Failure:

A Brief History of Federal Government Spending

IAIResearch July 4, 2012

Page 1

Contents
Introduction Historical Overview of Spending The War on Poverty Education and the War on Illiteracy Federal Health Care Intervention Social Security Other Government Programs Conclusion Appendices 3 8 13 22 33 45 49 54 55

Page 2

d
Thomas Jefferson

I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.

Americans estimate that the federal government wastes 51 cents of every dollar it spends, a new high in a Gallup trend question first asked in 1979. (http://www.gallup.com/poll/149543/americans-say-federal-gov-wastes-half-every-dollar.aspx ). Even Liberals in the survey estimate federal waste at 44% of spending. This paper seeks to prove that, once again, the American people are right. Without raising a penny of new taxes, our government finances could be in surplus by eliminating failed and wasteful programs. When government tries to solve big American problems (e.g. poverty, education, drugs, health care, etc.) they fail. In fact government spending programs not only make matters worse, but also create new problems. The typical solution is to spend more taxpayer dollars, and always fails. Next, we will document some of the fraud, waste, and abuse that the government itself acknowledges consumes government programs. Finally, we shall demonstrate that we do not need government direction to insure economic progress and opportunity. In fact, government intervention and spending tend to diminish economic growth. For the first 30 years of the twentieth century, excluding the First World War years, federal spending averaged 3.9% of GDP and our country saw strong, real growth. More importantly living standards for most citizens improved dramatically. Due to poor government decisions, we then entered, and were unable to exit, the longest depression in American history. This was the only depression where government actively tried to fix things. After the end of the Second World War, America was the lone, undamaged industrial nation and we prospered. However, in the mid-1960s the federal government came to believe it could solve any problem. From 1962 to 2010 the federal government consumed 20.5% of GDP and economic growth and individual welfare slowly degraded. America is not under-taxed, but the money we send to Washington, DC, is generally wasted or stolen. In one program after another the government acknowledges that fraud consumes up to 25% of funding. That is only what they admit to. How much of your taxes really goes to crooks? If some of the money actually finds its way to duplicate or obsolete federal programs the problems only worsen.

Page 3

This first chart depicts growth of real GDP and federal spending (in 2005 dollars) since 1903. Two broad issues quickly emerge: two world wars caused substantial, but temporary, increases in spending; and since 1930 federal spending grew exponentially while GDP increased linearly. The result is that federal spending has dramatically increased its share of the American economy.

The following chart shows the trend of federal spending as a % of GDP:

Page 4

How has increased government intrusion impacted economic growth? To answer graphically we will make two simple adjustments to the data. First, we will eliminate the impact of world war years. Second, we will smooth out the GDP trend by plotting the ten year rolling average change in GDP. This allows us to view long term trends without the distractions of short term booms or busts.

Until the Great Depression, America experienced consistent economic growth with minor federal intrusion. Beginning in 1930 the federal government began to implement inept solutions to the economic crisis it had created. Not until the 1950s, when the United States was the only undamaged post-war, industrial economy, did we return to sustained growth. However, by then New Deal programs had become a permanent part of American life, the governments role in the economy expanded adding to our debt burden and economic growth gradually declined (which is more visible when we eliminate rolling average of GDP growth, but include the linear trend lines for each factor):

Page 5

We have allowed the federal government to become more involved not only in our economic, but also our personal, lives. As it takes, borrows, and spends more of our money it has have proved particularly inept at growing our economy. However, our focus will be on the other failure of government spending: Government fails to solve the problems it attempts to solve. As Thomas Jefferson and the other founders realized, the people need to strictly limit what a centralized government should do.
Experience has shewn, that even under the best forms of government those with power have, in time, and by slow operations, perverted it into tyranny Thomas Jefferson

When government must be involved, which should be seldom, such needs should be accomplished by that government that is closest to the citizens. Our founders therefor created a federal constitution that left most activities with the states, and went on to restate this relationship in the tenth amendment to the Constitution. The founders had just fought a war to protect themselves, and us, from a government that had grown ever more powerful and tyrannical. They understood the risks of centralization and bureaucracies. Large centralized government is philosophically dangerous because such distant power is neither accountable nor controllable. Pragmatically, it is not very good at solving problems in a country this large and diverse. Our founders were visionaries. Although there were only 3,000,000 people living in America at its founding, they were preparing for a much larger country. They already had land, would soon add more, and they knew our freedoms would attract people to fill up that land. Regretfully, we turned away from the government structure they created and now have a federal government taking on never-imagined tasks, and doing an incredibly bad job at them. At the beginning of the 20th century, America became the worlds strongest economy and our federal government was inconsequential in the daily lives of Americans. One hundred years later, the national government controls one quarter of our economy. Yet both our economy and way of life are faltering. Weve tried stimulus plans; they failed. Now some want to try them again. Weve tried massive deficit spending; all we relearned was that Keynesian economic theories do not work. Many want to repeat the New Deals version of Robin Hood economics: steal from the rich, give little to the poor, and let the merry bureaucrats, fraudsters, campaign contributors, and unions keep the rest. Americans believe their federal government wastes 51% of the money it spends. Your government even has a website where they set targets for the amount of improper payments desired in various programs (http://paymentaccuracy.gov ). On this site your government proudly touts fraud rates ranging from 4% to 25%. What are the real numbers if this is what your government admits to? The Government Accounting Office (GAO) recently summarized its continuing work detailing federal inefficiencies and duplicative programs (http://www.gao.gov/new.items/d11318sp.pdf ). The GAO report is only a small sample that identifies waste totaling an estimated $100 to $200 billion each year,

Page 6

yet our leaders cannot even agree to eliminate this spending. Why not? Because every program puts money into someones pocket and is run by entrenched bureaucrats. Beneficiaries lobby Congress or donate campaign funds; so we end up with layers of duplicate or obsolete programs. Government spending is wasteful. But what about particular programs to alleviate poverty, improve education, create energy independence, etc.? We spend trillions of dollars on such programs. Have they accomplished anything (other than make well-connected individuals or companies wealthy)? We focus on non-military spending since national defense is one of the few tasks assigned to the central government in our Constitution. Our armed services, while not free of waste caused by government meddling, admirably perform the tasks given them. Are the wars we fight on poverty, illiteracy, drugs, etc. waged as effectively as our military campaigns?

We will discuss how experts in Washington managed not only to diminish our economy but also to create failed programs attempting to battle poverty, educate children, heal the sick, provide energy, rebuild proud cities, etc. These failures create a stifling national debt and make the original problems worse.

Page 7

The United States of America became an economic super power while its national government consumed less than 4% of GDP (total for each of the years from 1903 to 1929, excluding the two years of WWI). Today the central planners consume 25.9% of GDP and our economy is in decline. The organizerin-chief wants to waste more of your money, while the problems we face continue to worsen. The central government has waged war on poverty, tried to guarantee educational success, and assumed myriad other responsibilities. Have any of these expensive programs actually worked? Do we have fewer people in poverty or are our children better educated? Is it easier to start a business or hire new employees? Are our cities safer and more dynamic? In a little over 100 years we have experienced a complete reversal in governments role in America. At the beginning of the twentieth century the United States was a vibrant and growing country. We rapidly became the leader of the industrial world and remained a magnet for people who sought freedom and opportunity. Today even illegal immigrants see our decline as they are returning home at a faster rate than they are coming to America. What was the role of government at 100 years ago? For most people, their only contact with central authority was a post office. In 1903 the federal government spent less than 3% of the nations GDP on that postal service, a small military, and a few other minor functions. How did the nation survive without central direction? Why did millions of immigrants come to a country with such weak government? How had we become the worlds second strongest economy and created the most equal distribution of wealth in the world, without central planning? What changed over the next 100 years? Lets start by referring again to this chart showing the growth of federal spending, as a % of Gross Domestic Product, since 1903:

Page 8

Let us take a brief tour of government spending since 1900. Wars profoundly impacted outlays (the governments term for spending). The first three major conflictsWorld War I, World War II, and Koreaall created spending spikes. Equally important, the impact of wars can be seen after each conflict: federal spending never returns to prewar levels. Federal involvement in peoples lives persists long after the battles end. Interestingly, the wars in Viet Nam and against terror generated less noticeable increases in spending. Of course, military spending grew during both periods, but the impact was less pronounced due to the larger overall scale of federal spending (more on this later.) To fight a major war, the federal government must consume more national resources. However, war is one of the few costly activities the Constitution permits the federal government to perform. (Yes, the word permits is correct. The original purpose of our Constitution was twofold: to create a central government, but also to restrict what that central government was allowed to do. Most government programs we now endure are neither permitted by our founding documents nor added later by amendment.) Apart from war, three crucial periods drove federal incursions after 1900: the Great Depression, the Great Society, and the Great Barak. After decades of general prosperity, and limited government involvement, we entered the world depression in 1929. The seeds of this depression were sown by our entry into the First World War and the peace terms forced on Germany. Recent scholarship adequately demonstrates that federal policies caused this Depression to be both Great and long. During the Depression, Franklin Roosevelt cowed the Supreme Court to permit unparalleled federal entry into the economy, creating the foundation for todays over-regulated welfare state. Herbert Hoover, and later Roosevelt, used the federal treasury to combat, unsuccessfully, economic depression for eleven years. Federal spending, as a percent of GDP, grew aggressively after the 1929 stock market crash without improving the economy. GDP did not approach 1929 levels ($104 billion) for 11 painful years ($101 billion in 1940.) By then federal spending had reached 9.9% of GDP, up from the more traditional 3.7% in 1929. In 1941 we went to war. By 1948, post-war spending dropped rapidly back to 13% of GDP as the economy boomed. But the Cold War, then the Korean Conflict, drove federal outlays back to another 21% peak in 1953. Ensuing economic growth, together with Eisenhowers and Kennedys fiscal discipline, allowed spending levels to decline slowly. Despite our entry into the ground war in Viet Nam and the maturation of New Deal programs, spending levels dropped to 16.4% of GDP by 1965. Many thought if we could just win the Cold War, spending would drop again. The most significant year in modern American history might be 1965. Lyndon Johnson had been elected president. He grew up poor, and saw Roosevelt use taxpayer money to buy votes and build a powerful political coalition for the Democrat Party. By 1965 we were prosperous again, and even while fighting a little war in Southeast Asia; now was the time to use that prosperity to create a new coalition and once again try to buy votes for the Democrat Party. President Johnson pushed through his Great Society spending programs.

Page 9

Government spending from 1965 to 2008 looks reasonably consistent. One might consider governments role in the economy and society since the 1960s to be normal, but it is not at all normal. It is a time of unprecedented peace-time intrusion by central government into every aspect of American life. For most of our history, American citizens lived in freedom and created prosperity with little help from Washington D.C. As recently as 1929, we spent less than 4% of GDP to support national government. After 1965 we became complacent about spending 18% to 22% of our nations wealth by the central government. Then came the Great Barak. The last two years have seen federal spending top 25% of the economy. Where did all the new federal spending go? The New Deal failed to stimulate recovery. We never found the Great Society we were promised. And now, for the first time in American history, we have had massive increases in total government spending at the same time military outlays declined:

With Viet Nam and the Cold War over, military spending reached a post-WWII low in 2001. Even with two active wars in Iraq and Afghanistan, defense spending does not equal previous levels. Meanwhile, failed programs, dating to the New Deal and Great Society era, together with an ever-increasing regulatory culture, consumed an ever-increasing share of our wealth. With over $16 trillion of debt, we are reaping the whirlwind that comes from wasting trillions of dollars of American wealth. We will focus on these last fifty years of spending; 1962 is a good year to start. We will cover a fifty-year window that begins in the term of a visionary young president and includes the birth of the Great Society. From 1962 to the end of 2011, we spent over $60 trillion of Americans hardearned treasure.

Page 10

The Obama presidency has accelerated non-military expenditures to an historic level. We dont yet have a catchy phrase to describe this period. Neither New, nor Great, maybe it is just the tipping point. What has America received for all this money? If you are a beneficiary of some of these dollars you might believe you have received something worthwhile. If you are simply a taxpayer, you will have a different perspective. The purpose of these pages is to discuss factually whether these programs are successes or failures. Do government programs work? Do they solve, or create, problems? If they happen to solve some problems, what is the true cost to society and to individual Americans who either receive or pay for them? Lets first look at where we spend all this money and how non-military spending has changed over the past 50 years. We will exclude military spending and group outlays into five federal categories: Net Interest, Health Costs (including Medicare, Medicaid, Veterans and other health outlays), Income Security, Social Security, and all other outlays.

How did non-military spending grow from less than 10% to over 20% of GDP? The simple answers: 1.) Social Security spending increased as the nation matured and people learned how to scam the disability system, 2.) we thought we could solve medical and social problems by spending other peoples money, 3.) we have dramatically increased regulation, and 4.) the government adds a layer of fraud or inefficiency to every problem it tackles. Only through dramatic, and ill-advised, action by the Federal Reserve has Net Interest cost temporarily declined as the national debt soared. This will change and

Page 11

interest will consume an ever growing share of GDP as the debt escalates and the Fed loses its ability to keep interest rates artificially low. In succeeding chapters, we will focus on how well these non-military programs accomplish their objectives.

Data sources and links: For spending by category from 1962 to 2011 see: http://www.gpoaccess.gov/usbudget/fy07/hist.html For spending and GDP from 1903 to 2010 see: http://www.usgovernmentspending.com/downchart_gs.php?year=1903_2010&view=1&expand=&units =p&fy=fy11&chart=F0-fed&bar=0&stack=1&size=m&title=&state=US&color=c&local=s#copypaste

Page 12

It appears that as the federal government spends more money, more people fall into want. After World War II, as federal budgets contracted and America prospered, poverty levels dropped consistently. Post-war prosperity drove poverty levels from 50% in 1939, to 40.5% in 1949, and to just over 20% when the Census Bureau began tracking the needy in 1959. (Ross, Danziger, and Smolensky, 1987.) Throughout that period, federal spending on social programs was miniscule. Then, in 1965, we began LBJs War on Poverty. By 1970, after decades of improvement, the proportion of Americans living in poverty leveled out. As government dedicated an ever greater share of our national resources to fight for their definition of social justice, poverty rates stopped improving and the number of impoverished Americans began to increase again. Three Generations of Americans Sacrificed to the Lost War on Poverty Our founders shed blood to give us a few rights: life, liberty, and the pursuit of happiness. Building government around these core beliefs made us a free and rich nation. To honor the founders we should fight to eliminate any roadblocks preventing citizens from preserving life, liberty, and the opportunity to pursue their own visions of happiness.

Page 13

Our founders understood that poverty existed, saw how the states dealt with it, and chose not to permit the new federal government to become involved with such social problems. Even if we accept that eliminating poverty is necessary to pursue happiness, can government achieve this goal? No, after spending more than $11 trillion since 1965, our government has proven particularly inept at this task. By our modern definition, eighty percent of Americans would have qualified as living in poverty during the 19th century. Yet immigrants poured into America. Today government sets the poverty level income at three times the cost to feed a person or family. The corollary to this definition: If one must spend more than 33% of their income on food, they are considered poor. But in 1901 the average American spent 42.5% of income on food and another 37.3% on clothing and shelter. By current standards the average American was deeply impoverished. One could, however, take another perspective: by 1901, average Americans were able to spend 20.2% of their livelihood on other pursuitsentertainment, health care, tobacco, alcohol, education, reading, religion, and charitythat made them happy. This was great progress, and there was no income tax. No longer were people trapped in a subsistence lifestyle. People flocked to America for the opportunity to be free, work to feed their families, and have money left over to spend on diversions. In reality, few first-generation immigrants achieved this standard of living, but their children and grandchildren did. The Bureau of Labor Statistics shows how much personal spending patterns have changed since 1901 (www.bls.gov/opub/uscs/report991.pdf and www.bls.gov/cex/2010/share/age.pdf ).

Average American Spending

Food Clothing & Shelter Discretionary

20.2% 35.8%

37.3% 39.9%

42.5% 24.3% 1901 1960

By 1960, the average American spent only 24.3% on food and a total of 64.2% on all necessities of life (food, clothing, and shelter), leaving 35.8% for discretionary items. As more Americans were deciding to own ever larger and more expensive homes only housing increased in relative terms since 1901. In just 60 years, average Americans as a group substantially increased their standard of living, increased home ownership, and were able to spend almost twice as much of their incomes on discretionary items. By the

Page 14

early 1960s, the number, and the percentage, of Americans living in poverty was declining. Then the federal government decided to fix the problem. Federal spending on discretionary programs (total spending less defense and veterans services, Social Security, and interest on the debt) were to begin growing rapidly. These programs consumed 4.7% of GDP in 1962. (This is twice total government spending in 1903.) Failed New Deal programs from the 1930s did not end. LBJs Great Society efforts increased spending. Bushabama spending would drive these numbers ever higher, until by 2011, the government estimated it would spend $1,973 billion dollars, 13.3% of GDP, on its discretionary programs.

By the 1960s American capital, knowledge, and productivity not only lifted most citizens to new levels of prosperity but also enabled new levels of government extravagance. Only rich countries believe they can eliminate poverty while spending trillions of citizens dollars trying to force economic equality. In 1965 Lyndon Johnson decided to spend other peoples money to remake America. How well has that worked?

Page 15

The Great Societys War on Poverty Poverty won! It is hard to dig out how much we really spend to fight poverty, but since 1962 the federal government has spent $6.3 trillion on what they call Income Security programs. In addition, weve spent $4.1 trillion on public health (excluding Medicare). Other anti-poverty programs infiltrate most other government departments (some examples are listed below).

Yes, we now spend nearly $1 trillion each year to combat poverty and create safety nets. That is over $21,000 in current year outlays for every man, woman, and child living in poverty per the US Census Bureau (i.e. the theoretical family of four has $84,000 spent to support them). These outlays do not, however, include Social Security or Medicare dollars paid to the elderly poor. A few anti-poverty programs that consumed $11.4 trillion since 1962: 1962 Income security, excluding federal employee retirement & disability % of GDP Other poverty reduction programs Health services, excluding Medicare Community Development Area and Regional Development Training, employment and social services 2011E ($ in millions) $471,465 3.2% $357,691 $10,926 $5,719 $30,403 $4,082,540 $207,634 $116,023 $737,632 1962 to 2011E Total

$7,248 1.2% $528 $266 $179 $373

$6,262,875

This $11.4 trillion list does not include all spending (e.g. Education and Agriculture programs) and does not include payments made to poor Americans through our tax code. The largest single anti-poverty payment is the Earned Income Tax Credit (EITC) created to pay the working poor who meet certain

Page 16

income and family characteristics. (This is not, however, the only anti-poverty payment provided through the tax system.) EITC cash did not flow until 1975, a year when Democrats forced many new programs on the weakened post-Watergate presidency. The intent of EITC was to refund Social Security taxes paid by working people in the form of income tax credits. However, they receive this money whether or not they actually pay any income tax. (When liberals claim poor people pay their fair share of taxes through the payroll tax, remember that most of those folks get even that money back via the EITC.) By 2009 ninety percent of EITC cash was being refunded or paid back to people who never paid income tax! From 1976 to 2009 the federal government paid $.5 trillion in EITCs back to the poor that is not included in the $11.4 trillion in spending outlays.

Over 27,000,000 families, not individuals, received EITC cash in 2009. Since this excludes the elderly poor, more people receive EITC payments than live in poverty (see below). One advantage claimed for EITC is that it is controlled by the IRS and has very low administrative costs: no local bureaucrat determines whether you are entitled to payments. You simply provide your income and family size and then receive money. There is a downside to this advantage: the IRS estimated that $15.2 billion, or up to 26% of EITC payments were inappropriate or fraudulent in 2009! Again, if they acknowledge 26% of what they pay out is fraudulent, what must the real number be?

But we must have eradicated poverty with all this spending? Based on recent Census Bureau data we now have 46.2 million Americans, or 15.1% of the population, living below the government poverty line. If we spend $1 trillion a year, how can we still have poor people? The following Census Bureau chart depicts the number, and percentage, of Americans living in poverty.

Page 17

Number in Poverty, and Poverty rate 1959 to 2010

Source: US Census Bureau, Current Population Survey Clearly the poor didnt receive that $11.4 trillion, but the above chart highlights some important facts: Before the federal government declared war, poverty was declining rapidly. (Remember, it was estimated 50% lived in poverty in 1939 and 40.5% in 1949.) After 1959 both the number of Americans in poverty and the poverty rate continued to decline for several years. We began our War on Poverty in 1965 and, like most wars, full engagement took a few years. However, by the late 1960s both the number in poverty and the poverty rate stopped improving. We began this war in 1965 as part of Lyndon Johnsons Great Society. At that time less than 15% of the population lived in poverty. Your government has since spent well over $11 trillion of your money and by 2010 the poverty rate had increased to 15.1%! Even as spending and new programs like the EITC accelerated, the number of poor Americans has almost doubled from its 1970s low point. Recessions cause poverty to worsen. This is not profound. Those who have most recently moved out of poverty are most likely to be impacted when the economy worsens. However, before our most recent recession, government programs had no positive effect on poverty in America. During the Clinton administration, poverty rates returned to 15% in the early 1990s. In 1994, Republicans took power in Congress and overhauled the welfare system. Poverty then dropped substantially. George Bushs Compassionate Conservatism and Barak Obamas stimulus both reversed this positive trend.

Since much of the impetus behind the Great Society was to improve the relative position of minorities and inner-city residents, how has this spending impacted these groups? Again, the Census Bureau provides data:

Page 18

Black poverty rates, which began at abysmally high levels, were dropping faster than overall rates prior to declaring war on the poor in 1965. Poverty rates bottomed out for African-Americans in 1968 and stagnated above 30% for the next 25 years. We began tracking poverty in the growing Hispanic community in the early 1970s and their poverty levels increased over this same 25-year period. By the 1990s, the impact of the Reagan eras growth agenda was driving the economy; we had reformed the welfare state; and finally, these minority groups saw substantial drops in poverty rates, which continued until the recent recession. How effective was the Great Society at improving living conditions for inner-city Americans? Since we began to fight this war, only rural areas and small towns have seen a decline in poverty levels. Government programs again failed to bring the promised urban renewal:

Page 19

All that money must have changed something! Progressive 1960s programs had other goals than eradicating poverty. Progressive elites wanted to re-engineer society, to create their vision of a Great Society. They wanted to teach your children how to be better citizens. What did we get for our $11 trillion, other than an unsustainable $15+ trillion federal debt? The government proved it can impact individual behaviors. While not able to eliminate poverty, it can change birth rates:

This chart shows the percentage of births to unmarried women from 1940 to 2001. The thin straight line forecast expected birth rates to unmarried women based on actual rates from 1940 to 1964. Based on 24 years of history we would have expected that by 2000 about 10% of children would have been born to unmarried women. Instead this number quickly climbed toward 35%. By 2009, the Census Bureau reports 41% of births were to unmarried women. Why is this change important? The following link provides a good summary of how increased singleparent households impact our country: http://www.heritage.org/research/reports/2010/09/marriage-america-s-greatest-weapon-against-childpoverty Few people, conservative or liberal, believe people are better off in single-parent households. Increased levels of poverty, crime, and abuse follow increases in births to unmarried women. Conclusions Though many claim that liberal elites and the Democrat party need to keep people poor to ensure their votes, lets give them the benefit of any doubt. No one, rich or poor, wants Americans to remain in poverty. We would all be better off if we could lift people out of poverty. Corporations would benefit from wealthier consumers. Government would benefit not only from lower outlays but also from more

Page 20

tax dollars. Society would benefit from fewer dysfunctional behaviors (e.g. crime) that accompany poverty. And of course the poor themselves would be able to better pursue happiness, their natural right. Our primary purpose is to demonstrate that large, central government fails to solve social problems that they attempt to fix. Our leaders proved they can spend lots of your money to battle poverty with no positive impact. Their programs probably made poverty worse. Are there alternatives to failed government programs? What if this money had been left with taxpayers? How many jobs and improved lives would have resulted if you had spent or invested that $11+ trillion? Think of our economic potential if that $11+ trillion, plus interest, had not been added to our debt? Arent there better ways to deal with poverty? The accompanying pamphlet, American Solutions provides some suggested actions to improve this issue. Of course, a good education would give Americans a better chance at defeating poverty but we have largely handed the control of education over to the federal government.

Page 21

I
To defeat poverty, one must give individuals the tools to prosper. Those tools include an attitude of personal responsibility and a set of useful skills to offer to employers. Since the 1960s the federal government has directed Americas educational system and has tried to eliminate any concept of personal responsibility. Central control of our childrens education has been the most pernicious failure of government intrusion. Shortly after the first settlers stepped ashore, most colonies supported free public education. This was particularly true in religious-based communities that saw biblical literacy as foundational to knowing and understanding God. From the beginning, education was locally supported and school houses moved with settlers as the country expanded. General public education lagged in the South as planters paid to have their children tutored, many early immigrants did not have strong educational cultures, and slaves were specifically prohibited from gaining literacy. The Civil War changed everything. The emancipated slaves desired two primary objectives once the war ended: to reconnect disrupted families and to educate their children. These people knew the key to long-term success for their community depended on strong families and literacy. The importance of education would continue into the twentieth century; the keynote issue of desegregation in the 1950s was equal access to quality schools. Black children who drop out of school or disparage the value of education would make their ancestors weep. Effective education is the only way to turn around the economic stagnation of the poor. At the beginning of the twentieth century America led the world in providing free education to its children. Local government ran education, which was relatively costless. After WWI we spent only $539 per student, per year, in todays dollars.

Spending per pupil in Constant 2008-09 dollars

$14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 1919 1931 1935 1939 1943 1947 1951 1955 1959 1963 1967 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Page 22

SOURCE: U.S. Department of Education, National Center for Education Statistics, Biennial Survey of Education in the United States, 1919-20 through 1955-56; Statistics of State School Systems, 1957-58 through 1969-70; Revenues and Expenditures for Public Elementary and Secondary Education, 1970-71 through 1986-87; and Common Core of Data (CCD), "National Public Education Financial Survey," 1987-88 through 2007-08. (This table was prepared November 2010.)AN IMPORTANT NOTE: THERE ARE VARIOUS SOURCES OF COST PER STUDENT DATA. Some use students at the beginning of the year as the denominator in their calculations, some use average students. Some make adjustment for non-academic activities. WHEN MAKING COMPARISONS THE KEY IS TO NEVER MIX THE NUMBERS FROM DIFFERENT STUDIES. YOU WILL SEE DIFFERING NUMBERS WITHIN THIS STUDY, BUT EACH CHART WILL BE INTERNALLY CONSISTENT WITHIN THE YEARS OF THAT PARTICULAR STUDY.

By 1929, state and local governments increased spending to $1,127 per student, still in todays dollars, where it would remain stable until the post-WWII era. By 1940 the majority of Americans still had only an 8th-grade education, yet these citizens won the largest war in history and set America on a path to unprecedented prosperity. American high school graduates through the 1950s were as well-educated in the basics as most college graduates today. Then the federal government intervened to make things better. As you read further, you will see that: Total spending by all levels of government on K-12 education exceeds $500 billion per year. Barely of this amount is spent in the classroom as educational overhead costs boom. While private sector unions have been losing members, teacher unionization rates rose from 35% to 70% over the past 50 years. (http://www.cato.org/pubs/journal/cj30n1/cj30n1-8.pdf ). The number of students each teacher serves has dropped by 40% in the past 50 years. Student performance has at best stagnated since the early 1970s, and in many districts, by many measures, has declined badly. The solution to poor student performance since the 1960s has been to spend more money, and that is one thing our government can do very well. The federal governments impact on public education is two-fold: massive increases in direct spending since the Great Society began in the 1960s, and insidious indirect impacts of federal mandates that accompany such aid. The following is a brief history written by the Department of Education summarizing its view of the federal governments role in education (www.ed.gov):
The original Department of Education was created in 1867 to collect information on schools and teaching that would help the States establish effective school systems. The passage of the Second Morrill Act in 1890 gave the then-named Office of Education responsibility for administering support for the original system of land-grant colleges and universities. Vocational education became the next major area of Federal aid to schools World War II led to a significant expansion of Federal support for education. The Cold War stimulated the first example of comprehensive Federal education legislation, when in 1958 Congress passed the National Defense Education Act (NDEA) in response to the Soviet launch of Sputnik. The anti-poverty and civil rights laws of the 1960s and 1970s brought about a dramatic emergence of the Department's equal access mission. The passage of laws such as Title VI of the Civil Rights Act of 1964, Title IX of the Education Amendments of 1972, and Section 504 of the Rehabilitation Act of 1973 which

Page 23

prohibited discrimination based on race, sex, and disability, respectively made civil rights enforcement a fundamental and long-lasting focus of the Department of Education. In 1965, the Elementary and Secondary Education Act launched a comprehensive set of programs, [emphasis added] In 1980, Congress established the Department of Education as a Cabinet level agency. Today, ED operates programs that touch on every area and level of education. [emphasis added]

In reality the federal government had little impact on American education, other than to gather data, until President Johnson decided to create his version of a Great Society in America. The federal government clearly became involved with education in order to touch on every area and level of education. Note that nowhere do they discuss helping your children. Federal spending on K-12 education exploded.

Federal K12 Spending by Year ($ in millions)

$90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 est

The federal government spent over $2 trillion on education and training from 1962 to 2011.
1962 Total, Education, training, employment, and Social Services (per the federal government) % of GDP Details of Educational Spending Elementary, secondary, and vocational Higher education Research and general educational aids Training, employment and social services $1,241 .2% $482 $328 $58 $373 2011E ($ in millions) $126,399 .9% $61,040 $31,262 $3,694 $30,403 $757,206 $492,139 $78,933 $737,632 1962 to 2011E Total $2,065,900

Training, employment and social services costs were discussed as part of the lost War on Poverty, but even excluding these expenditures the federal government has directly spent over $1.3 trillion on

Page 24

education since 1962. Beyond these expenditures, other departments such as Agriculture directly fund other school programs. The federal government imposes hidden costs that do not appear in this $1.3 trillion: State and local school boards need staff to beg for, and manage, these dollars. Most school districts now have teams of specialists that compete for federal grants, manage federal dollars, generate required reports on the performance of federal dollars, test students to meet federal standards, etc. No federal spending comes without stringsvery expensive strings. Any measure of school performance will show this spending has been a waste of tax-payer money. At least 10% of the current national debt results from federal education spending that at best had no impact on our childrens learning, and at worst diminished their opportunities to succeed. Results: National Performance Testing Schools became a front line of the War on Poverty in 1965. We began testing in 1971 and have 40 years of data to measure how spending trillions of dollars changed your childrens educational progress:

Page 25

Seventeen year old students are near graduation and thus have had the full advantage of their public school system. After nearly 40 years, and trillions of dollars in added federal, state, and local spending, we have improved already mediocre reading scores by 1 point and math scores by 2 points. How does this track record of academic progress compare to the increased cost to educate each student in American public schools? Spending per student increased almost 130% since 1971 while academic performance stagnated. And politicians demand that we spend more on education!

Spending per pupil in constant dollars vs Performance in Math and Reading

250.0% 230.0% 210.0% Ratio Percent 190.0% 170.0% 150.0% 130.0% 110.0% 90.0% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Constant 2008 $ per Pupil Reading

Math

Page 26

Results: By State The above looked at aggregate national performance. Do states that spend more get better results? No. We need to look at 8th grade testing since older students were not tested in every state during 2011. Appendix I provides the most recent statistics for 8th grade tests, student teacher ratios, and spending per student by state. The following plots show no discernible trend for those states that spend more per student. There was a very slight positive correlation between math and reading test results and spending-per-student, but the result was not statistically significant. However, the data shows 13 of the 24 states that scored above the national average in math actually spent less per student than average. Sixteen of the 31 states that performed above average in reading spent less per student than the national average. 2011 8th Grade Math Testing Compared to Spending per Student
310 300 290 280 270 260 250 $0 $5,000 $10,000$15,000$20,000$25,000 280 275 270 265 260 255 250 245 240 $0 $5,000 $10,000$15,000$20,000$25,000

2011 8th Grade Reading Testing Compared to Spending to Student

Unionized teachers would solve all our problems by lowering the number of students they must deal with. We will see later, student-teacher ratios declined dramatically after the 1950s, yet we see no increase in student performance. If one compares performance in reading to student-teacher ratios you would actually find a small negative correlation. In other words, states where teachers teach more students have slightly better reading scores than states where teachers have a lighter work load. (Math results show no meaningful relation.)

2011 8th Grade Reading Testing Compared to Student Teacher Ratio

280 270 260 250 240 0.0 5.0 10.0 15.0 20.0 25.0

Page 27

Results: Literacy Another measure of educational performance is the rate of illiteracy and harder-to-define functional illiteracy. In the last (1960) census before the advent of our Great Society, The Bureau of the Census estimated that 3,055,000 American adults (over 14 years old) were illiterate. This represented 2.4% of the relevant population. Another 8 million, or 6.3%, were functionally illiterate. (Functional literacy was based on a term used by the Army in World War II to refer to persons who were incapable of understanding the kinds of written instructions that are needed for carrying out basic military functions or tasks.) Per the Bureau of the Census, literacy improved dramatically before we created a new Great Society: 1900 1910 1920 1930 1940 1950 Percent illiterate 11.3% 8.3% 6.5% 4.8% 3.3% 2.4% It was not until 1940 that half of all students would actually graduate from high school so American elementary education proved to be particularly effective. With little federal intervention, the states drove literacy and functional literacy rates to 97.6% and 92.7% respectively. Today, most sources (e.g. the CIA World Fact Book and the regular Census reports) conclude that America is still 97 to 99% literate. However, using a different statistical methodology the U.S. Census found that illiteracy totaled 5.6% of the population in 2004. (Source: U.S. Census Bureau. 2004 ACS Congressional Toolkit, Washington, D.C.: U.S. Census Bureau, 2004). Other studies question whether our Great Society improved literacy. The 2003 National Assessment of Adult Literacy found that 14% of adult Americans (over 16) have only Below Basic prose literacy and other studies estimate even higher levels of functional illiteracy. Regardless of the actual numbers, the massive federal intrusion into our educational and social systems again failed to make things better. As with poverty, the Great Society and subsequent programs made matters worse. Results: Students vote with their feet American students are the ultimate customer of our education system. In a world where knowledge becomes ever more important for pecuniary success, more than 30% of our students do not believe finishing high school is a worthwhile investment of their time. Christopher Swanson (http://www.edweek.org/ew/articles/2010/06/10/34swanson.h29.html) summarizes the history of high school graduation in America:
Historical data can be used to trace the nations graduation rate well over a century into the past. In 1870, the earliest date on record, only 2 percent of 17-year-olds in the nation had a secondary-level education. The turn of the 20th century brought rapid social and economic changes, which ushered in a new age for education. In 1940, for the first time, half of all students finished high school, although graduation did not become an established norm until the 1950s. The U.S. graduation rate reached its historical high point at the end of the 1960s, with the graduation rate peaking at 77 percent in 1969. When contemporary data on the nations public schools became available in the late 1980s, the rate of graduation had gradually declined from its historic highs to around 70 percent. The graduation rate fell precipitously during the early 1990s, eventually stabilizing around 66 percent by the latter part of that decade. The period since then has generally been characterized by gradual but steady improvements. The class of 2005 was once again earning diplomas at a pace last seen in the early

Page 28

1990s. However, two consecutive annual declines since then have eroded the nations graduation rate, which stood at slightly less than 69 percent for the class of 2007.
SOURCES: EPE Research Center, 2010; U.S. Department of Education

Once again we see the 1960s as the peak level of performance, the federal government decided to make things better, and graduation rates became one more failure due to increased federal help. It is important to note that the latest drop in graduation rates occurred before the recent recession. The Spending & Hiring Boom Since the 1960s one sees only diminished or stagnating academic performance amid a sea of added spending. Where have we spent all this extra money? We dramatically increased spending both in the classroom by adding more teachers and in the administrative suite by creating more overhead functions. Unions and their supporters can solve public educations problems: reduce the number of students each teacher serves (measured as the Student-Teacher Ratio). This, together with higher pay, is the union panacea. If teachers just didnt have so many pesky students to deal with everything would be better. Over time we have dramatically reduced this ratio as we put more, but not necessarily better, teachers into classrooms. The following graph shows how this ratio has declined since 1955.

30.0 Students served by each teacher 25.0 20.0 15.0 10.0 5.0 0.0 1955 1957

Public School Student Teacher Ratio

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

SOURCE: U.S. Department of Education, National Center for Education Statistics, Statistics of Public Elementary and Secondary Day Schools, 195556 through 1984-85; Common Core of Data (CCD), "State Nonfiscal Survey of Public Elementary/Secondary Education," 1985-86 through 2005-06; Private School Universe Survey (PSS), 1989-90 through 2003-04; Projections of Education Statistics to 2016; and unpublished data. Years between 1955, 1960, 1965, and 1970 are interpreted to equal the value in the named year.

http://nces.ed.gov/programs/digest/d07/tables/dt07_061.asp?referrer=report TABLE 61

Page 29

2005

At the current rate of decline we will be paying one union teacher to teach each public school student by around 2131 (and each teacher will require at least two administrators to supervise and generate performance reports). This ever increasing army of unionized teachers has not, however, improved learning, but has helped drive up the cost of running the educational establishment. We compounded the impact of adding more teachers in the classrooms with even faster growth in educational overhead costs.

SOURCE: U.S. Department of Education, National Center for Education Statistics, Biennial Survey of Education in the United States, 1919-20 through 1949-50; Statistics of State School Systems, 1959-60 and 1969-70; Revenues and Expenditures for Public Elementary and Secondary Education, 1979-80; and Common Core of Data (CCD), "National Public Education Financial Survey," 1989-90 through 2007-08. (This table was prepared August 2010.)

How did we add teachers to the classroom, increase salaries for those teachers, and yet see the percentage of instruction costs decline? This anomaly can be easily explained: the cost of union benefits, when combined with the added bureaucrats, administrators, and staff required to respond to federal mandates has grown even faster. The following comes from an annual Census Department study of educational finances that began with the 1991-92 school year:
Category Instruction salaries & wages Instruction benefits Other salaries & wages Other employees benefits Other current expenses Total current spending US Spending per student Students $ $ $ $ $ $ $ 1991-92 2008-09 ($ in millions) 94,571 $ 209,007 20,591 $ 70,059 44,262 $ 101,327 11,497 $ 39,129 42,442 $ 98,186 213,363 $ 517,708 5,001 $ 10,499 % growth 221.0% 340.2% 228.9% 340.3% 231.3% 242.6% 209.9% +/- 15.6%

Page 30

Summarizing the above into three basic spending categories:

Category Instructional salaries & wages All employee benefits All other costs Total current spending Total benefits as % of salaries & wages 1991-92 94,571 32,088 86,704 213,363 23.1% 2008-09 209,007 109,188 199,513 517,708 35.2% % growth 221.0% 340.3% 230.1% 242.6%

$ $ $ $

$ $ $ $

The above demonstrates one impact of unionized American teachers and the intrusion of federal mandates. The increase in dues-paying members has been the number one priority for teachers unions, as demonstrated by declining student teacher ratios. However, the impact of collective bargaining on the cost of employee benefits has been equally pernicious. In 1991 schools spent 23.1 cents on benefits (e.g. pensions, health care, etc.) for each dollar of employee salaries and wages. By 2008 this number grew to 35.2 cents and was dramatically higher in several states. However, the impact of union bargaining goes beyond increasing the cost of teachers. The increased benefits unions negotiate with hard-nosed school bureaucrats are then given to non-union school employees (including those hardnosed bureaucrats). That is why other employees benefits grew at the same rate as teachers benefits. Of the $517.7 billion the Census Bureau says we spent on education in 2008, $238.6 billion, or 46% of the total, was spent outside the classroom. This overhead spending does not educate your children. While there is no proof that decreasing a teachers work load helps education, it is certain that adding bureaucracy does not improve your childrens performance. In an era of low inflation and moderate growth in the number of students (less than 1% per year on average), school costs rocketed upward. Why should you expect anything different? If the federal government spends more it borrows more. If state and local governments spend more, they shift money from one over-stuffed pocket to another, or increase taxes. In other words, you pay more for a poorer product. Like every government program, there is no accountability. We cant import education from China or outsource teaching to Finland (whose teachers do a really good job by the way).

Page 31

How do we compare to the rest of the world? One does not have to look far to realize how mediocre our education system is, compared to the rest of the developed world. Our excessive spending has little impact on performance when compared to other countries. The following plot various countries PISA (Programme for International Student Assessment) reading and math scores compared to spending per student. The United States is the light colored diamond on the right side of each graph.

PISA Reading 2009

600 600

PISA Math 2009

500

500

400 $0 $5,000 $10,000 $15,000 $20,000

400 $0 $5,000 $10,000 $15,000 $20,000

Appendix II details performance of various countries on the two major international educational tests (PISAProgramme for International Student Assessmentwhich tests 15-year-olds and the jointly administered PIRLS and TIMMSS testsProgress in International Reading Literacy Studies and Trends in International Mathematics and Science Study). In addition, Appendix II includes data on spending per student in OECD countries and populations. (China and India do not conduct nation-wide testing, only in select better districts so they are not included.) The message is consistent: America spends more but our students perform poorly. Conclusions Americas low standing in the world of education has received a lot of press attention lately. Unfortunately the media is firmly on the band wagon to reduce class size and spend more of other peoples money to solve the problem. No one seems to realize that we tried that for 50 years and it does not work. Despite shining examples of charter schools and other programs that have broken through the barriers of apathy and union control, there are few solutions that take a systematic approach to both lowering the cost burden on American citizens and improving performance. (The companion article, American Solutions: Health, Education, and Welfare does offer an entirely new strategy.)

Page 32

In

v n

The quality of American health care has improved dramatically since 1900, but that improvement had little to do with increased government intervention. Most notably we have seen a steady increase in life expectancy:

Life expectancy

80 70
68.2 69.7 73.7 70.8 75.4 77.0 77.8

Age

60
59.7

62.9

50
50.0 47.3

54.1

40 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2004

Looks good: over 104 years, life expectancy increased from 47.3 to 77.8 years. However, about 21 years of that improvement occurred in the first fifty years of the twentieth century, a period of minimal federal involvement in health care. Improved sanitation, safer jobs (accountants and baristas had safer jobs in 2004 than farmers or industrial workers in 1900), and better diets prevented diseases and accidents that had kept life expectancy low before the 20th century. As with many social indicators in the 20th century, one notes the downward inflection beginning in 1960. Most of the gains in life expectancy during the 20th century came before 1950 and resulted far less from medical advances such as penicillin than from improved nutrition, housing, sanitation, and the increase in average living standards. Indeed, the specific role high-tech medicine has played in improving public health is so subtle as to be hardly measurable. (Longman, Phillip J. The Slowing Pace of Progress, US News and World Report December 25, 2000/January 1, 2001.)

Page 33

During the fifty-year period when life expectancy improved the most, healthcare spending was less than 5% of GDP.

Costs from 1940 forward, as a % of GDP, are based on data from the Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group and the US Department of Commerce. Prior periods are estimated using the ratio of 1940 spending to the size of the healthcare workforce (Census Bureau).

As with poverty and education, America saw continuous improvement in health outcomes with little federal government intervention. The federal Public Health Service had a small role in our nations healthcare for decades, but federal intervention in health care began in the 1960s with the introduction of Medicare and other Great Society programs such as Medicaid. Federal medical expenditures increased exponentially over time and are now drowning our nation in debt.

Page 34

The government spends over $900 billion per year on healthcare, and Obamacare has not yet started. Since 1962 the federal government spent over $15 trillion on healthcare for people living in America. 1962 Medicare Medical care for Veterans Other Health Services Total % of Gross Domestic Product (GDP) 0 1,084 1,198 $2,282 0.4% 2011E ($ in millions) 497,341 49,392 400,661 $947,394 6.4% 1962 to 2011 Total 8,560,374 886,778 6,285,084 $15,732,236

This growth in spending has substantially increased government intrusion into all areas of American life. Measured as a % of GDP, healthcare is one of the largest portions of federal spending. Even more important is the trend: healthcare is on pace to consume the entire federal budget within a couple decades.

Federal programs increase the demand for medical care and at the same time limit the number of medical providers. America now spends more than 17% of GDP on healthcare. Federal involvement is one of the major causes for this massive redistribution of income and wealth from middle-class American citizens to the medical-industrial complex. As recently as the early 1960s, medical costs were a small part of family budgets. Major medical insurance provided security for typical Americans against catastrophic illness, at reasonable cost. Charity care offered hope to those most in need. The system was not perfect, yet the advent of central government intervention degraded health outcomes and drove the cost of care to skyrocket. What impact have these programs had on the quality and cost of care since the 1960s? What return-oninvestment did we really gain from growing healthcare expenditures? Both healthcare costs and life expectancy grew over the past 100+ years. But, how much of that improvement is due to spending more

Page 35

money since 1950? What have we gained from $15.7 trillion in government spending over the past 50 years? (Note that this amount was in excess of the 2011 public debt.) As we spent more on healthcare, increases in life expectancy slowed:

Return on Investment
18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
% Increase in life expectancy by decade % of GDP

Healthcare has grown to dominate the cost of living for many Americans. The cost of medical care or health insurance is the largest expense for many citizens. As a nation we have seen total healthcare expenditures move from less than 3% of GDP in 1900 to 17% of GDP by 2010. Most of this increase occurred since the advent of Medicare and Great Society programs in the 1960s. What caused this massive reallocation of national income to the medical-industrial complex? Introduction to Failure Americans spent $2.5 trillion to maintain our health in 2009. This was more than the total gross domestic product (what is spent on everything) of every other country in the world except Japan, China, Germany, France, or the United Kingdom. Spiraling healthcare costs, and government efforts to fix the problem, are bankrupting America. Medicare, the centerpiece of government healthcare solutions, will be insolvent by 2017 and is on target to generate a $37 trillion deficit. We spend 17% of our national output to maintain our health while competing countries, on average, spend half that amount. Increased healthcare costs are one more reason jobs flee America. Has it always been so? No! As recently as the 1950s, we spent less than 5% of our wealth to maintain our health. Yet the length and quality of our lives was little different than today. As recently as the 1970s, we spent about the same as other developed countries to maintain our health. Yet the length and quality of their lives are little different, and often better, than ours. What happened?

Page 36

Most importantly, in 1965 the government passed Medicare and Medicaid. While we were assured in 1965 that these programs would not be costly, government now controls nearly half of our escalating healthcare expenditures and Obamacare will increase this portion. By the mid-1960s, insurance coverage began to change from covering major medical costs to paying almost all of our bills. By the 1970s and 1980s companies tried new ways to control spiraling healthcare costs, but most of these changes further distanced consumers (patients) from their healthcare bills. Doctor visits seemed cheap so we visited more often. Around the same time, medical cartels (e.g. the AMA or local hospitals that control care in many communities) discovered how to restrict the supply of their services to drive up prices. Medicine evolved from a healing profession into a lucrative business. Health practitioners took aggressive actions to protect or monopolize their markets. The healthcare system is broken. We no longer directly pay for our own care. Ninety percent of medical costs are processed through government or insurance; yet the average, healthy American still ends up paying. They pay through egregious insurance premiums, higher taxes, and higher prices for Americanmade products. This robs middle-class Americans, wastes a trillion dollars each year, and makes our companies uncompetitive in world markets. The following link is a more detailed analysis of the post-1960s federal intervention into the American healthcare system. This includes the sources and references to the brief summary points made below: http://www.scribd.com/doc/26366710/Healthcare-Killing-America

Waste, fraud, defensive medicine to avoid lawsuits, and unneeded procedures absorb nearly half of our medical dollars. Experts around the globe and even in the current White House recognize at least 30% of American healthcare spending could be eliminated without impacting our quality of care. Who benefits from this mess? Trial lawyers profit from honest medical errors and at least 10% of medical spending is wasted as doctors protect themselves from litigation. Doctors as a group earn 6 times the average level of national income. They profit from prescribing procedures and tests (often in their own facilities) that are sometimes defensive, or often just wasteful. Pharmaceutical companies, and other members of the medical-industrial complex, profit from the highest prices in the world for their products. Unions profit from organizing more workers. Unions realized the lack of accountability or profit motive makes government entities the best targets for organizing efforts. Is it any wonder they now seek to have medical care become a government function? Insurance companies profit from selling policies and managing care for corporations, often on a cost plus profit basis.

Page 37

Bureaucrats profit by controlling ever-growing organizations. Power accrues as they grow their fiefdoms, and we suffer from a bloated system riddled with fraud and waste. Politicians profit by using the healthcare issue to distract the American people, to make us think they want to help us, and to generate massive campaign contributions from all the above. Who pays for our dysfunctional healthcare system? Middle class Americans pay through insurance premiums that rob either their bank accounts or paychecks, through higher-priced goods and services, and through higher taxes. American companies (that are not part of the medical-industrial complex) pay for ever-morecostly employee healthcare and find it harder to compete in world markets. Are 47 million uninsured people really the problem? Comprehensive health insurance is a new concept, a way for healthy people to share the cost for those who are not so healthy and to protect from possibly catastrophic medical costs. Almost all of our 76 million residents were uninsured at the turn of the 20th century and few were denied medical care. Debating health insurance takes the focus off the real problems: out-of-control spending and quality of care that has not kept up with increased costs. Part of the problem is that healthcare is no longer a free market. Insurers or government now pay most bills. Consumers (sick people) rarely know the price of a procedure. This is particularly true in Medicare where bills often take over a year to be disclosed to patients. People without coverage or on Medicaid dont pay anyway, so they dont care about price. And prices vary widely depending on whether one is on Medicare, in a PPO insurance plan, or walks in off the street. The key to a functioning free market is that consumers are aware of the price and quality of the product to make informed decisions. The healthcare industry jealously hides information on both these topics. Whats so bad about spending 17% of our national income on healthcare? We really should view increased healthcare costs as a tax on society. We had good care in 1970 while spending just 7% of GDP. Since 1970, we have experienced little general improvement in health outcomes but, due largely to government intervention, now spend 17% of GDP. In effect, we implemented a 10% healthcare tax on the entire economy that is imbedded in the price of all other products. This tax takes money from middle-class workers, who are now getting raises in the form of more expensive medical insurance, and gives it to a growing healthcare bureaucracy and the medical elite. This tax, like any tax, redistributes wealth and is a drag on the economy. High healthcare costs tax the economy by placing American producers at a competitive disadvantage. American companies pay roughly twice what foreign firms expend for healthcare, so it becomes more difficult to compete in foreign markets. Excessive healthcare costs become another reason to move jobs offshore. The American worker is thrice harmed: lower net wages, higher priced goods, and the loss of jobs.

Page 38

How do we compare to the rest of the world? We are roughly 4% of the worlds population, yet pay half of all money spent on healthcare. Do we get better healthcare for those extra dollars? Not if one looks at life expectancy: Life Expectancy
Country United States Japan Germany France Italy United Kingdom Canada 1970 71 72 70 72 72 72 73 2006 (Increase) 78 (7) 83 (11) 80 (10) 81 (9) 81 (9) 79 (7) 81 (8)

While our life span is not quite as long, nor improving as quickly, we spend substantially more on care than any other country: Total Health Care Expenditure as a % of GDP
Country United States Japan Germany France Italy United Kingdom Canada 1970 7.3 4.6 6.3 5.8 5.2 4.5 7.0 1980 9.1 6.5 8.8 7.6 7.0 5.6 7.2 1990 12.6 6.1 8.7 8.9 8.1 6.0 9.2 2007 16.0 8.1 [2006] 10.4 11.0 8.7 8.4 10.1

Why do we spend so much more? The Health Division of the OECD studied just this question:1 The richer a country is, the greater the amount of money it devotes to its health. [However, a] country with the income level of the United States would be expected to spend around $2,500 less per capita than it actually doesequivalent to $750 billion per year. [emphasis added] One factor which cannot explain why the US spends more than other countries is aging. Many European countries and Japan have been aging much more rapidly than the United States. Similarly, Americans are not any more likely to be sick. When comparing to other countries we find that we have a price problem: Prices in the United States were around 25% higher than the OECD average. [and] there is good reason to think that prices in the United States are underestimated, Pharmaceutical spending per capita is higher and the difference in price is as much as 50%. US price levels of hospital services [tend] to be nearly twice as high Another component of outpatient care costs is the cost related to diagnostic tests the number of MRI and CT exams per capita are over twice as high as the OECD average.
1

Pearson, Mark, Disparities in health expenditures across OECD countries: Why does the United States spend so much more than other countries? a Written Statement to Senate Special Committee on Aging, September 30, 2009.

Page 39

Remuneration of US GPs exceeds those of doctors in other countries The gap is even larger for specialists. On balance, however, it seems likely that at least some part of the high rates of remuneration are due to high prices rather than to high volume of activity. So what? We spend more on healthcare even though our people are neither older nor sicker. We began spending more to maintain our health in the 1960s. Why? Could it have anything to do with our friend Lyndon Johnson and that Great Society he was going to create? 1. Government decided to fix the healthcare problem In 1965, post-Kennedy-assassination angst and LBJs landslide election allowed passage of the Medicare and Medicaid laws. The federal government now paid medical bills for the elderly and poor. (Of course, state and local governments had long paid costs for the indigent on a charity basis.) Healthcare became an American right. At first, this right extended only to the aged and the poor. (Where does the Constitution say certain groups, like the aged and the poor, have more rights than others, or any right to federal medicine? This is not to benefit the general welfare which is oft used to justify federal intrusion, but rather the particular welfare of these targeted groups.) However, politicians assured us it would cost so little to do so much good. Once again the politicians either lied to us or proved to be incompetent. (Of course, both could be true.) In 1965, they estimated that by 1990 Medicare would only cost us $12 billion and by 1992 Medicaid Hospitalization would only cost $1 billion. Actual costs totaled $110 billion in 1990 and $17 billion in 1992 respectively. 2 We are now seeing the same thing with Obamacare. They originally estimated it would only cost $900 billion over 10 years. More recent CBO estimates raised the 10 year cost to almost twice this figure and the program has not even started. State governments share the blame. Insurance companies are regulated at the state level. Each state mandates what care must be covered and precludes competitors from other states. State regulators could not allow ill-informed consumers to decide what coverage they really want or from where to buy it, and such state mandates drive premiums up by 20%. 2. People no longer know what healthcare really costs Even the White House Deputy Economic director realized: One important contribution to all of these challenges is the increased insulation of Americans from the cost of their care [and] cost sharing, if related to a familys income, could reduce health spending by an average of 31 percent without any worse health outcomes. Subsequent research finds that the savings could be even greater.3 Since Obamacare called for no added cost sharing, this fellow must have been hiding somewhere in the White House when Nancy and Harry wrote the bill. Americans pay only 11% of the billed cost of medicine. Americans do not, however, avoid paying for their healthcare. Since most people are generally healthy, they consume much less healthcare than they pay for through insurance and co-pays. Most healthcare is consumed by the very elderly and those with
2 3

From Editorial page of the Wall Street Journal of October 20, 2009 quoting various government sources. Furman, Jason, The Promise of Progressive Cost Consciousness in Health-Care Reform, The Brookings Institution, April 2007, p. 2.

Page 40

chronic conditions (5% of consumers use half of all care). Many of these people are not able to participate in their own health care decisions so nursing homes, hospitals, and doctors control their lives and decide just how much care they receive. Think about the incentives for cost savings in that situation. (None!) People who work for corporations, unions, and government have insurance that keeps the out-of-pocket cost of care low. So consumers rationally decided to go to the doctor, a lot. But ever since doctors stopped taking chickens in payment for services, no doctor would treat anyone for the price of the copay. Someone else must pay what the visit really costs. Those on Medicare or Medicaid do not see a bill for months or years. Millions of Americans observed false price signals and think medical care is really cheap. Like anything that becomes really cheap, they demand a lot more of it. However, as the demand from consumers increased the real price required by the doctorand paid by the employergoes through the roof and we misallocate national resources away from other segments of the economy to the medical-industrial complex. 3. What do Doctors and Oil Sheiks have in common? Both belong to cartels that limit the supply of their product. Oil sheiks go to Geneva for OPEC meetings. Doctors, and their trade associations like the AMA, go to state capitols to write laws to restrict competition. The effect of each is the same: control the supply of their product (oil or the number of pediatricians) in order to drive up the price of their product. One way to control supply is to limit the number of doctors and competing practitioners, justifying such restrictions as protecting the health of American consumers. Over time the AMA cartel has lobbied hard to limit the number of doctors, clinics, and other competitors. 4. The Democrat Party found two sugar daddies Franklin D. Roosevelt wanted one thing more than any other: to be elected, lots of times. To do this he built a coalition that kept Democrats in power for most of the next 70 years. Over time, this coalition changed and evolved. Today two key groups provide much of the money: trial lawyers and unions. These funding sources have deep tentacles wrapped around our healthcare system. Trial lawyers want the unfettered right to sue doctors and other deep-pocket providers. No other country in the world handles medical errors like the United States. The cost of malpractice and defensive medicine has been a major cause of increased healthcare costs since the 1950s. Reforming the malpractice industry is the easiest action we could take to reduce healthcare costs, but Democrats simply do not wish to lose the political donations. There is a debate over the cost of malpractice to Americans. One study estimated we would save only 1% to 2% of healthcare costs. (Only in Washington, DC would $50 billion not be worth pursuing.) So lets save $50 billion to start. Doctors would no longer have to pass malpractice insurance costs on to their patients. Most importantly, doctors could stop prescribing unneeded tests and procedures to defend against litigation. (Remember all those MRI and CT scans not needed in the rest of the world?) The real cost of defensive medicine is hard to pin down but estimates range from $50 billion to in excess of $250 billion each year. Our politicians forego these immediate savings that have no possible impact on the quality of care.

Page 41

Unions want the unfettered right to unionize workers. Remember the purpose of any union: get more members to pay dues. The best method to gain more members is to create work rules that limit what tasks a particular worker can perform and the volume of tasks they can perform during the work period. Anything that restricts activity results in hiring more, and higher-paid, workers to perform the same volume of work. The current administrations favorite union is the SEIU. Their top priority, per their web site, is to fight for health care. Isnt that noble, a union that cares more about our nations healthcare than its own members? Altruism plays no role. The SEIU is trying hard to organize healthcare workers; ten percent of the American workforce is an appealing target. Over the long-term, trial lawyers, unions, and their contributions may be the biggest impediment to lowering medical costs. Both have massive financial incentives to increase costs and degrade quality. Unions demand more workers and trial lawyers bring more suits. 5. We have systematized fraud and waste Any industry that claims 17% of the worlds largest economy will attract people who wish to distort the underlying economics for their own benefit. Such distortions can range from legally controlling the supply of licensed providers to schemes to defraud the system. Many studies demonstrate the inefficiency and declining integrity of the American healthcare system. Seven hundred billion dollars. Thats a ballpark estimate of how much money is wasted in the U.S. medical system every single year, according to a new Thomson Reuters report. A sum equal to roughly one-third of the nations total health-care spending is flushed away on unnecessary treatments, redundant tests, fraud, errors, and myriad other monetary sinkholes that do nothing to improve the nations health. 4 Remember, the OECD study claimed we spend $750 billion more on healthcare than we should, based on national income. There are hundreds of other studies that come to the same conclusions. Fixing these problems takes hard work. One persons waste is someone elses income. Stop waste and you eliminate profits for political contributors to both parties. And the trend today is to turn more care over to government controlled programs. Part of the waste is truly criminal: fraud. Politicians see Medicare as the example of an efficient government program: Medicare only spends 3% for administration. Medicare is the model for the ultimate liberal goal of 100% government provided healthcare. Politicians rail against insurance companies that spend a higher percentage on administration, but such companies know one must spend more to prevent fraud (estimated at only 1.5% of cost for privately paid care.) Surely, our hyperefficient government watchdogs let no fraud creep into the programs they manage today? The following highlight recent acknowledgements of fraud the government caught, after the fact; so imagine how much real theft exists:

Arnst, Catherine, 10 Ways to Cut Health-Care Costs Right Now, BusinessWeek, November 23, 2009, p. 34.

Page 42

The government paid more than $47 billion in questionable claims, including medical treatment showing little relation to a patients condition, wasting taxpayer dollars at a rate nearly three times [what was reported] the previous year. Excerpts of a new federal report, obtained by the Associated Press, show a dramatic increase in improper payments in the $440 billion Medicare program that has been cited by government auditors as at high risk for fraud and waste for 20 years. 5 This is the estimate of the insiders and more recent reports increased the reported fraud. It is estimated anywhere from 3 percent to 40 percent of Medicaid payments are lost to fraud and abuse. However, the actual amount cannot be known because the Centers for Medicare and Medicaid Services has failed to properly track improper paymentsin clear violation of federal law. 6 In 2007, National Public Radio reported Medicare is a trusting system whose main mission is not to root out fraud; it is to pay claims quickly and smoothly. If fraud and abuse account for 20 percent of the current Medicare budget, that would amount to more than $70 billion. 7 60 Minutes reported Medicare and Medicaid fraudsters are beating U.S. taxpayers out of an estimated $90 billion a year using a billing scam that is surprisingly easy to execute. In fact, Medicare fraudestimated now to total about $60 billion a yearhas become one of, if not, the most profitable crimes in America. 8 Again, this is only how much we know about. No studies quantify the abuse one can see every day in nursing homes where a huge portion of Medicare dollars are spent in the last year of life: Doctors roam nursing homes to say hello, and then bill Medicare; 82-year-old, bed-ridden patients receive occupational and physical therapy; a psychologist remains a friend after one requested visit, stops by to chatand bills for each friendly visit without informing the patient; or we run test after useless test on someone with only months to live, who is no longer aware, and who has no relatives to review the care. Providers rail against cuts to the prices they receive for services, but as the reimbursement rates drop they just increase the number of visits and procedures. It is doubtful that any of these billing tactics or unneeded services in the last stages of life are included in fraud statistics. But they occur and the payments are trustingly and smoothly paid once the proper forms are completed. Addressing these 5 items on a market-driven, non-political basis, could realistically take 20% to 40% out of the cost of healthcare. We would then see 20% to 40% declines in insurance costs and similar savings in federal budgets and corporate costs. Conclusions on the American Healthcare System What other industry generates more business by fixing its own mistakes (e.g. a misdiagnosis)? Where else can you grow profits by making customers worse off (e.g. infections during hospital stays)? Where else do honest errors turn into opportunities for trial lawyers? And we have not even addressed the impact of patient behavior (e.g. smoking, obesity, lack of exercise, etc.) on healthcare costs. Remember,

Govt: Medicare paid $47B in suspect claims Yen, Hope, Associated Press as reported in the Naples Daily News, Novermber 15, 2009, p. 18A. 6 Bolstering the Safety Net: Eliminating Medicaid Fraud Senator Tom Coburns Oversight Action Hearings, on http://coburn.senate.gove/oversight March 28,2006. 7 Allen, Greg, Medicare Fraud Acute in South Florida October 11, 2007 reported on www.npr.org. 8 Medicare Fraud: A $60 Billion Crime, October 25, 2009 as reported on www.cbsnews.com .

Page 43

you pay for every one of these problems through higher taxes, higher insurance bills, and higher prices for the products made in America. The cost of healthcare could be cut in half, but what do our politicians want to fix first? They want to cover 47 million Americans without insurance rather than fix the cost of care for all 300+ million Americans. They want the most fraud-riddled and inefficient systemour governmentto take over more of our care! Millions of the uninsured are healthy young people who do not want to be covered at rates determined by this wasteful cost structure. Millions more are illegal visitors to the country. Most of the rest are middle-class people, often uninsured for a brief period between jobs, who cannot afford individual policies. Some are very sick people who, while not poor, have no reasonable options for health insurance. If these people get sick, they go to a hospital and do not pay their bills. So they have crafted their own old-fashioned hospitalization plan, without premiums. The rest of us pay. There are solutions, but to fix the problem we, the American citizens who pay the bills, must demand change. Not hope for it, but demand it.

Page 44

Creating a federal pension and disability program was not constitutionally valid. Therefore, FDR created the Social Security System as a trust fund to collect money from participants while they worked in order to pay pensions when they retire. The first problem is that FDR did not set the system up properly and early retirees received much more in benefits than they had contributed. The second problem is that for todays Americans the return on investment for their contributions is abysmal. This is particularly true for minority men. Is Social Security a Ponzi scheme where early investors earned an excellent return during their retirement at the expense of todays retirees? A recent Urban Institute (not a conservative group) analysis of the demographics, benefits, and taxes of the Social Security system provide data that address these issues. The following chart compares lifetime benefits to the lifetime taxes paid for a single man earning the average wage at 4 different retirement years:

If you turned 65 in 1960 1980 2010 2030

Lifetime Benefits Received $113,000 $203,000 $265,000 $336,000

Lifetime Taxes Paid $18,000 $96,000 $294,000 $398,000

(These are comparable present values as described in the Urban Institutes notes on the next page.) Retirees in 1960 received a 627% return on their investment of tax dollars. Congress continued to increase benefits through cost-of-living (or COLA) increases. But the increased benefits went largely to low wage workers who made minimal contributions. By 2010, an average male retiree would expect to receive less than he had put into the system, or a negative return on investment. And this return will only get worse by 2030. So early investors clearly received exaggerated benefits at the expense of later participants. The Urban Institute looked at several lifestyle decisions, or cases, to see the impact of family status on the comparison of benefits received to taxes paid. This data is provided below for people retiring in 2010. Even under the best option (a one-earner couple) the ratio of benefits received to taxes paid does not show a good return after working, and paying taxes, for 40+ years:

Page 45

Social Security Benefits Collected vs Taxes Paid

$800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Benefits Taxes

Lifetime Social Security Assumptions: Case #: Benefits Taxes Social Security Benefits at age 65 for individuals and couples turning 65 in 2010 Single man, average wage Single woman, average wage One-earner couple, average wage Two-earner couple, one average/one low wage Two-earner couple, two average wage Two-earner couple, one high/one average wage Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 $ $ $ $ $ $ 265,000 290,000 447,000 470,000 555,000 665,000 $ $ $ $ $ $ 294,000 294,000 294,000 426,000 588,000 750,000

Source: Social Security and Medicare Taxes and Benefits Over a Lifetime C. Eugene Steuerle and Stephanie Renname
Notes: All amounts are in constant 2011 dollars as noted, adjusted to present value at age 65 using a 2 percent real interest rate. Each calculation assumes survival until age 65 and then adjusts for chance of death in all years after age 65. It also assumes that benefits scheduled in law will be paid even if trust funds are exhausted. Workers are assumed to work every year from age 22 to age 64 and retire at age 65 or the Normal Retirement Age. An average-wage worker earns the average wage in the economy every year, based on Social Securitys measure of the average wage. The low-wage worker earns 45 percent of the average wage, while the high-wage worker earns 160 percent of the average wage. The tax-max wage worker earns at the taxable maximum every year.

http://www.urban.org/publications/412281.html

Page 46

In these six cases, only couples with one working spouse or with one spouse making an average income while the other makes a low income receive slightly more in benefits than they pay in taxes. In general, low earners receive a slightly better return on investment but higher earners get back much less than they put into the system. Even with subsidies to low earners, every citizen should expect to at least receive some positive return after making tax payments throughout their working career. Remember, this system was not sold to America as a welfare program. FDR told us we would invest while we worked, to get a fair return when we retired. The actual legislation never met this lofty goal and the economics grew worse over time as politicians used it to benefit lower income voters. Later politicians made adjustments to the system to create just another welfare program. The largest impact was to change the tax status of participants. Since we pay after-tax dollars into the program, the original intent was that benefits would be tax-free. In later fits of fairness it was decided that the rich needed to pay taxes again on the benefits they received, even as benefits were capped for high income earners. And what level of income qualifies you as rich if you receive Social Security? Think about our current tax-the-rich debate? According to Social Security, you become rich, and your monthly payments become taxable if you are single person and earn $25,000 per year or if you are a couple and earn $32,000 a year. Pretty rich! The Buffet Rule will soon become the Joe the Plumber Rule. Of course the real issue is how many years YOU will live after retirement, to receive and enjoy your benefits. If you die the day you are eligible to receive benefits your return will be zero. We all know that on average women outlive men, and we can see the average female retiree will receive a higher benefit even though she paid the same taxes as a man. Of course, high-earning women lose this advantage and join the ranks of those who subsidize others. Other groups are penalized for the simple reason that they do not live as long as the averages; minorities, and especially minority men, are especially hurt. Based on the 2011 National Vital Statics Reports (www.cdc.gov/nchs/fastats/lifexpec.htm ), the following table provides life expectancy for white and black men and women in 2007: At birth age 0 At age20 White Male 75.9 76.8 White Female 80.8 81.5 Black Male 70.0 71.7 Black Female 76.8 78.1

Taking the above expected lifespans, on average each group can expect to live the following years after retiring at 65: At birth age 0 At age 20 White Male 10.9 11.8 White Female 15.8 16.5 Black Male 5.0 6.7 Black Female 11.8 13.1

So a typical black male born in 2007 can expect to receive only 5 years of benefits, after contributing $294,000 from working for 45+ years. If in 2007 an average black man enters the work force at age 20 he can expect to receive 6.7 years of benefits. And, if he is a high earner his negative return shrinks

Page 47

even faster. Who would willingly make this investment decision? But when he dies his family still receives a $255 death benefit, after which his contributions go to support someone else. The following link provides a much more detailed discussion of the rate of return and value of Social Security to working Americans. The Heritage Foundation is generally considered a conservative organization, but they provide detailed assumptions that allow one to verify their results. Few would argue that Social Security is a good financial deal for its contributors, and even so it is on a path to insolvency. http://www.heritage.org/research/reports/1998/01/social-securitys-rate-of-return

Even though the federal government has again failed to provide a fair and functioning pension system for it citizens, Social Security must be preserved. We have a contractual obligation to millions of Americans who have contributed into the system. Of course politicians can change the terms of that contract whenever they want. Yet we need to provide guaranteed minimal support to the elderly who do not have strong earnings capability, or who have been overwhelmed by the welfare-state mentality created during the past 50 years. But, there has to be a better system to give contributors a better return on investment while protecting those who need guaranteed support. Social Security should return to an honest trust fund system, run independently of all elected officials. The federal government should not be able to dip into Social Security payments made by workers to fund other programs. The money received should be invested to generate income for the system. Benefits should be based on the real value of available assets.

Page 48

We have focused on the failure of government-sponsored social programs intended to remove people from poverty, educate our children, improve Americans health care, and provide for their retirement. While these efforts have achieved the highest failure rates, they are not the only problems. The following provides a snapshot of programs run by the federal government, measured in terms of their costs as a percent of GDP. (This data has been referred to in previous chapters and is available for all years since 1962. For this summary we will look at recent 5 year increments. This allows us to capture some good years, some average years, and a recession year.)
Table 3.2OUTLAYS BY FUNCTION AND SUBFUNCTION: 19622015 (in millions of dollars) Function and Subfunction Total, National defense Total, International affairs Total, General science, space and technology Total, Energy Total, Natural resources and environment Total, Agriculture Total, Commerce and housing credit Total, Transportation Total, Community and regional development Total, Educ., training, employ., and social services Total, Non Medicare Health Spending Total, Medicare Total, Income security Total, Social security Total, Veterans benefits and services Total, Administration of justice Total, General government Total, Net interest Total, Allowances Total, Undistributed offsetting receipts Total outlays 1991 4.6% 0.3% 0.3% 0.0% 0.3% 0.3% 1.3% 0.5% 0.1% 0.7% 1.2% 1.7% 2.9% 4.5% 0.5% 0.2% 0.2% 3.2% 0.0% -0.7% 22.1% 1996 3.4% 0.2% 0.2% 0.0% 0.3% 0.1% -0.1% 0.5% 0.1% 0.6% 1.5% 2.2% 2.9% 4.5% 0.5% 0.2% 0.1% 3.1% 0.0% -0.5% 19.9% 2001 3.0% 0.2% 0.2% 0.0% 0.2% 0.3% 0.1% 0.5% 0.1% 0.6% 1.7% 2.1% 2.6% 4.2% 0.4% 0.3% 0.1% 2.0% 0.0% -0.5% 18.1% 2006 3.9% 0.2% 0.2% 0.0% 0.2% 0.2% 0.0% 0.5% 0.4% 0.9% 1.9% 2.5% 2.6% 4.1% 0.5% 0.3% 0.1% 1.7% 0.0% -0.5% 19.8% 2011 est 5.1% 0.4% 0.2% 0.2% 0.3% 0.2% 0.1% 0.7% 0.2% 0.9% 2.7% 3.4% 4.0% 5.0% 0.8% 0.4% 0.2% 1.7% 0.1% -0.6% 25.9%

Remember, the United States became the worlds leading economic power in the early 20th century when total federal spending averaged 3.9 % of GDP, except during WWI. Today we spend 25+% and watch GDP growth slowly decline.

Page 49

Looking quickly at the other areas of expenditures not previously addressed, we find that since 1962: We spent $752 billion on foreign aid and State Department operations. How many friends have we created? How much of that money is in the Swiss accounts of various dictators? What positive economic impact accrued to America? Space flight and related activities consumed $442 billion. Since we landed men on the moon in the late 1960s what substantial accomplishments have we achieved? Private companies launch satellites cheaper than NASA, but we subsidize NASAs price to keep private competition out of the market. We only funded $192 billion in General Science and basic research. This is one area where federal spending might be in line with the powers granted by the Constitution and we do have examples of success. Energy-related issues consumed $197 billion. Are we more energy-independent? No, we import more oil than during the 1960s. Regulators have aggressively stopped drilling. The recent growth in oil and gas production has come on private land and in spite of government policies. Instead we fund campaign contributors to develop alternative energy sources that require massive subsidies and still fail. We spent $882 billion on natural resources and the environment. This includes water resources, conservation and land management, recreation resources, pollution control and abatement, and other natural resources. We have improved the environment since the 1960s, but today these agencies have unbridled power and comprise one of the most direct threats to economic success that most companies face. Agriculture programs consumed $705 billion. Only $105 billion has been targeted at research to increase food supply and quality. The remaining $600 billion went to welfare payments for individuals and farmers. This corporate welfare does not include import quotas and tariffs that cost consumers billions of dollars annually through increased food prices. Commerce and housing credit costs consumed $596 billion. Together with the Education bureaucracy, these boondoggle departments should be the first to be shuttered. We invested $1,656 billion in transportation projects to support infrastructure needs. Remember, the last major infrastructure projectthe Interstate Highway Systemwas largely complete by the end of the 1960s. Much of this money went to earmarked projects or other bridges-to-nowhere, to buy votes for incumbents rather than to solve real infrastructure needs. We need to spend this money, but must reform how we allocate project dollars. The administration of Justice consumed $779 billion. This is an activity that the Constitution allows the central government to accomplish. While the current emphasis or level of spending may not be correct, we do need funds to protect American freedoms. We spent $579 billion to run the general government. We leave it to you to determine if this money was well spent.

Page 50

Almost every one of these categories saw massive spending spikes in the last two years as we tried to stimulate the economy. As with other federal programs, these increases did little to improve the economy yet left us with trillions of dollars of new debt and increased interest obligations to China. We have other systemic problems that afflict all government programs: fraud, waste, and deceitful assumptions. We will not even address the substantially higher level of pay and benefits received by government workers than their private-sector counterparts; however, this is certainly embedded in all three of the above. Deceitful Assumptions What are deceitful assumptions? We have already discussed the most costly deceitful assumptions used by our leaders to sell American on their important programs: in 1965, politicians estimated that by 1990 Medicare would only cost us $12 billion while the real cost was $110 billion. The same folks estimated that by 1992 Medicaid Hospitalization would only cost $1 billion and the real cost was $17 billion. Similarly, when the politicians sold many on Obamacare they forecast its cost at only $900 billion over 10 years. Of course we cannot afford another $900 billion, but their accounting games and erroneous assumptions came home to roost quickly: two years later new forecasts show almost twice this cost. What will it be when the program begins in 2014, when Americans learn how they can game the system (we will not disclose the best scam), and companies end their healthcare benefits because it is cheaper to pay the fine and throw employees into the subsidized government program? These are deceitful assumptions. When Enron similarly misled investors people were arrested for fraud. If politicians mislead Americans they get re-elected. On a daily basis we hear about construction projects that overrun budgets. Once a project starts it will be finished. Would you believe that some contractors purposely low-bid a job knowing they will be able to recoup any losses and earn huge future profits through change orders once construction has begun? A wonderful example of government management is the Capitol Visitors Center. This project broke ground in 2000, to be finished in four years at a cost of $265 million. We could discuss why Congress needs an auditorium, gift shop (Nancy Pelosi bubble-head dolls?), and more display space. As an example of government projects it is a perfect metaphor: the final cost was $621 million when it opened, four years late. Congress cannot manage its visitors center; do we believe it can manage our country? Anyone paying the bills in Massachusetts remembers the Big Dig in Boston and realizes this problem is not limited to the federal government. Bad assumptions and specifications are a major issue in the Defense Department and a primary reason for escalating procurement costs. The GAO routinely points out problems to Congressional oversight panels who bemoan the problems to cable news anchors. Then nothing happens. Actually, the same thing happens over and over again.

Page 51

Fraud and Abuse We have already discussed hundreds of billions of federal medical spending losses due to fraud and abuse and that is not the only source of improper payments. (Recent GAO reports http://www.gao.gov/new.items/d11842t.pdf and http://www.gao.gov/new.items/d11575t.pdf describe billions in improper payments in medical and other programs.) This amount does not include $100 billion to $200 billion in duplicative and redundant programs the GAO identified. Youve guessed right: nothing being done about these. A report from the Cato Institute summarizes many fraudulent practices that steal your tax money every year: http://www.downsizinggovernment.org/fraud-and-abuse . Government healthcare might be the largest source of fraudulent payments, but it is not the only program fraught with theft, waste, and error. In the following charts (from http://paymentaccuracy.gov) government acknowledges improper payments in certain programs since 2004. While the graph is fuzzy (which is appropriate) the trend is obvious: after the government started ramping up spending (2008) the level of fraud increased along with the spending.

Highlights from this government website include these levels of theft and error they admit to: The largest anti-poverty cash payments come from the Earned Income Tax Credit that is efficiently administered by the IRS. They have acknowledged rapidly growing fraudulent payments. The most recent estimate is that well over 20% of payments, or $15.2 billion, are improper. At their own site the federal government admits it does not yet have a program to reduce this theft, but they are thinking about it. (http://paymentaccuracy.gov/content/programs-not-reported ). In this era of extended unemployment, the federal government spent $114.1 billion and estimates that $13.7 billion, or 12%, of payments are improper. So we give people money for not working, and government admits that people manage to steal at least $1 out of every $8. (http://paymentaccuracy.gov/programs/unemployment-insurance ).

Page 52

Social Security Disability, on a very fast track to bankruptcy, spent $50.3 billion last year, and according to the government made $4.6 billion in bad payments. There is also a very strong pattern: just when peoples unemployment runs out they realize they are really disabled so we can continue to pay them not to work. (http://paymentaccuracy.gov/programs/supplementalsecurity-income ) Even the School Lunch Program, which feeds poor children, has problems. This program relies on parents reporting their income, has no audit function, and estimates that 16% of its $10.7 billion in expenses are fraudulent. As a result 31 million students67%receive free, or partially free, meals. Since just 15% of Americans live in poverty, including the elderly poor, why do 67% of students qualify for free meals? There is another dirty little secret here: states spend less to feed kids than they receive from the government. Local districts often abet this fraud; some even offer financial incentives to apply for free lunches. (http://paymentaccuracy.gov/programs/national-school-lunch-program ). In the you-have-to-be-kidding category, the Food Stamp (now SNAP) program estimates only 3.8% of their $64.7 billion program is fraudulently paid. They must not be reading the newspapers. They are proud of the fact that benefits are now paid through electronic debit cards. We all know that they could never be used by anyone who is not authorized or by fraudulent merchants. Of course this agency also claims: For every $5 in new benefits, $9.2 is
generated in total economic activity. Maybe they mean that you must spend $4.20 in gasoline to buy every $5 in food. (http://paymentaccuracy.gov/programs/supplemental-nutrition-assistanceprogram ).

Many government programs actually have targeted levels of improper payments. Rather than shooting for 0% dishonesty, the best we can do is set plans to keep improper payments at low levels. For example Unemployment wants to process only 9.7% of its payments improperly in 2012, Medicaid only wants 7.4% of its payments to be errors, Supplemental Security also has a target to process 7.4% of its payments inaccurately, the School Lunch Program wants improper payments to hit 15.5%, etc.

In these programs government estimates 3.8% to 26% of the money is improperly used. In an earlier chapter we saw that the American people believe 51% of government spending is wasted. My money is on the American peoples estimate. If the government does not hit its targets for fraudulent payments, what are the consequences? Absolutely nothing. No one loses their management position. No one takes a pay cut. We have reviewed just a few examples. And every one of these departments have Inspectors General and auditors to root out problems. We have entire departments, like the General Services Administration (GSA) and the GAO to stop waste. But as the spending grows the fraud and waste grow right along with it. The only way to stop the fraud and waste is to stop the programs.

Page 53

America has a spending problem. Our politicians are addicted to using your money to buy votes and to fund programs that fail. The only way to beat an addiction is to stop enabling the behavior. It is not hard to find where the people you elect to office waste your money, using it to keep themselves in power. There are solutions to these problems. If 535 average American citizens were picked at random they could solve these problems. One set of options is included in the companion pamphlet Solutions. But to make any real change we need leaders who dont care about their next election. They must be willing to make hard choices and put in place controls that will be very hard to eliminate. Franklin Roosevelt knew this would be necessary when he passed Social Security. He realized that if the program was funded by a tax paid by future retirees no one would be able to eliminate it once people had invested. If you dont think $15 trillion in debt is important, do nothing. If you dont mind wasting the money we spend on programs that ultimately make problems worse, do nothing. If you think the solution to all our problems is to tax the rich, PLEASE do nothing. Today many want to divert you into thinking the answer to every question is to fairly tax the rich to provide for the non-richthemselves. Remember a couple things: First, those calling for fairness often seek only to enhance their own power and authority. They wish to take an ever-increasing share of everyones wealth and divert it through the government to the proper programs. This allows them, and their friends, to siphon off a portion of the funds. It also allows them to control the behavior of those who become dependent on the programs. In short, this gives them power to remake America. Second, remember the lesson from Social Security: when government decided to tax rich folks who receive Social Security they defined rich as an individual making over $25,000, or a couple earning $32,000! (Two people working 40 hours per week at minimum wage will earn $30,160 in a year.) Third, the problem is not that we have too little revenue. The problem is that we spend too much of your tax dollars; and more importantly spend it on failed programs. We have demonstrated that your government does not solve problems it throws your money at. It generally makes problems worse and contributes to a culture of fraud, theft, and waste.

We already have a tax system in which the richest few percent pay the bulk of taxes, and half of Americans pay no income tax at all. We dont need more tax dollars. We need to stop spending the tax dollars we collect today, and will have to collect in the future, to pay for past waste. This needs to be the laser focus of everyone you send to Washington. This must be the only litmus test for everyone you send to Washington. It really is your money.

Page 54

Appendix I The following are the data for comparisons among states:
National Center for Education Statistics 2009-10 Total student/ teacher ratio 15.4 15.8 16.3 20.7 12.9 20.0 17.0 12.9 14.7 10.9 14.3 14.4 15.8 18.2 15.2 16.8 13.7 13.7 15.3 13.9 11.6 14.6 13.7 17.8 15.8 14.9 13.5 13.5 13.3 19.4 12.7 12.1 14.7 12.9 14.1 11.4 15.8 15.3 20.3 13.6 12.8 15.4 13.3 14.9 14.6 22.9 10.6 17.6 19.4 13.9 14.9 12.3 2011 8th Grade Math Testing 283 269 283 279 279 273 292 287 283 260 278 278 278 287 283 285 285 290 282 273 289 288 299 280 295 269 282 293 283 278 292 294 274 280 286 292 289 279 283 286 283 281 291 274 290 283 294 289 288 273 289 288 2011 8th Grade Reading Testing 264 258 261 260 259 255 271 275 266 242 262 262 257 268 266 265 265 267 269 255 270 271 275 265 270 254 267 273 268 258 272 275 256 266 263 269 268 260 264 268 265 260 269 259 261 267 274 267 268 256 267 270

State or jurisdiction United States Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

2007-08 Spending per Student $11,950 10,481 17,299 9,641 9,966 11,458 11,061 16,530 14,481 20,066 11,626 11,498 12,877 8,525 11,874 10,040 11,126 11,009 10,076 11,329 12,696 15,032 14,240 11,445 11,943 8,587 11,070 10,941 12,287 10,377 13,007 18,971 10,798 18,073 9,045 10,378 11,982 8,372 11,156 13,712 14,897 11,128 9,684 8,746 10,596 7,756 15,465 12,030 11,200 10,341 12,312 17,478

Page 55

Appendix II
2006 Elementary Spending per student $6,437 2006 Secondary Spending per student $8,015

Country
OECD average
1

Population (millions) 22.0 8.2 10.4 34.3 10.2 5.5 5.3 65.6 81.3 10.8 10.0 0.3 4.7 61.3 127.4 48.9 0.5 115.0 16.7 4.3 4.7 38.4 10.8 5.5 47.0 9.1 7.7 79.7 63.0 313.8 138.1 5.4 7.0 2.2 2.0

PISA Reading 2009 515 470 506 524 478 495 536 496 497 483 494 500 496 486 520 539 472 425 508 521 503 500 489 477 481 497 501 464 494 500 459 526 429 484 483

PISA Math 2009 514 496 515 527 493 503 541 497 513 466 490 507 487 483 529 546 489 419 526 519 498 495 487 497 483 494 534 445 492 487 468 562 428 482 501

PIRLS 4th grade

Notes 1 2

TIMSS 8th Grade 496

Australia 6,311 8,700 Austria 8,516 10,577 Belgium 7,072 8,601 Canada NA NA Czech Republic 3,217 5,307 Denmark 8,798 9,662 Finland 5,899 7,533 France 5,482 9,303 Germany 5,362 7,548 Greece NA NA Hungary 4,599 3,978 Iceland 9,299 8,493 Ireland 6,337 8,991 Italy 7,716 8,495 Japan 6,989 8,305 Korea, Republic of 4,935 7,261 Luxembourg 13,676 18,144 Mexico 2,003 2,165 Netherlands 6,425 9,516 New Zealand 4,952 6,043 Norway 9,486 11,435 Poland 3,770 3,411 Portugal 5,138 6,846 Slovak Republic 3,221 2,963 Spain 5,970 7,955 Sweden 7,699 8,496 Switzerland 8,793 13,268 Turkey 1,130 1,834 United Kingdom 7,732 8,763 United States 9,709 10,821 Other countries of note: scored better than US on one test Russia Singapore Bulgaria Latvia Slovenia

538 523

504 546 522 548 551 511 551 517

480 570 597

557 547 532 498 519 531 513 549

469

491 432 513 508 512 593 464 501

539 540 565 558 547 541 522

Notes: 1. Average French & Flemish speakers 2. England only (i.e. not including Scotland and Wales) Sources: www.oecd.org; TIMMS & PIRLS International Study Center CIA World Fact Book; ed.gov

Page 56