Everyone wins a little and loses a little in this process, but the winnings are sufficient for Members of Congress to be reelected in their district or state.  Completely reasonable and economically attractive proposals disappear either because they threaten rice bowls or the opposition does not want the proponents to gain political credit for proposing and orchestrating the idea to fruition.

How might this dilemma be addressed?   Singapore provides a compelling example of a professionally managed economy and country.  Top leadership has impressive credentials and experience – and is very well compensated.  Our federalist traditions would not support this.  Every state, indeed every city council and school board, can independently make its own rules.  Any citizen, regardless of expertise, can be elected to serve. 

Change will have to be more subtle and incremental.  The ethic has to evolve from everyone scrambling to get their piece of the pie, to a public consciousness focused on performance, quality, and equity.  The ingredients for this sentiment are occasionally apparent, but far from pervasive.  My guess is that forces such as the pandemic, war in Ukraine, and the impending climate crisis will prompt important dialogues about performance, quality, and equity, and slowly enable embracing this sentiment.

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