There is no practical limit to the thrust and scope of government programs that are proposed, so choices must be made to avert national bankruptcy. In principle, all concerned should support choosing the best programs available and making sure they are funded appropriately (not too much, but also not too little). In practice, crafting optimal outcomes is easier said than done.
Some programs make no sense on a benefit/cost basis. But even obviously wasteful programs have supporters, e.g., corn farmers and ethanol producers for the Renewable Fuel Standard (ethanol blending mandate), which can make such programs tough to abolish once they get established. Renewable fuel standard is an unjustifiable giveaway, 6/10/19.
Update: Trump can’t seem to get out from under his ethanol promises, John Siciliano & Josh Siegel, Washington Examiner, 6/14/19.
At the other end of the spectrum, some programs merit generous funding based on their strategic importance and/or high benefit/cost ratios. The only danger is that some of these stellar projects may be underfunded due to the tendency of politicians to support spending limits on an across-the-board (versus targeted) basis.
Most government programs fall somewhere in the middle. Net benefits are generated, but other programs might offer greater benefits for the taxpayer’s buck. So all programs in the government’s portfolio should be evaluated on a regular basis, including permutations and combinations, in search of better overall outcomes. And there appear to be many opportunities for improvement, ranging from relatively small to giant-sized. For example:
•Maybe the public doesn’t need scores of job training programs, administered by nine federal agencies. Limited progress has been achieved in reducing the overlap, however, since the General Accountability Office raised this concern in 2011. Department of Labor should assess efforts to coordinate services across programs, GAO, 3/23/19.
•Perhaps disability applications are being approved too liberally, thereby reducing the incentive of some people who could find productive employment to seek work. Time to do something about Social Security disability program, 6/1/15.
Update: Whether due to improved administration or an improving economy, there has been a marked slowdown in disability awards. Summary: Actuarial status of the Social Security trust funds, ssa.gov, April 2019.
Disabled-worker applications have continued to decline since 2010 and disability incidence rates have been well below expectations. Based on sustained lower incidence rates, the Trustees have reduced the long-range disability incidence rate assumption for this report.
•Improper government payments suggest a need for more effective controls. See, for example: (1) HHS OIG admits: We’re just flushing money down the drain, Leslie Paige, cagw.org, 12/11/18; (2) Tens of millions in Social Security still being paid to dead people, sonsof1776.com, 3/27/19.
•Actuarial projections for Social Security, Medicare, etc. call into question whether these programs will be affordable in coming decades. If not, younger workers are being charged for future benefits that the government may not be able to support. Trustees say Social Security and Medicare face $59 trillion long-term deficit, Philip Klein, Washington Examiner, 4/22/19.
So why have these and other opportunities to rationalize the government’s portfolio of programs been so often neglected, while the overall performance of the US government stagnated or deteriorated?
Our guess would be that our political leaders are more interested in protecting their pet programs than in improving overall outcomes. Discussion follows of some of their strategies for maintaining the status quo.
I. Standard tactics – When a government program is first proposed, supporters typically hype the benefits while “low balling” the costs. Strict eligibility criteria or benefit limits are assumed, and the program is seen as a modest response to a clearly justifiable need. After the program catches on, its size and cost may be greatly expanded.
Here’s a case in point, one of many that could be cited. Government schemes cost more than promised, Chris Edwards, cato.org, September 2003.
When Medicare Part A [hospital care] was enacted in 1965, costs were projected to rise to $9 billion by 1990, but actual costs reached $67 billion by 1990. Or consider that when the Medicaid special hospitals subsidy was added in 1987 annual costs were projected to be $100 million. By 1992 costs had risen to $11 billion annually.
Another common tactic is to resist deficit reduction pressure on grounds that spending cuts would be catastrophic so taxes must be increased instead. The possibility of targeted spending cuts (slash wasteful programs, leave other programs intact) is typically ignored. See, e.g., A scalpel, not ax needed to cut US budget, Ted Kaufman, News Journal, 11/25/12 (scroll down).
I remember a business executive who wrote it’s always easy to cut budgets by 5%, but “by the time you get into the teens you begin to hit muscle” and “cost cutting [becomes] counterproductive and may risk the viability of the company.” And some may say “let the states handle that,” but “I hope not.” So please, Congress, use a scalpel and not an ax.
And then there is “log rolling,” which means voting for the other side’s pet projects if they will vote for yours – with the result that most everyone gets what they want except fiscal conservatives hoping for a balanced budget. Barring changes in the Senate filibuster rule, which don’t seem to be in the offing, a 60% supermajority is required just to bring an appropriation bill up for debate. This reinforces the “let’s make a deal” mindset. Consequences of keeping the legislative filibuster, 4/24/17.
Small wonder that budget talks don’t serve the purpose of optimizing the government’s program portfolio very well; they seem more like a “food fight” than a rational debate.
II. Alternative funding – Several strategies have developed for insulating individual programs from budget scrutiny, thereby adding an extra layer of complexity to the search for optimal budget outcomes.
One approach is to dedicate specified revenue sources for a program and set up a trust fund; another is to structure the program in such a way that the cost will be borne by consumers, businesses, etc. instead of being covered by government outlays.
#TRUST FUNDS – Some government programs seem inherently unsuited for period-by-period budgeting. Take the Social Security retirement program, which required relatively modest outlays in earlier years but will chew up more and more cash as the ratio of active workers to beneficiaries declines. To accommodate this situation, certain tax revenues (FICA payroll taxes, and later income taxes on Social Security benefits) were dedicated to the program and used to set up a trust fund that purported to ensure the promised retirement benefits would be paid.
The current balance in the trust funds (retirement and disability funds) is nearly $3 trillion. Annual outlays are exceeding dedicated tax revenues by a growing margin, however, and the trust funds balance is projected to go negative around 2035 after which revenues would only cover about 80% (declining to 74% by the end of the 75-year projection period) of currently promised benefits. Summary: Actuarial status of the Social Security trust funds, ssa.gov, April 2019.
The magnitude of the current trust funds balance may seem reassuring, but there is no money in the trust funds – the indicated balance has already been spent by the government for other purposes – so the huge Social Security program is effectively operating on a “pay as you go” basis. There are only three options to cure the growing funding shortfall – raise taxes, cut benefits, or borrow more money. See the Social Security page of this website for further discussion.
#REGULATORY MANDATES – The previously mentioned ethanol blending program began as a spending program in that subsidies were paid for the production and use of ethanol. In 2005/2007 however, the program was recast as a government mandate for the rapidly increasing blending of ethanol in motor fuel – after which the subsidies were eliminated. Renewable fuel standard is an unjustifiable giveaway, 6/10/19.
This change in strategy obfuscated the rapidly growing cost and moved it from the government’s budget (where our political leaders might have had to periodically take responsibility for it) to the private budgets of American motorists. From the standpoint of program beneficiaries, e.g., corn farmers and ethanol producers, this is a great way to minimize public scrutiny.
Similar approaches have been used in setting up government programs to encourage the use of “renewable energy” sources (e.g., wind and solar) to produce electric power without acknowledging or taking responsibility for the cost involved. See, e.g., our recent letter to Delaware Governor John Carney, 5/27/19.
#LOAN GUARANTEES – Student loan programs have not, thus far, produced much apparent cost for the government. Indeed, it was said when the government started making loans directly (versus guaranteeing loans from banks) that the government would earn a profit. However, these programs have been recklessly expanded and the foreseeable losses are mounting. The long road to the student debt crisis, Josh Mitchell, Wall Street Journal, 6/7/19.
Borrowers currently owe more than $1.5 trillion in student loans, an average of $34,000 per person. Over two million of them have defaulted on their loans in just the past six years, and the number grows by 1,400 a day. After years of projecting big profits from student lending, the federal government now acknowledges that taxpayers stand to lose $31.5 billion on the program over the next decade, and the losses are growing rapidly.
Worse, the ready availability of student loans has given colleges a perverse incentive to raise their tuition without necessarily increasing the value of the educational services they are offering. Ibid.
•College tuition has soared 1,375% since 1978, more than four times the rate of overall inflation, Labor Department data show.
•Four in 10 recent college graduates are in jobs that don’t require a degree, according to the New York Federal Reserve.
•Many American colleges are dropout factories: At more than a third of them, less than half of the students who enroll earn a credential within eight years, according to the think tank Third Way.
And resentment of student debt is growing, which will inevitably fuel demands for student debt relief, “free college,” etc. Elizabeth Warren is climbing in the polls, and it may be because of her plan to cancel student loan debt, Philip Klein, Washington Examiner, 5/23/19.
The government’s student loan program was basically designed by Alice Rivlin during the Johnson Administration. Ms. Rivlin went on to become the first head of the Congressional Budget Office, OMB director, and eventually vice-chair of the Federal Reserve. In an interview in February, three months before her death, she was asked “what she thought about the system she helped to create 50 years ago.” Her commendably candid response: “We unleashed a monster.” The long road to the student debt crisis, op. cit.