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Tuesday, October 18, 2005

Senate Majority Leader's Top Budget Aide Claims Federal Spending "Not Profligate," Cutting Pork Would Make Little Difference for Uncle Sam

The following memorandum by Bill Hoagland is circulating in email format among majority staff aides on the Senate appropriations and budget panels. Hoagland is Senate Majority Leader Bill Frist's top aide on budget issues. The underlining here was not in the original email made available to Tapscott's Copy Desk.


October 8, 2005

From: Bill Hoagland

Subject: Republicans and Fiscal Responsibility

You asked have Republicans shown fiscal responsibility over the last 5 years?

The answer to this question will depend on your audience's definition of "fiscal responsibility." For some government spending will define fiscal responsibility, for others, the federal deficit will be their benchmark. A third, benchmark might simply be the state of the macro economy - after all, the end product of fiscal decisions should be measurable outcomes, such as the strength or weakness of the national economy.

Since the current Republican focus on "fiscal responsibility" appears to be on government spending, this note is limited to that subject.

Fiscal Responsibility as Government Spending.

The case can be made that government spending over the last 5 years has not been profligate, given the geopolitical situation post September 11. This is not to say, however, that there has not been unnecessary and wasteful spending - in a $2.5 trillion budget how could there not be?

But Republicans have become our own worst communicators on this subject by allowing fiscal responsibility to be defined by the media and outside groups' total focus on individual, parochial, Congressional projects as in the recently passed highway and energy bills. Eliminating all such projects might be useful, but would not substantively change the overall level of federal spending.

More recently, the expenditure of nearly $71 billion for the worst natural disaster in this country's history, has also raised concerns by some about fiscal largess. This even though, the federal government has both a statutory responsibility, if not a moral responsibility to respond to such disasters.

Further, for those Republicans and others who have not supported the President's foreign policies in Iraq and the consequential Global War on Terrorism spending that has followed, the $290 billion already appropriated since 2001 plus an additional $50 billion in this week's Senate-passed defense bill along with no indication when such spending will subside, becomes a convenient argument for critics tying foreign policy and fiscal responsibility into one package.

Finally, the Medicare Rx bill has become a symbol of federal spending out of control, though the actual spending from that legislation, let alone the benefits to be derived from it, have only now begun. The spending criticism of the Rx legislation falls into the category of anticipated spending, which there clearly will be, but not actual spending. And as you heard this week, the costs of the program could be significantly less than what was anticipated as increased competition in drug pricing now becomes a reality.

So objectively, how has federal spending over the last five years compared to previous time periods? For the federal fiscal year that just ended, it is estimated that total federal spending will have reached nearly $2.5 trillion. A large number obviously, but in the context of the largest and strongest economy in the world - a $12.3 trillion economy - no other industrial nation’s centralized government spends less than the United States measured as a share of their economy.

Federal spending as a share of our economy in 2005 represents about 20.2 percent. How does this ratio - federal spending to the size of our economy - compare to previous periods? For the decade of the 1980's, federal spending averaged 22.2 percent of GDP - a whole 2 percentage points higher than last year. That was a time President Reagan build up our national defenses and waged the final battle to end the Cold War. This increased spending was not without controversy also, but the Cold War was won!

For the decade of the 1990's - the Berlin Wall falls, the economy expands - and guess what? Federal spending as a share of an expanding economy averaged 20.7 percent. A whole half a percentage point higher than last year. Compared to the last two decades we have done a good job of maintaining the principles of limited, controlled federal spending.

When we turned into the new century, pre-September 11, 2001 spending averaged a historic low of 18.5 percent. It has been the increases in federal spending for the Global War on Terrorism that has been the most significant driver these last 5 years, not highway bills, not energy bills, nor a Medicare drug bill.

Since the turn of the new century, we have devoted significant resources to our national security. As a share of GDP, defense spending has increased from 3.0 percent in 2000 to 4.0 percent last year. In other words, if it were not for this 1 percentage point increase in funding for our national security between 2000 and last year, federal spending overall would be a remarkable 19.2 percent, well below the previous two decades.

Bottom line, federal spending has grown these last 5 years, but for very clear and understandable national security reasons. We should not use this fact as an excuse to lessen oversight, nor to eliminate and restrain federal spending where there is no proven, critical national need. But we, also do not need to be overly defensive that we have not exercised fiscal responsibility measured by this metric of spending.

UPDATE: 10/19/05

The Heritage Foundation's chief budget analyst, Brian Riedl, says wait just a minute, if defense only accounts for a third of the increased spending, Hoagland's case falls apart. Go here for Riedl's fisking of Hoagland's numbers.