Slash Government Spending

The federal budget in 2005 was $2.5 trillion, or about 20% of Gross Domestic Product (GDP).  State and local government are spending an additional 11% of GDP, so the total cost of government amounts to nearly 1/3 of the economic output. 54% of current federal government spending is for “entitlements” (Social Security, Medicare, federal portion of Medicaid, etc.), 39% is discretional, and 7% goes for interest on the national debt.

Government spending as a % of GDP has grown dramatically:
Federal-defense: 1900 – 1.0%; 1950 – 5.7%; 2005 – 4.0% (enough?)
Federal-nondefense: 1900 – 1.8%; 1950 – 9.0%; 2005 – 16.0%
State/local: 1900 – 5.0%; 1950 – 6.6%; 2005 – 11.0%

Assuming rapid growth in entitlements due to retirement of baby boomers and longer human life spans, the Government Accountability Office (GAO) projects federal expenditures at 23% of GDP by 2015, 33% of GDP by 2030, 45% of GDP by 2040.

Economic experts (Boston University economist Laurence Kotlikoff, former Secretary of Commerce Peter Peterson, et al.) warn that our country will pay a devastating price if fiscal discipline is not restored.    See The Coming Generational Storm and Running on Empty.

New Zealand halved its government spending, why not us? Download this entertaining and inspiring audiotape ( total about 1.25 hours, including Q&A) by Maurice McTigue (Mercatus Center) and share it with your family and friends. McTigue1,  McTigue2,  McTigue3. (.WAV files, compatible with Windows XP and Mac OS X, practicable to download with a broadband connection).

WHERE TO CUT – DISCRETIONAL SPENDING

Unnecessary government programs should be eliminated, such as agricultural subsidies, “corporate welfare,” and tax credits for favored industries.  These programs do not serve the interests of the general public, and the beneficiaries do not need government support.  Agricultural subsidies primarily benefit big agribusinesses and wealthy landowners, for example, while driving up food prices for all Americans.

Another problem is duplication.  Federal programs often have overlapping objectives, resulting in “turf wars” and/or unnecessary costs to ensure coordination, e.g., several different agencies have been involved in water resources development.  The solution is to pick the best programs and terminate the rest.

Federal grant programs should be eliminated, with the functions involved being left to state & local governments or the private sector. Some $426 billion in federal grants were paid in 2005, ranging from $186 billion for the federal share of Medicaid and the $71 billon cost of the Department of Education (mostly grants) to 50 different grant programs for the homeless in eight federal agencies.

What is wrong with grant programs?  They encourage overspending for the stated grant purposes, foster the growth of federal, state and local bureaucracies to document compliance with federal mandates, and reduce the flexibility and innovation of recipients.

Is there truly some reason to believe, for instance, that the states, school districts, teachers, and parents of this country cannot be trusted to determine how our young people should be educated? 

For more about cuts in discretional programs, see Downsizing the Federal Government.

WHERE TO CUT – ENTITLEMENTS

As already noted, over half of the federal budget currently goes for “entitlements” (Social Security, Medicare, the federal share of Medicaid,etc,) and these programs will continue to grow rapidly unless corrective action is taken.  What should be done?

 #Permit younger workers to use the payroll taxes that they pay for Social Security to set up individual retirement accounts in lieu of traditional retirement benefits, which would help keep the system solvent and make it far more equitable.  See Social Security. 

#Restructure Medicare and Medicaid.  No one wants to oppose healthcare for people who need it, but there is no escaping the fact that the escalation of medical costs has been fueled by government policies that cut the perceived linkage between the consumption of medical services and the payment for them.  To make things better, this linkage must be restored – which means reducing government control over the healthcare marketplace, not further increasing it. (There are already 100,000 pages of Medicare regulations, and what good have they done?). For more, see Healthcare: Something Has to Give.

 STRUCTURAL CHANGES TO THE BUDGET PROCESS

A balanced budget amendment to the Constitution, either prohibiting deficit spending except in time of declared war or requiring a 2/3 majority to approve deficit spending in any given years, would be a tremendous help -- if it could be adopted.

Giving the president a “line item” veto could be modestly helpful as a means of cutting pet Congressional projects (or “earmarks”) out of the budget.  The ideal approach would be to restore the president’s impoundment authority, since a presidential power to veto elements of Congressional authorizations would require a Constitutional amendment.

Also mentioned are the “pay as you go” rules that were recently reinstated, but these rules are far from a panacea.  First, they have never been viewed as applying to mandated spending programs, such as entitlements.  Second, their primary effect is to limit tax cuts (including extension of tax breaks enacted for a limited period of time, e.g., provisions designed to prevent millions of middle class taxpayers from being subjected to the Alternative Minimum Tax). 

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