10-8-24: It’s Past Time for a Federal Government Spending Overhaul

by Bryan Perry

October 8, 2024

Last week launched a new federal fiscal year, so I have a modest proposal, but first – the jobs report:

There sure was a lot of market excitement surrounding the Friday release of the employment numbers. The September employment report indicated that employers added 254,000 jobs, significantly more than the forecast of 140,000. The headlines boasted growth in sectors such as food services, health care, government, social assistance, and construction, and the unemployment rate also ticked down to 4.1% from 4.2%. The stock market glommed on to the headline numbers and stocks rallied big time.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What a change from six weeks ago, when the U.S. Labor department revised down job growth by the most since the Great Recession in 2009, subtracting 818,000 jobs from what they had initially reported from April 2023 through March 2024. (In 2009, the BLS revised employment growth lower by 824,000.) That means the U.S. economy added 2.08 million jobs during this time frame instead of the 2.9 million jobs initially reported. The average monthly gains were closer to 178,000 instead of the robust 246,000.

In the September jobs data, released last Friday, the Labor Department released upward revisions. Non-farm payroll employment for July was revised up by 55,000, from 89,999 to 144,000, and the change for August was revised up by 17,000, from 142,000 to 159,000. As the last jobs report before election day, some skeptics said these numbers may have been manipulated, heavily influenced by political agendas.

One area that comes under heavy scrutiny is the growth of federal government jobs. Big government costs big money. From 2010 to 2020, the average annual government growth rate was about 1.5%. However, recent years have seen a higher growth rate, with a notable increase of 4% in 2023 alone. Between 2019 and 2023, more than 140,000 employees joined the civil service, an increase of about 7%, according to data that the non-partisan, non-profit Partnership for Public Service compiled and released last week.

The latest increase brings the grand total of full-time federal employees to just over two million. In total, agencies hired more than 200,000 employees in the last fiscal year — an increase of more than 45,000 hires over the previous year, the Partnership said. That does not account for attrition due to retirements and others leaving the government. Adding in all changes, the net gain was about 87,000 employees.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Models for Cutting Back Future Federal Spending

We entered a new federal fiscal year last week. By one accounting, the deficit for fiscal-year 2024 reached $2.3 trillion. Back when Ronald Reagan was President and budget deficits were rising, he rolled out the “New Federalism” program, aimed to shift more responsibilities from the federal government to state and local governments. The public was receptive to his ideas, the notion being that states and localities know best what the needs are for their citizens. Reagan used Congress and executive orders to implement many of his federalism reforms, but many more of his proposals failed after confronting special interest groups.

Reagan’s ideas were not new. At the time, his ideas captured and stimulated growing public opposition to big government, big business and big labor, prescribing a solution that appeared consistent with the ideas of the Constitution. Returning responsibility for domestic policies to state governments, he suggested, would give the states greater discretion in crafting and implementing the policies, require less federal monetary assistance, and reduce the need for federal regulations and oversight. Today, non-defense spending by the federal government topped $3.8 trillion for 2023, primarily funding Social Security, Medicare, Medicaid, federal pensions, health care, education, welfare, and other non-defense spending. ‘

In fiscal 2024, total federal spending is budgeted to be $6.941 trillion, an astonishing 13.3% more than the total outlays of $6.135 trillion in fiscal-2023, according to the official budget for fiscal-2025.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The federal government is facing several ticking time bombs that require the full attention of Congress to avoid major financial calamities down the road. First and worst, medical spending is projected to grow dramatically. The number of persons enrolled in Medicare is expected to increase from 47 million in 2010 to 80 million by 2030. The same demographic trends that affect Social Security also affect Medicare, but rapidly rising medical costs appear to be the fastest growing cause of projected spending increases.

We already have a model for what happens in nationalizing healthcare – the Veterans Administration, a subject of heavy criticism due to inadequate healthcare services, including long wait times and insufficient mental care, excessive spending, contradictory policies, a massive backlog of benefit claims, lack of protection for its staff and issues related to veterans’ access to private healthcare services. Universal healthcare run by the federal government could look like Canada’s long wait time on steroids.

The Congressional Budget Office (CBO) has indicated that, “Future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.” For 2024, federal healthcare accounts for approximately 6.3% of GDP, and is forecast to soar to 19.7% by 2030.

Social Security spending will increase sharply over the next decades, largely due to the retirement of the Baby Boom generation, born 1946 to 1964. The number of program recipients is expected to increase from 44 million in 2010 to 73 million in 2030. Program spending is projected to rise from 4.8% of GDP in 2010 to 5.9% of GDP by 2030. The solution to fixing a Social Security system, whose Trust Fund goes bankrupt around 2035, is likely to be an increase in payroll taxes and a reduction in the cost-of-living increases. This sacred cow is considered untouchable, but like health care, nibbling around the edges has the look and feel of rearranging the deck chairs on the Titanic if hard policy decisions aren’t made.

In 2024, interest on the federal debt is projected to be $892 billion, almost a third higher than what it was  in 2023, accounting for 3.1% of GDP. For 2024, the federal debt to GDP ratio is 121%, meaning total public debt is over 20% bigger than the U.S. economy. By 2050, the CBO states that this number will rise to at least 166% of GDP, and debt is growing much faster than debt, so predictions remain blurry at best.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, what should we do about the bloated federal government and its layers of incompetence? It is past time to end the bureaucratic labyrinth of endless paperwork, red tape, one-hour hold times, waste and fraud. Like him or not, a government efficiency czar like Elon Musk has proposed top-down reforms in the form of audit and accountability to identify areas of waste and inefficiency that hinder operations and economic growth, slashing unnecessary spending, and applying principles from the private sector, such as streamlining processes by implementing the most advanced technologies available. The goal would be to make the government more responsive, cost-effective, transparent and leaner and doing more good for citizens with far fewer federal workers by instituting extreme productivity gains through implementation of technology and innovation – the stuff at which America’s private sector is the best at in the world.

We balanced the budget and – amazingly enough – generated budget surpluses from 1998 to 2001, and we could do so again, to secure our future, our kids’ future, our grandkids’ future, and generations thereafter. On this issue, during this election season, I believe there is widespread consensus from the vast majority of Americans that something must be done to overhaul the federal government – and be done soon.