SINCE HIS DAYS on the banquet circuit as an employe of General Electric, Ronald Reagan has been preaching the need to reduce government spending. He campaigned for president on a pledge to shrink the government. His efforts as president to cut spending have been widely publicized. But measured against years of his own political rhetoric, Reagan has failed.
In his own budget for fiscal year l984, the president esimated that total federal spending will peak in this current (FY 1983) fiscal year at one-quarter of the gross national product -- the highest it has been since World War II.
More significantly, even if all the proposals contained in the president's budget are implemented, and even if all the economic assumptions are realized, by fiscal 1988 federal spending will still be 23 percent of GNP. This is just what it was when Ronald Reagan inherited the White House from Jimmy Carter, and it is a higher level than at any time from the '50s through the '70s. And given the current chaos in Congress, these numbers seem likely to go even higher.
How can this be? After all, Reagan's predecessor, Jimmy Carter, was something of a budget cutter himself. And all the talk these days is about how severely federal programs are being cut. Why is federal spending not dropping more significantly?
One way to try to answer that question is to divide federal spending into four large categories: (1) defense, (2) net interest on the national debt, (3) President Reagan's "social contract" (which includes Social Security, Medicare and Medicaid), and (4) everything else.
Clearly, defense is Ronald Reagan's favorite program. From $160 billion in FY 1981, Reagan wants to increase defense spending to $385 billion in FY 1988. That's an increase from 24 to 34 percent of the federal budget, and from 5.6 to 7.9 percent of GNP.
If defense spending is to increase, while total outlays either decline or even just remain steady, something else must give.
This, however, cannot be outlays for interest on the national debt. Net interest is perhaps the most uncontrollable of all government spending. Interest outlays depend strictly on outside factors: the size of the federal debt and current interest rates.
Between 1951 and 1977, net interest oscillated between 1.2 and 1.6 percent of GNP, holding steady at the latter figure from 1974 to 1977.
In 1978, however, a slow rise began. In 1980, net interest reached 2.0 percent of GNP -- matching the previous record of 1946. And for the coming fiscal year, outlays for net interest are projected to be 3.0 percent of GNP -- double what they were a decade earlier.
The Reagan Administration hopes that net interest will drop back to 2.7 percent of GNP in 1988. But this will require isnterest rates to fall to 6 percent in 1988.
If real rates are even a little higher, the cost to the Treasury can be great. For example, if beginning this July, interest rates are merely one percentage point higher than the Administration projects, outlays for net interest will be $15.9 billion greater in 1988 (and a total of $57.5 billion higher over the next five years). This could boost outlays for net interest to over three percent of GNP in 1988.
In its 1984 budget, the Reagan Administration categorized three social insurance programs -- Social Security, Medicare, and Medicaid -- as "a vast social contract upon which 54 million Americans depend for basic retirement and disability income and health care services." The social contract does not contain all of the nation's entitlement programs, but it does contain the big ones.
For example, in the current fiscal year, federal benefit payments to individuals will provide a total of $408 billion. Of this, $167 billion (or 41 percent) will go for just the three social-contract programs. The next two biggest transfer programs are feder1)
(percal retirement ($48 billion) and unemployment assistance ($37 billion). Together, public assistance, food and nutrition assistance, and housing assistance total only $46 billion -- less than federal retirement payments.
Spending for the three social-contract programs has grown steadily and dramatically over the past three decades -- from less than half a percent of GNP in 1950 to four percent in 1970, to nearly eight percent today.
Given the nature of such entitlement programs (or, as the Reagan budget describes it, "the relative downward inflexibility of the social contract"), it is difficult to reduce spending for these programs, particularly in the short run. Thus, although the Reagan Administration has proposed cuts in Medicare and Medicaid and achieved some in Social Security, social contract outlays are projected to remain at 7.6 of GNP for the next five years.
In FY 1956, the "social contract" outlays passed those for net interest. In FY 1975, social-contract outlays exceeded those for defense. And next year, the Reagan Administration proposes, social-contract outlays will even exceed those for my fourth budget category: "everything else." That is, federal spending for just three programs -- Social Security, Medicare and Medicaid -- will be greater than federal spending for all other domestic programs put together.
In part, this is because "everything else" is the part of the budget on which the Reagan Administration has targeted its budget cutting efforts. This does not seem particularly unreasonable until you realize that this everything-else category accounts for only a third of all federal outlays. What many people think of when they hear the term "federal spending" is in fact not all that large.
A simple way to remember the distribuiton of federal outlays is to note that net interest is about 10 percent of the budget, and that the other three categories (defense, the social contract, and everything else) are about 30 percent each. But if 30 percent of the government is growing (defense), 10 percent is uncontrollable (net interest), 30 percent is to remain constant (the social contract), and you still want to cut the budget significantly, then you are going to have to make some very big cuts in the remaining 30 percent.
This is exactly what the Reagan administration proposes. The pending Reagan budget calls for spending for "everything else" to drop from $258 billion this year to $235 billion in 1988. What the Reagan administration is proposing is to reduce "everything else" from 8.1 to 4.8 percent of GNP in just five years.
To reach that level, the administration has to propose some drastic cuts. For example, the Reagan budget proposes the following cuts between FY 1983 and FY 1988.
* The Department of Labor, down from $43 billion to $27 billion.
* The Department of Agriculture, down from $45 to $33 billion.
* The Environmental Protection Agency, $4.4 to $3.4 billion.
* Space dlight, $4.0 to $2.4 billion.
* Unemployment compensation, $36.9 to $22.5 billion.
But here, too, it pays to look carefully at the components. The $14 billion "cut" in unemployment compensation depends not on legislative or administrative decisions, but upon a projected reduction in the unemployment rate from 10.7 percent this year to 6.5 percent in 1988. In other categories, Congress appears unwilling to make such drastic reductions. Last year, for instance, the Reagan administration proposed to spend only $26.5 billion on the Labor Department in FY 1983, although it now projects these outlays will be $43.0 billion.
Is it politically possible to cut the "everything else" category by more than one-third? If it is not, then President Reagan's budget targets for 1988 cannot be met.
It might be possible, by 1988, to cut federal spending back to those idyllic days of, say, 1965, when the federal government spent only 18 percent of the gross national product. But this would leave you with a national government consisting of only five programs: Social Security, Medicare, Medicaid, national defense and interest on the national debt.