Moneybeat: How to curb government spending

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN, GUEST: Good morning, Nick. Good to be with you.

EICHER: Should we start with markets? The WSJ reported, “​​S&P 500 Turns In Worst Week So Far This Year.” Big story after the market close on Friday, but is it the important market story?

BAHNSEN: No. I mean the market has been on fire. That there was one week that was down a bit isn’t much of a story. The S&P was up Friday; it had been down some other days. And yeah: it was a down week. But I think it’s important when the market’s up or down in a given week that we do our best to always remind listeners that markets are supposed to be invested in for more than one week at a time.

EICHER: David, we have time for two listener questions and they’re two sides of the same coin. Here’s the first:

BRIGGS: Hi my name is Nate. You mentioned a few weeks back that most people in America don't have any specific ideas on what the government could cut spending on. This is something I've wondered a lot about and I'm wondering from your perspective: Do you have any specific recommendations?

All right, David, this puts me in mind of the heckling during the State of the Union last week over Social Security. Republicans jeered President Biden because he referred to a GOP senator’s plan from a year ago. The plan would sunset all federal programs—including entitlements, meaning Social Security. And Republicans do not want that hung around their necks.

Now, to be fair, and to the point you’ve made a few times here, Republicans talk a good game when it comes to cutting spending.

But to the listener question: Nate’s asking for specifics. What recommendations would you make to cut federal government spending?

BAHNSEN:I think that before one evaluates what they would cut it’s very helpful to know how we presently spend money. What do we spend money on?

It’s so difficult to have an intelligent conversation about government spending without talking about entitlements. When the former President, Donald Trump, intervenes to say we will not touch entitlements and when the Republicans accept the political challenges that referring to entitlement reform include, all we’re saying is we’re not serious about doing anything with spending. That’s where the issue really is.

We spend a grand total of 8% of total federal outlays on the interest expense of our debt. We spend a grand total of 12% on military and national defense (that’s roughly 20% so far): That goes to keeping the government itself running and funds some of its various programs, some of which are discretionary.

And while there exist certain areas within that 20% in which cuts could probably be found, 60% of federal outlays are spent in what we would call transfer payments: 19% for Social Security, 15% in healthcare, 14% in income security, and 12% in Medicare. At the end of the day—not to take away benefits from people currently receiving them—but some form of entitlement reform, no matter how politically inconvenient it is to discuss, is not just the best way but the only way. There is not going to be any reduction of spending that makes a whiff of a dent in our deficits or national debt apart from entitlement reform. Period.

EICHER: Now to the other side of the coin. We’ve talked about avoiding new indebtedness. But now I have a question about current indebtedness.

Steve Kemp of Ames, Iowa, writes: “[The] balanced budget amendment … only stops the bleeding and doesn’t necessarily do anything about the enormous swelling that has already taken place. What are the various strategies that could be considered for removing the national debt? And what are the consequences of doing so, now that the national debt is so baked-in to our economic condition?”

The listener also said in his email that he appreciates your common sense and says it’s “always fresh and welcome.” That’s good.

BAHNSEN: Well, I appreciate that very much. The question about how we reduce the principal balance of the national debt is one that can only be addressed when you’ve stopped adding. Since we’ve only had something like two years in the last 70 where we weren’t adding to the debt, it’s hardly an accepted precondition. If we got to the point where we were adding no monies to the national debt, that would result in a $0 addition to the budget deficit on an annual basis. And disregarding the $31 trillion that would still be sitting over our heads, reaching that point in our budget would be the largest fiscal victory we could ever claim.

So the notion of further debt reduction is so far away from present reality, so far away from anybody’s policy intent or conversation, it is somewhat Pollyannaish. I certainly appreciate the question, because it’s where I’d love to see things go. And of course, the answer is that when you make a principal payment on debt as it matures, you reduce the debt. All of our debt is essentially treasury bonds, and the way to not have the debt go higher is to not issue new bonds. In other words, you’re paying down one but not adding another; we only pay down our bonds by issuing new bonds. So how do you actually get to the point of doing that? Well, you would need economic growth. Economic growth produces more revenues than are needed for your fixed expenses, because you’ve now got a balanced budget. You’re not allowing these expenses to blow out higher every year; that produces surplus revenue to pay down debt. Now, that’s the basic back-of-the-napkin financial answer. But I just want to be very clear, it’s not even in the stratosphere of reality at this point in time.

EICHER: All right, you may have a question for David Bahnsen.

If so, send it on over. The email address is feedback@worldandeverything.com. You have the choice of typing out your question or sending it in the form of an audio file attachment. I’ll summarize for you or play your audio on the air. We certainly prefer hearing your question in your own voice.

So if you have a smartphone, I’d ask that you make use of the voice memo app. Doesn’t have to be perfect. If you mess up—as I do so frequently—just back up a few words and start over. We’ll fix it up and it’ll sound great.

Again, feedback@worldandeverything.com.

Thank you to Nate Briggs and Steve Kemp this week.

And special thanks to David Bahnsen.

David is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com.

See you next time.

BAHNSEN: Thanks so much.

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