How the composition of government spending changed since the 1960’s
Taylor (para 9) notes that a huge percentage of government expenditure is directed to entitlements as opposed to investments. Notably in 1962, the expenditure on investment was 2 ½ times that of entitlements. However, in the 21st century, the spending on entitlement is three times more than on investments (Taylor para 9). This trend attributes to the fact that most of the government spending goes to consumption, and only a few investments are made. In 1960’s the expenditure on entitlements was approximately 15 percent, but now it is more than half of all the federal expenditure. For instance, in 2001, the federal finance capital was $3,054 billion, and close to 2/3 (about $925 + $1, 017) went to transport and defense while the rest was directed to economic development (Taylor para 6). The rise of “necessary” elements that require compensation may make the situation worse in the future when the expenditure on entitlements completely surpasses that of investments. According to the graph by Taylor, in the 22nd century (2022), the funds directed to investment may fall to less than 10 percent or even zero while spending on entitlements may rise to 60 percent or higher.
How categories of federal government spending qualify as either consumption or investment
Consumption is the gross expenditure on consumer products and services (Zaccal 35). Hence, consumption is the money that is directed towards personal development rather than economic improvement. Conversely, investment is the injection of funds in an activity or service with a goal of realizing growth in value (Kaptan 1). Thus, investment entails injection of funds with a goal of achieving future benefits either directly or indirectly.
Importantly, the categories of the federal expenditure qualify as either consumption or investment. “Mandatory Spending” which is entitlement spending qualifies as consumption. The category allocates funds to personal development factors such as unemployment insurance and Medicare. “Federal Investment” qualifies as both consumption and investment since close to two-third of the allocated funds goes to national defense and transportation. The “Research and Development” category is purely investment since the funds are directed towards research whether or not defense-related. The “financed education” is also a form of investment since the funds go to the particular purpose.
How the changing pattern of government spending affects the real economic burden of the national debt.
The increased spending on entitlements and less expenditure on investment translate to a slow economic growth. Ideally, the government will borrow more loans to sustain entitlement spending, which will result in an enormous national debt. Due to the massive debt, the creditors may lose trust in the government’s capacity to pay its debt and thus, ask for high-interest rates or the rates may rise due to the instability of the dollar. In that case, the government will pass the burden to the citizens in the form of increased taxation. Americans may be required to pay unbearable interest rates on a loan, mortgage and credit cards. Importantly, these interest rates will have devastating impacts on citizens; they may not be able to borrow loans, start a business, or buy a house. Also, there may be few employment chances, and even wages may be low.
The federal government will not have the capacity to invest in the economy since a large share of the national government will be directed to entitlements. Also, significant federal revenue will be used to pay debts. Further, if the government decides to monetize the debts, it may inflate the economy. That would severely affect the citizen since the prices of basics would be high and consequently reduce the purchasing power.
Works cited
Kaptan, S. S. Investment Management. India: Sarup & Son, 2001. Print.
Taylor, Timothy. “Entitlements, Public Investment, and the Changing Nature of the U.S. Government.” CONVERSABLE ECONOMIST. 2012. Web. 13 Apr. 2016. < http://conversableeconomist.blogspot.co.ke/2012/08/entitlements-public-investment-and.html>
Zaccai, Edwin, ed. Sustainable Consumption, Ecology and Fair Trade. United Kingdom: Routledge, 2007. Print.
