Tag: downsize the federal government

Updated Cato Budget Plan

Over at Downsizing the Federal Government, Chris Edwards has released an updated version of his “Plan to Cut Spending and Balance the Federal Budget.” The plan proposes spending cuts of more than $1 trillion annually by 2021, which would balance the budget without resorting to damaging tax increases. Federal spending would be reduced to 18 percent of gross domestic product by 2021 under the plan, which compares to President Obama’s projected spending that year of 24.2 percent of GDP.

Some key points:

  • No sacred cows are spared. Defense, domestic, and so-called entitlement programs are all cut.
  • The plan recognizes that the scope of federal activities must be curtailed. It would begin the reversal of decades of federal expansion into hundreds of areas that should be left to state and local governments, businesses, charities, and individuals.
  • Instead of viewing federal spending cuts as a necessary evil, the plan recognizes that the cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP.
  • The plan doesn’t achieve budget balance by increasing taxes. Under current tax policy, federal revenues as a share of GDP will gradually return to levels considered normal in recent decades. It is federal spending that has reached abnormally high levels. It must be reduced in order to get the government’s spiraling debt under control.

Bright Spots in Fiscal Commission Report

President Obama’s Fiscal Commission has produced a serious and sobering analysis of the government’s budget mess, and it provides some of the needed solutions. Three of the report’s main themes are on target: the need to make government leaner, the need to cut business taxes to generate economic growth, and the need to impose tighter budget rules to discipline spending.

The report rejects the view of many Democratic leaders that the welfare state built over the last 80 years must be defended against any and all budget cuts. “Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared. The federal government can and must adapt to the 21st century by transforming itself into a leaner and more efficient operation.” How lean the government should be, and how many agencies to eliminate, will be the central fiscal debate in coming years. Downsizing government is the order of the day.

The report recognizes the need to spur economic growth, particularly by cutting the corporate tax rate. “The corporate income tax, meanwhile, hurts America’s ability to compete… statutory rates in the U.S. are significantly higher than the average for industrialized countries … and our method of taxing foreign income is outside the norm…. the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors.” The report recommends cutting the 35 percent federal corporate tax rate to 28 percent or less to respond to the Global Tax Revolution and to “make America the best place to start a business and create jobs.”

Finally, the report suggests that Congress impose new procedures to enforce budget restraint. However, the rules suggested by the commission are complex and not tight enough. It would be simpler and more powerful to impose a cap on overall federal spending. For example, a law could require that the government’s overall budget not grow faster than general inflation each year else the president would sequester spending across-the-board. Such a cap would be easy for the public to understand and enforce.

In sum, the report provides a useful menu of reform options that incoming members of a more conservative Congress can pursue next year. We need bigger spending cuts than the commission has laid out—as I’ve outlined in this balanced-budget plan—but the commission deserves credit for spurring a national discussion on how to downsize the federal government.

Biden’s Fatal Conceit

The White House’s misbegotten “Summer of Recovery” continued today with the release of another administration “analysis” that purportedly demonstrates the stimulus’s success in “transforming” the economy.

Vice President Joe Biden unveiled the report alongside Energy secretary Steven Chu and numerous businesses officials willing to serve as political props in return for Uncle Sam’s free candy. Biden bemoaned the nefarious “special interests” that were coddled by the previous administration. What does the vice president think those subsidized business officials attending his speech are called?

The money the White House has lavished on these privileged businesses isn’t free. The money comes from taxpayers—including businesses that do not enjoy the favor of the White House—who consequently have $100 billion (plus interest) less to spend or invest. Therefore, the fundamental question is: Are Joe Biden — an individual who has spent his entire career in government— and the Washington political class better at directing economic activity than the private sector?

Biden repeatedly stated that the “government plants the seed and the private sector makes it grow.” Because the government possesses no “seeds” that it didn’t first confiscate from the private sector, what the vice president is advocating is the redistribution of capital according to the dictates of the Beltway. This mindset exemplifies the arrogance of the political class, which at its core believes that free individuals are incapable of making the “right” decision without the guiding hand of the state.

Unfortunately for Joe Biden, the state’s hand guided the private sector into the economic downturn that the administration and its apologists would have us believe was a consequence of imaginary laissez faire policies. From the housing market planners at HUD to the money planners at the Federal Reserve, government interventions led to the economic turmoil that the perpetrating political class now claims it can fix.

Enough already.

The following are Cato resources that challenge the vice president’s breezy rhetoric on the ability of the federal government to direct economic growth:

  • Energy Subsidies: The government has spent billions of dollars over the decades on dead-end schemes and dubious projects that have often had large cost overruns.
  • Energy Regulations: Most federal intrusions into energy markets have been serious mistakes. They have destabilized markets, reduced domestic output, and decreased consumer welfare.
  • Energy Interventions: The current arguments for energy intervention and energy subsidies fall short.
  • High-Speed Rail: Policymakers are dumping billions of dollars into high-speed rail, even though foreign systems are money losers and carry only a small share of intercity passengers.
  • Special-Interest Spending: Many federal programs deliver subsidies to particular groups of individuals and businesses while harming taxpayers and damaging the overall economy.

Federal Spending Limit

The nation is facing a fiscal emergency. Debt is exploding and federal spending exceeds revenues by more than $1 trillion a year. To fix the problem, policymakers should pursue reforms on two paths.

First, policymakers should start identifying programs for termination, privatization, and devolution to the states. If a business conglomerate overexpanded and its spending ran ahead of revenues, prudent managers would start shedding low-value operations and refocusing on core activities. The federal government should do the same.

Second, policymakers should adopt new rules to bring greater discipline to federal budgeting. Right now, it’s anarchy on Capitol Hill with every member and interest group pushing for more dollars. Very few members consistently defend restraint.

The solution is for Congress to pass a law limiting annual increases in overall federal spending. Rep. Lamar Smith (R-TX) recently introduced legislation to do just that. His SAFE Act (H.R. 5323) would cap annual growth in the federal budget to inflation plus population growth.

Smith’s bill, which has 34 co-sponsors, would cap growth in all spending including defense, nondefense, and entitlements. If spending this year was $3.70 trillion, inflation was 2 percent, and population growth was 1 percent, then federal spending next year would be limited to $3.81 trillion. If Congress failed to get spending under the limit by the end of the year, the president’s budget office would be required to apply an across-the-board cut, or sequester. I’ve discussed some of the details of such a spending limit in this congressional testimony.

Rep. Smith’s spending restraint legislation is exactly the type of budget process reform that Republicans should be championing. The idea of a cap on overall spending was supported by tea partiers in their Contract from America, and it’s easy for the average citizen to understand. The idea is simply that the government’s budget shouldn’t grow faster than the average family’s budget.

With a budget cap in place, it would be easy for voters and activists to know whether Congress was living up to a basic standard of fiscal prudence. If members of Congress tried to cheat on the legal spending limit, or tried to repeal it, citizens could impose political pressure on the spendthrifts. A simple and rigid budget limit would be a high-profile symbol of restraint for people to rally around and defend.

The chart below shows actual spending since 1990 and a budget limit of population growth plus inflation, with those variables averaged over the prior five years. In the 1990s, Congress generally kept spending under the limit. Over ten years, actual spending rose an average 4.2 percent annually, which was less than the 4.6 percent average growth of the limit. By contrast, spending growth during the 2000s has far exceeded the limit, illustrating where today’s huge deficits came from.

In sum, the nation can move back toward fiscal sanity by voting out the big spenders of both parties and voting in a reform-minded Congress to terminate programs and shrink the budget. Then, if Congress passed a law capping overall spending it would lock-in those cuts and make them harder to reverse later on. This two-part process could help ratchet-down the size of government over time.

Notes: Rep. Smith does not specify a five-year average for his spending limit variables, as I’ve assumed here. Also note that federal spending is calendar year data from the National Income and Product Accounts, Table 3.2.