A Sustainable Federal Budget

Balancing the Federal Budget without Defaulting on the National Debt

Defaulting on the national debt is like cutting off your nose to spite your face.  Republicans in Congress are not wrong: our current level of federal spending is not sustainable over the long-term.  Democrats are not wrong: the services federal spending supports are popular and deserve taxpayer investment.  However, defaulting on that debt worsens the problem without addressing its causes.  Fixing the imbalance between our national spending and our national revenue should not wait, and neither of the approaches favored by the left or the right fix the problem. 

What is the national debt and why does it matter?  The US Government accumulates debt the same way we all do – by spending more than it collects.  We now spend about $6.27 trillion per year but collect only about $4.9 trillion in revenue.  We charge the expenditures to our national “credit card” by selling US Treasury securities that pay a certain amount of interest.  If we continue to run an annual deficit, we continue to add to the national debt.  Currently, there is no immediate crisis – the US can still borrow money at reasonable rates.  However, like all debt, the growth of national debt limits our choices because an increasing amount of the budget goes to pay for interest on the debt.  Defaulting – failing to make our payments on time – results in increasing the interest rate we have to pay to get others to buy our bonds, just as a credit card company increases the rate when we fail to make mandatory minimum payments.  Instead of defaulting, we should look how we can save money in our spending and determine how much additional income is necessary to end the deficit and reduce the debt over time.

Social Security.  Social Security benefits, at 19% or $1.2 trillion annually, are the largest single portion of the federal budget.  Initially conceived as supplemental income for retirement, Social Security has become essential; 2/3 of seniors would live in poverty without it.  We pay for Social Security benefits from payroll taxes on working people.  We all pay 6.2% of our salaries (matched by our employers) to fund the system, up to $160,200/year.  Wages over $160,200/year are NOT taxed for Social Security.  Currently, the Congressional Budget Office estimates that Social Security will be insolvent in 10 years, by 2033, resulting in an immediate reduction in benefits by 23%. 

Saving Social Security will probably take a number of measures.  As proposed by Democrats, removing the wage cap and taxing income above $160,200 a year and making investment income subject to Social Security taxes would bring in $150 billion more/year.  The Republican proposal, reducing the growth in benefits by applying the so-called Chained Consumer Price Index (a measure of inflation), would increase revenue by $15 billion/year.  More likely, payroll taxes will have to increase by 1-2%.  Congress took some steps last year to reduce dependency on Social Security by increasing retirement savings options and benefits in the SECURE 2.0 Act.  SECURE 2.0 will help lower income workers add significant self-directed retirement savings, in addition to the retirement supplement from Social Security.

While we tend to view Social Security as politically untouchable, restructuring benefits can happen in a rational way.  Currently, monthly Social Security benefits range from around $700 to $4,555, depending on the retiree’s work history and salary; the average is about $1,500.  Changing the system to one where everyone who worked a minimum term received a set benefit of $1,500/month is one way to reduce senior citizen poverty significantly and make a more financially healthy system.

Federal Healthcare Programs.  Medicare, Medicaid, Affordable Care Act insurance subsidies, and the Children’s Health Insurance Program comprise 24% of the budget, or around $1.6 trillion. They are funded through a mix of a small payroll tax, general revenues, and premiums paid by beneficiaries.  The central challenge of these programs is that growth in their expenses far outpaces the growth in their revenue. 

The most straightforward way to address this problem is a single-payer healthcare system.  Failing that, we could reduce the $210 billion in low-value healthcare we pay for every year.  For example, a recent federal task force identified the top five savings area as reducing (1) vitamin D screening tests, (2) diagnostic imaging before low-risk surgery, (3) PSA screenings for men over 80, (4) the use of branded drugs when a generic is available, and (5) low-back pain imaging within 6 weeks of onset.  Although opponents of change are quick to call out death panels, none of these changes are life-threatening.  Given how cheap vitamin D is, a lifetime supply would probably cost less than the testing to determine if an asymptomatic patient would benefit.

Congress took a step in the right direction last year by allowing Medicare to negotiate drug prices.  A solid next step would be to have a single negotiation for all federal payers, with state, local, and private insurers allowed to “opt in.”  I have yet to see a compelling argument as to why different insurers should pay different prices for identical drugs.  Finally, Medicare Advantage programs were supposed to save the federal government money and give beneficiaries more flexibility by allowing a limited amount of private insurer involvement.  They have been popular, with 45% of Medicare beneficiaries opting in, but they have not delivered the promised savings.  Instead, they’ve ended up costing 3% more than standard Medicare.  We can save a significant amount of money by capping reimbursements to Medicare Advantage plans.

Defense.  The record size of the 2023 defense budget in absolute terms makes it an easy target for the left.  While it is the largest category of discretionary spending, it represents only 12% of the federal budget, around $800 billion.  Defense spending as a share of Gross Domestic Product has actually declined from almost 7% in early 80’s to about 3.5% now.  The defense department itself has recommended changes that would save money, but Congress has balked at implementing them.

More than half of the defense budget goes to contractors, not servicemembers.  The biggest category of contract expenses for the Department of Defense is pharmaceuticals at $36 billion, which could be substantially reduced if all federal buyers negotiated prices.  Aircraft are next at $32 billion, with other weapons systems taking up large chunks.  As we finally operationalize NATO in response to the invasion of Ukraine, it’s time to have a conversation about common systems.  How many different kinds of artillery cannons, frigates, and aircraft do we really need in one mutual defense organization?  Additional savings can be realized by allowing the military to retire obsolete weapons systems, as DoD has requested. 

Facility-related services cost almost $25 billion.  We have too many bases.  DoD has requested that they be allowed to close many, only to be blocked by Congress.  Finally, while personnel costs are only 24% of the defense budget, we have recently seen just how capable and cost effective the reserves can be.  When I was a young lieutenant, I saw a convincing presentation that the cost of a National Guard armored division was less than a tenth of the cost of an active-duty equivalent.  Overall, while we’re quick to blame DoD for overspending, it is Congress that mandates some of the least efficient defense spending.  A Base Realignment and Closure process that included bases, weapons systems, and active duty vs reserve capacity would reduce spending and increase capability.

In public service, the “fewer services, less taxes” refrain from the right and the “more services, more taxes” from the left are equally frustrating.  A pragmatic approach would be to focus on more efficient services and thoughtful tax policies to build a sustainable budget.  We can neither exclusively tax nor exclusively cut our way out of our national debt.  The crisis is not yet upon us, but it is in view.  It’s time to take a careful look at the sustainability of our budget, not to blow it up with a default.

If you’d like to take a deeper dive into various proposals for reducing the deficit from the non-partisan Congressional Budget Office, they produced a recent report available here. 

When You’re in a Hole, Stop Digging.  To reduce climate change, we must reduce our emissions of carbon dioxide.  That starts with reducing the increase of carbon dioxide emissions.  Put another way, we’ve got to stop worsening the problem by adding housing that uses natural gas to heat and cook.  If you like your gas stove, no one is coming to take it from you.  The Eugene City Council’s new ordinance simply stops the growth of natural gas – it doesn’t take natural gas away from anyone who has it already.  I encourage you NOT to support the referendum effort.  The opposition to the referendum is attempting to mislead current users of natural gas that the ordinance somehow targets them.  It does not.  In fact, the ban will actually reduce the cost of new construction.

Of course, if you do have natural gas, I wholeheartedly encourage you to explore a heat pump – which will heat and cool your house for much less – and an induction stove – which is faster than and does not pollute your indoor air quality like natural gas – the next time you need to replace a natural gas furnace or stove.  What you put into the air, your children and grandchildren will have to pay to remove to maintain a livable planet.

 

A Note on the Future of This Column

Speaking of financial sustainability, thank you to everyone who participated in the poll about subscriptions, donations, and the future of this column.  A remarkable 55% of respondents were interested in supporting the column in one way or another.  I’m pondering how to go about this, but here’s where I am on it now.

1. There will always be a free version of this column as long as I write it.

2. I’m struggling a bit with the subscription model because 1) Substack requires it to be at least $5/month, 2) I wouldn’t mind writing more, but I’m not sure how often I want to commit to writing, and 3) I need a bit of flexibility because I’m likely to be starting a new job soon.

3.  As it stands, it seems likely that I’ll set something up for donations in the relatively new future, with the idea that I’ll write some additional columns for folks who donate.  I’m leaning against a subscription model.

People Doing Good Things

I’d like to highlight the work of my friend Rep. Maxine Dexter on housing this week. She’s got a proposal to significantly increase the construction of housing, while preserving communities’ ability to shape how that looks locally. Her work builds on what we did in House Bill 2003, which required cities to calculate their housing shortages and plan for housing production in the future.

Boo!

Conversely, the decision to stop handing out tents to the unhoused in Portland is short-sighted. We’d all prefer not to have people living in tents on our streets, but the answer to that isn’t to expose them to greater risk ahead of a cold snap. It’s better to help people live than die.

Opportunities for Involvement This Week

SPRINGFIELD CITY COUNCIL 

TUESDAY, FEB 21, 5:30-6:00 PM Executive Meeting

            Property negotiations

TUESDAY, FEB 21, 6:00 PM Work Session

            Police Update

TUESDAY, FEB 21, 7:00 PM Regular Meeting

            FY23 Supplemental Budget

            Interim Ward 4 Councilor Appointment Process (Vote on Process)

            Mill St Project, S 28^th paving project, Laura St redevelopment

https://springfield-or.gov/wp-content/uploads/2023/02/2023-02-21-Revised-Council-Agenda-Packet.pdf

OREGON LEAGUE OF CONSERVATION VOTERS

ENVIRONMENTAL TOWN HALL FOR A HEALTHY OREGON

WEDNESDAY, FEB 22, 7:00-8:30 PM

https://secure.everyaction.com/K34269YRHE-I6yr90_kVSg2

            Sen Manning, Rep Julie Fahey, Rep Nathanson

Resilient Buildings Bill Package, Toxic-Free Bill Package, Factory Farm Moratorium, Zero Waste Bill Package, Natural Climate Solutions, Budget

SPRINGFIELD POLICE ADVISORY SUB-COMMITTEE

THURSDAY, FEB 23, 12:00-1:00 PM

https://springfield-or.gov/wp-content/uploads/2023/01/SPAC.230223.sub-committee-agenda.pdf