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Posted at 10:44 AM ET, 02/14/2011

The U.S. Government: An insurance conglomerate protected by a large, standing army

By Ezra Klein

Budget graphinsurance.png

American politics is one long argument about what government should or shouldn’t be doing, and how it should or shouldn’t be doing it. It’s rare that we step back, take in the larger picture and ask what it is doing. The release of the president’s proposed 2012 budget is a good time to do that. If you want to know what the federal government is really doing, just look where it’s spending our money.

Two of every five dollars goes to Social Security, Medicare or Medicaid, all of which provide some form of insurance. A bit more than a buck goes to the military. Then there’s a $1.50 or so for assorted other programs -- education, infrastructure, environmental protection, farm subsidies, etc. Some of that, like unemployment checks and food stamps, is also best understood insurance spending. And then there’s another 40 cents of debt repayment. Calvin Coolidge once said that the business of America is business. Well, the business of the American government is insurance. Literally. If you look at how the federal government spends our money, it’s an insurance conglomerate protected by a large, standing army.

But you wouldn’t know it to listen to the debate over the budget. When House Republicans talk about cutting spending and the Obama administration talks about freezing spending, neither group is talking about the vast expanse of the government’s commitments. They’re looking at a small corner of the budget, the 12.3 percent known as non-defense discretionary spending. The stuff that’s not Medicare, not Medicaid, not Social Security or the military. It’s the odds-and-ends, so to speak.

And it’s a bad place to focus cuts. Politicians don’t take the axe to non-defense discretionary spending because they think Teach for America or the food safety infrastructure -- both of which the Republicans are proposing to cut dramatically -- is more wasteful than the Pentagon or the health-care system. They do it because Teach for America and the food safety system is less politically powerful than the Pentagon or Medicare beneficiaries. The budget ends up like the yard of a man who owns only a lawnmower: The grass is trim, but the trees are overgrown and the ivy is everywhere and the gazebo is falling apart. Yet we keep mowing, because that’s what we feel able to do.

Cutting government spending is a grim and unpopular business, at least when you get specific about it. A Pew poll released last week asked Americans whether they’d like to increase or decrease spending in 13 areas. In all but two, Americans wanted to see spending go up, not down. And those two -- unemployment insurance and foreign aid -- are mere rounding errors in the budget. It’s like dieting by swearing off canapes: It’s something, but I wouldn’t rush out to buy smaller pants.

Politicians get this: Deficits are unpopular, and so are the specifics of deficit reduction. So they’ve developed a few ways to sound fiscally responsible without committing to anything politically damaging. The term “waste, fraud and abuse,” for instance. There is plenty of waste, fraud and abuse in the government, but there’s little agreement on what that waste, fraud and abuse is. Farm subsidies, for instance, don’t seem like waste to farmers. The defense budget looks tighter to hawks than it does to doves. Gov. Mitch Daniels was right when he told the crowd at CPAC that waste, fraud and abuse are worth little when it comes to cutting the deficit. Focusing on the three items “trivializes what needs to be done, and misleads our fellow citizens to believe that easy answers are available to us.”

Promising to freeze non-defense discretionary spending has also come into vogue. It has the dual advantages of sounding tough while remaining vague. But the single biggest chunk of that spending is on education -- and education, according to the Pew poll, is the part of the budget that Americans are least interested in cutting. As more specifics of these freezes emerge, and more of the people who depend on or favor these programs protest, we’ll see how they fare.

Either way, it’s time to admit that there’s little in the budget that’s truly unpopular. If it was unpopular, it either wouldn’t be there in the first place, or it would’ve been zeroed out when politicians went hunting for offsets to pay for programs that interested them more. Anything that’s survived Congress’s occasional spasms of fiscal responsibility and constant hunger for easy money has some sort of a constituency behind it.

And though cutting non-defense discretionary spending might buy us some time on the deficit, we’re eventually going to have to do as legendary robber Willie Sutton did when he started hitting banks: We’ll have to go where the money is. That means our social insurance programs, and our military. Of this group, Social Security is in the best shape, and is by far the most efficient. It should be last on our list. Not, as it often seems to be, first.

The military remains largely untouched -- and that is true in the budgets released by both the Republicans and the Democrats. This is one case where politicians are lagging behind the public: In the Pew poll, military spending was the third-least popular category of spending, even though in Washington, it’s frequently considered politically unassailable. But perhaps we’ll see more action on this soon: A bipartisan group of legislators including Reps. Barney Frank (D-Mass.) and Ron Paul (R-Tex.) created the Sustainable Defense Task Force to look at ways to reduce our military spending, and the plan they developed could save us a trillion dollars over the next 10 years.

That said, it’s Medicare and Medicaid that pose the largest long-term threat to the budget. They’re big -- about 20 percent of the budget right now -- but the real problem is the speed with which they’re getting bigger. Left unchecked, they’re projected to double in size over the next 30 years. The health-reform law makes a start on curbing their growth, namely through experiments that encourage paying for quality rather than volume and the creation of an independent board able to impose cost-controlling reforms without getting tied up in Congress. But it’s just a start, and it’s under constant threat of being undone or rolled back. The reality is we need to go further and faster. We’re an insurance company now, and we can’t continue to dither when it comes to righting our core business.

By Ezra Klein  | February 14, 2011; 10:44 AM ET
Categories:  Articles, Budget  
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Next: 2012 Budget: Like the Fiscal Commission never happened


Excellent post, Ezra!

Posted by: bmoodie | February 14, 2011 11:10 AM | Report abuse

yes good post and the point is that neither President Obama nor Republicans are responsible when it comes to cutting what truly needs cutting, those entitlements and defense spending. Small cuts in those go much further than what seem like large cuts in non defense discretionary spending.

Every year that's wasted before taking this on grows the interest on the debt side as well as the entitlement side.

Its high time for some responsible people in both the major political parties to step up, come together and have a serious discussion and actually do something in these areas.

Posted by: visionbrkr | February 14, 2011 11:17 AM | Report abuse

Great post.

Posted by: CarlosXL | February 14, 2011 11:22 AM | Report abuse

It is one of the great ironies, and inanities, of our current politics that a "large standing army" was the one aspect of government that the Founding Fathers were most suspicious of and most intent on avoiding. That was the real purpose of the Second Amendment. Yet those who are most abject in their supposed devotion to the Founders are also the biggest cheerleaders for a bloated military.

Posted by: jtmiller42 | February 14, 2011 11:38 AM | Report abuse

The US government should be increasing its deficit since
Govt. deficit=Private Sector surplus
and current lack of aggregate demand and unemployment mean that the private sector desires more surplus, not less.

Now, this doesn't mean that allowing Medicare to grow as it does is a good idea - but this is not a fault of our deficit, rather our broken health care system.

Posted by: pdrub | February 14, 2011 12:15 PM | Report abuse

"the point is that neither President Obama nor Republicans are responsible when it comes to cutting what truly needs cutting, those entitlements and defense spending."

The Affordable Care Act cut more than $500 billion out of Medicare and Medicaid spending. The Republicans beat up Obama during the elections for doing it, and have attempted to repeal the bill.

Tell me again which party is less serious about cutting wasteful spending in entitlements?

Posted by: theorajones1 | February 14, 2011 12:24 PM | Report abuse

How much of the 12.3% spending for interest on the debt is SSI cashing in Treasury bonds and certificates? Wasn't that Bush's point when he said the lock box was a filing cabinet filled with worthless pieces of paper?

Posted by: CharlesInOH | February 14, 2011 12:25 PM | Report abuse

"The Affordable Care Act cut more than $500 billion out of Medicare and Medicaid spending. The Republicans beat up Obama during the elections for doing it, and have attempted to repeal the bill.

Tell me again which party is less serious about cutting wasteful spending in entitlements?"

Probably the party that created those entitlements despite the warnings of Ronald Reagan.

Posted by: krazen1211 | February 14, 2011 12:27 PM | Report abuse

"The Affordable Care Act cut more than $500 billion out of Medicare and Medicaid spending. The Republicans beat up Obama during the elections for doing it"

That money is being used in order to fund a new entitlement (much of it done via an expansion of Medicaid).

Are you going to give the Republicans credit for closing 40 military bases if they use the money to purchase three new aircraft carriers and the associated carrier air wings? I wouldn't.

Posted by: justin84 | February 14, 2011 12:39 PM | Report abuse

What is "Other" ? At 16% it is a rather large bit to leave without itemization.

Posted by: sailor0245 | February 14, 2011 12:45 PM | Report abuse

If someone like Mitt Romney were president, he would run the government like a business. And a business would NOT make drastic cuts to the military, which more than anything else is our core competency. No, a business would instead turn our military into a profit center whose mission was to to pay for itself by plundering some countries and extracting tribute in exchange for not invading the rest. Our debt would vanish, and we'd once again be respected in the world.

Posted by: DavidinCambridge | February 14, 2011 1:57 PM | Report abuse

*****What is "Other" ? At 16% it is a rather large bit to leave without itemization******

I was thinking the same thing. Ezra has broken down the numbers differently than I'm used to seeing them. Usually social insurance + Pentagon + debt service works out to something like 86%, with everything else adding up to about 1/7th of federal spending.

I would guess based on the way his chart reads that the "other" is NON-discretionary domestic spending (unemployment insurance? food stamps?) plus all other non-domestic spending (foreign aid, UN dues, etc., plus some defense-related items that aren't "officially" part of the Pentagon budget?). But yeah, an explanation from Ezra would be appreciated.

Posted by: Jasper999 | February 14, 2011 2:09 PM | Report abuse

"What is "Other" ? At 16% it is a rather large bit to leave without itemization."

"an explanation from Ezra would be appreciated."

If one reads the post, it says, "Then there’s a $1.50 or so for assorted other programs -- education, infrastructure, environmental protection, farm subsidies, etc. Some of that, like unemployment checks and food stamps, is also best understood insurance spending." SInce $1.50 / $5 is 30%, I think this list of what makes up that 30% is a combination of "domestic discretionary spending" and "other" (since 16.4 + 12.3 = 28.7, roughly the 30% he mentions. But if you want a more detailed pie chart, look here:

Posted by: Nylund154 | February 14, 2011 2:25 PM | Report abuse

"The Affordable Care Act cut more than $500 billion out of Medicare and Medicaid spending. The Republicans beat up Obama during the elections for doing it"

That money is being used in order to fund a new entitlement (much of it done via an expansion of Medicaid).

Good point justin84. But this isn't quite robbing Peter to pay Paul. The $500B spending transferred from one entitlement (Medicare) to another (Medicaid) is now funded by taxes and other savings according to the CBO, instead of by borrowing. I think Obamacare was a way to sneak in a tax increase.

Posted by: gaaallen | February 14, 2011 2:41 PM | Report abuse

The problem is that the military is also largely a social insurance program. The money in the defense budget pays the salaries of soldiers, civilian DoD employees, those who work at defense contractors, and so forth.

I could easily argue that if the gov't is going to be paying people's salaries, it should pay them to do something more productive than making and using up weapons, and than our current activities in Afghanistan/Iraq (/Pakistan).

But that doesn't change the fact that even the money we're spending on defense is providing many Americans' salaries, and that simply cutting this spending would necessarily reduce the level of employment and/or the salaries of the employed.

Posted by: tegularius | February 14, 2011 3:13 PM | Report abuse

theorajones, I agree. While I think neither party is being particularly courageous on the issue of the deficit, it's also pretty obviously that they're not equally bad on the issue either. Republicans talk a mean game on deficit reduction, but they do very little when it comes to working to pass actual plans. If Republicans pledged 10+ votes in the Senate and a comparative amount in the House for the ACA if it had included more deficit reduction, there would have been more deficit reduction in the final bill.

The Dems were pretty cowardly when it came to fears that they'd get beat up for unpopular cuts, but it was the Republicans that were threatening to (and did ) do the beating.

Posted by: MosBen | February 14, 2011 3:35 PM | Report abuse

I disagree.

Insurance companies make money.

Posted by: MajorAce | February 14, 2011 5:48 PM | Report abuse

@MajorAce, "Insurance companies make money."

And you think that's a good thing, right? As the post says, Medicare and Medicaid could double in 30 years. Private insurance doubles in TEN YEARS! (usually, though it doubled in the last nine this time). So, if we let private insurance take it on, we can look forward to EIGHT TIMES as much in 30 years, or 4 times what the government programs will cost. If you're hazy on the math, 7% increase a year doubles in 10 (see exponential function). The doubled doubles in 10 (2X2) and that doubles in 10 (4X2).

This is the biggest lie of the opposition to these programs. We talk about the increased cost of programs without considering the increased cost of the status quo, which is worse.

Posted by: GreenDreams | February 14, 2011 7:14 PM | Report abuse

Excellent post. Until we get serious about raising taxes and cutting Defense (20% spending), Medicare & Medicaid (23%), and Social Security (20%), there will be no significant progress on budget reform.

We last balanced the budget from 1998-2001. What changed? From a policy standpoint, we enacted the Bush tax cuts (cutting revenue about 2% of GDP per year per CBO) and increased Department of Defense and related defense spending from 3% of GDP to 6%. These actions made the deficit 5% worse.

We can reverse the Bush tax cuts tomorrow. Defense should be shifted down over 7-10 years with the difference going to clean energy during that time; we can then bank the rest. This cuts our current deficit from 10% GDP to 5% GDP.

Social Security is actually a minor problem, at about a 1% GDP 75-year shortfall. We can reduce the annual cost of living adjustment by 0.5% and remove the cap on the payroll tax at about $200,000 to put it on sound footing indefinitely.

So these steps get us to a 4% deficit. We can probably find another 1% by reducing the non-defense discretionary categories back to 2008 levels, which brings us to a sustainable 3% GDP deficit.

However, the big long-term challenge is healthcare, nothing else comes close. Medicare & Medicaid are expected to jump from 5% GDP to 12% over the next 20-30 years, the primary threat. This dwarfs all the other decisions above. We have to address the cost drivers: obesity, defensive medicine, a shortage of doctors and nurses, redundant payment systems and insurance company overhead, incentives that reward more care instead of better care, intervention vs. hospice, etc.

When we get serious about deficit reform, we'll all know it because we'll be in the streets demonstrating about how much our taxes are being raised and our benefits being cut.

Posted by: Factified | February 14, 2011 8:33 PM | Report abuse

There's nothing wrong with examining the budget, but equating the function of government to a weighted sum of its expenses is a fallacy that even an economist knows enough to avoid. I wonder if you would dare to use a pie chart of expenses to explain "What parents should be doing."

In addition to buying medical care, pensions, and weapons, governments also write rules. Some might argue that this is what they are mostly doing. And for better or worse, writing and enforcing rules has such an enormous ratio of bang to buck that it immediately invalidates your premise.

Posted by: fastspinecho | February 14, 2011 9:35 PM | Report abuse

Let me tell you one thing that the best health insurance plans has completely different set of meaning for different type of people. For those who are rich, the plan which can earn them more is best. However, those who are in the middle class have different ideas. They think that insurance plan is the best for which they will have to pay minimum premium. However, the poor person does not even know that what is health insurance? If you are one of them search online for "Wise Health Insurance" and get smart about insurance.

Posted by: jamezbelly | February 15, 2011 1:25 AM | Report abuse

It's clear now that the tiny, thin green slice of the pie is driving us all to bankruptcy! The big, fat orange and yellow slices that make up almost the entire pie don't count.

Posted by: Candressuhmoose | February 15, 2011 12:17 PM | Report abuse

Best economic piece I've ever recalled in WaPo.

At least starting from an honest assessment, as this article does, is one step forward to defeat the panderers and grandstanders who wage war with Weapons of Mass Misinformation/Deception/Emotional Manipulation.

Maybe the masses of the American populace will not read your article, and continue to act in true ignorance. But at least you are taking a shot in the direction of honesty, and fairness, and rational behavior - all seeming anathemas to politicians and economic policymakers and Krugmans.

Moreover ... there's a shortage of that in journalism nowadays. This article gives hope that journalism can still do what it once did ... what it's supposed to do.

Posted by: Texan7 | February 16, 2011 11:35 AM | Report abuse

It's clear that the way to national fiscal as well as to physical health is to adopt a single payer health care system. All the other "advanced" nations have done so and they spend half what we do (per cap or as share of gdp) and achieve better health outcomes.

As the sage said, "The way out is through the door. How come nobody will use this method?"

Posted by: massmarba1 | February 16, 2011 5:37 PM | Report abuse

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