Reductions in U.S. Domestic Spending

John Williams Ellwood

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781351318587
• Topic: Politics & International Relations
• Subtopic: Economic Policy
• Index: Politics & International Relations

This book is the first product of a multiyear study by the Princeton Urban and Regional Research Center of how new domestic priorities have affected American states and localities. It concentrates on federal changes affecting the services, finances, and politics of state and local governments.

PART 1

The Federal Budget and the 1981 Policy Changes

1
Introduction

By John W. Ellwood

During the first year of his presidency, Ronald Reagan scored a series of congressional victories that culminated with the passage of the Omnibus Reconciliation Act of 1981 (P.L. 97-35). At the signing ceremony, the president stated his belief that its enactment represented “a turn-around of almost half a century” of federal expansion and marked “an end to the excessive growth in government bureaucracy and government spending” that had characterized this period.¹ Almost immediately, however, a debate began over the size of the budget reductions and their potential effects on different classes of citizens and on the finances, services, and politics of state and local governments.

The debate became more diffuse because of confusion as to exactly what had been accomplished. Some of this confusion resulted from the use of different sets of economic assumptions by different actors in the budget process. The Congressional Budget Office (CBO) forecast 2.9 percent real growth (that is, growth even after taking inflation into account) in the gross national product (GNP) for calendar year 1982, while the administration more optimistically forecast 4.2 percent real growth for the same period. Because federal spending is highly sensitive to the state of the economy, CBO’s estimates of total budget outlays for fiscal year 1982 were $13.5 billion higher than those of the administration. Yet CBO and the administration were but two of many actors in the process. At various times during the budget debate, differing sets of economic assumptions were put forth by House Democrats, House Republicans, Senate Republicans, Senate Democrats, and the Office of Management and Budget (OMB).

Confusion was widespread also because of the complexity of the changes that were advocated by the administration and enacted by Congress in the reconciliation act. In order to bring about lower levels of domestic spending, Congress modified programs in 232 budget accounts, some of them significantly. Some of the changes were made under such time pressure—as when the House of Representatives adopted the version of the reconciliation act that came to be known as Gramm-Latta II—that many members of Congress confessed that they were not sure what they were voting for or against.

During and after the budget debates of 1981, it appeared to be in everybody’s interest to magnify the extent of the changes and reductions. Those who were in favor of the changes wanted to show that their political efforts had been successfully realized. Those who opposed the new policies sought to magnify the potentially harmful effects of these policies so as to mobilize opposition groups. For example, those who had supported the establishment of nine new block grants, which were intended to return decision making over many programs to the states, tended to inflate the size and importance of the grants in order to justify the political capital that had been used in their creation and to build momentum for the enactment of more block grants. Those who opposed these programs, on the other hand, exaggerated their impact so as to mobilize groups to oppose future action.

But doubts about claims of a massive change began to be heard. David Stockman, the director of the Office of Management and Budget, said of the Omnibus Reconciliation Act of 1981, “There’s less there than meets the eye.”² Six months later, when a declining economy caused federal outlays to rise and receipts to fall, the administration asked for even larger budget reductions and more significant shifts in federal responsibilities in its fiscal year 1983 budget.

Just how significant were the domestic policy changes made in 1981? What effects will they have? This book provides background material and analysis related to these questions. Because the largest domestic reductions were made in programs administered by state and local governments, the book concentrates on federal changes affecting the services, finances, and politics of these governments.

The book is the first product of a multiyear study by the Princeton Urban and Regional Research Center of how these new domestic priorities have affected American states and localities. The study employs teams of field evaluators to assess how these changes affect the governments and people of fourteen states and fourteen major cities, thirteen suburban jurisdictions, and thirteen rural towns within these states. Much of the material in this volume was initially assembled to inform the field evaluators of the exact nature of the federal changes that could be expected to affect their jurisdictions. It quickly became evident that the political conflict over the adoption of the budget reductions had created such general confusion that this material could be of use to a much wider audience. Government agencies such as the Office of Management and Budget and the Congressional Budget Office, which had the capability to summarize the programmatic and budgetary effects of the 1981 changes, were so overwhelmed with the requirements of supporting further rounds of changes that they lacked the time to undertake a close and widely accessible analysis of past events.

The aim of this book is to provide perspective on the size, nature, and impacts of the budget reductions enacted in 1981. It does so by providing a consistent set of budget data that can be used to determine the magnitude and distribution of the budget changes and by analyzing the major changes that are expected to affect state and local governments and the people they serve.

The volume is divided into three parts. Part 1 provides an overview of the changes and the processes that were employed to bring them about. In addition to this introduction, it consists of five chapters. Chapter 2 contains a survey of the growth of federal domestic spending, an analysis of the causes of that growth, and a discussion of possible reasons these factors had so much less effect in calendar 1981 than in previous attempts to control the growth in spending. Chapter 3 explains how Congress controls the level of federal spending and how it legislated the domestic reductions of 1981. Chapter 4 analyzes the size and distribution of the budget reductions.

Chapter 5, written by Robert F. Cook, sets out the effects of the Economic Recovery Tax Act of 1981. This legislation will not only bring about the largest reduction of federal revenue in American history, but, because of the structure of the tax codes of many states and localities, it could also cause significant loss of revenue in these jurisdictions. Because the operating budgets of all but two states and almost all local governments cannot be in deficit, such a loss of revenue would require these jurisdictions either to separate their tax provisions from those of the federal government, to raise their taxes, to reduce their spending, or to do all three.

The last chapter in part 1 discusses a frequently overlooked topic—the implementation of changes in budget policy through regulations. The actual effects of the domestic policy changes that were enacted in 1981 will in large part depend on how they are implemented through the regulatory process. In this chapter Catherine Lovell summarizes the federal regulatory process and analyzes the approaches that have been employed by the Carter and Reagan administrations to “reform” that process.

Part 2 of the volume describes the programmatic and budgetary changes in forty budget accounts affecting state and local governments. The accounts were selected either because the reconciliation act reduced their fiscal year 1982 funding by a minimum of $100 million or, in the case of the new block grants, because they fund programs reflecting an important change in governmental policy. Each section summarizes the programs in the account prior to the changes enacted in 1981, sets out the changes that were made by Congress, describes relevant changes in regulations, and assesses how the changes have affected the program’s goals and nature. Each description is accompanied by a summary table that incorporates the Congressional Budget Office estimates of the budgetary effects of the changes for fiscal years 1982, 1983, and 1984.

Part 3 of the book contains the initial report of the field network evaluation study team on the effects of the 1981 changes in a sample of fourteen states and fourteen large cities within them. This report, written by Richard P. Nathan, Philip M. Dearborn, Clifford A. Goldman, and associates, analyzes data collected by field associates between October 1, 1981 and December 31, 1981.

Each of the field associates is a political scientist or an economist who lives in one of the states under study. After gathering data from interviews with government officials and others and from budget and program documents, the associates present their analytical findings, using a common reporting format. The authors of the preliminary report in this volume drew generalizations and conclusions from these field reports. Their report presents initial findings on the groups most affected by the domestic policy changes made by Congress in 1981; it includes separate sections on the effects of changes in entitlement programs, medicaid, employment and training programs, block grants, and capital grants.

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1. New York Times, August 14, 1981, p. A-10.

2. William Greider, “The Education of David Stockman,” The Atlantic Monthly, December 1981, p. 51.

2
Controlling the Growth of Federal Domestic Spending

By John W. Ellwood

The Reagan administration’s 1981 successes in persuading Congress to cut taxes and reduce domestic spending followed several decades of almost continuous spending increases. By 1981 many observers of the American political system had come to believe that the system had a bias toward ever greater levels of spending. For this reason, many commentators have called the Reagan administration’s victories an historic reversal of this trend.

This chapter reviews the pattern of the growth in federal spending since fiscal year 1951, sets out a commonly held view of the causes of that growth, and suggests several reasons why the growth in federal domestic spending was curtailed during the first year of the Reagan administration.

The Growth of Federal Spending

In fiscal year 1981, the federal government spent $657.2 billion for programs contained in its budget.¹ Of this amount, $159.7 billion, or 24.3 percent, was spent for national defense programs. Another $68.7 billion (10.5 percent of total outlays) went to pay interest on the national debt. An additional $57.4 billion (8.7 percent of the total) was used for a wide variety of federally run domestic programs, such as the space program; energy research and development; agricultural research and extension support; federal security operations such as the Coast Guard, FBI, and Secret Service; air traffic controllers; and the support of the federal bureaucracy.

Of the rest of the budget, the largest amount—$316.6 billion, or 48.2 percent of all budget outlays—went for income assistance programs. These programs—labeled payments to individuals in most budget documents—are of two general types:

• Payments made directly by the federal government. Included in this category are the largest federal domestic programs—social security, railroad retirement, military and civil service retirement, unemployment assistance, veterans’ benefits, student loans and grants for higher education, and medicare.² In fiscal year 1981, they accounted for 42.1 percent of all budget outlays, or $276.7 billion.
• Payments that are federally funded but administered by state and local governments. In this subcategory are many of the programs that are frequently grouped under the label “welfare”—medicaid, aid to families with dependent children (AFDC), housing assistance, and child nutrition programs. These grant programs spent $39.9 billion in fiscal year 1981, or 6.1 percent of all budget outlays. In most budget documents the programs included in this subcategory are also classified as grants to state and local governments.

A third type of federal grant goes not to individuals but to state and local governments for their operations or capital projects. In fiscal year 1981, the federal government spent $54.8 billion, or 8.3 percent of all budget outlays, for such grants. This category of spending includes three kinds of grants:

• categorical grants, which provide federal support for purposes that are specifically set ou...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Table of Contents
• Foreword
• Acknowledgments
• Contributors
• Advisory Committee for Field Network Evaluation Study
• Part 1 The Federal Budget and the 1981 Policy Changes
• Part 2 Descriptions of Forty Major Budget Reductions Affecting State and Local Governments
• Part 3 Initial Assessment of Effects
• Appendix A: Field Associates
• Appendix B: Excerpts from Conference of Field Associates
• Appendix C: Report Form