Tag: federal spending

Spending Reform in Rick Perry’s Plan

Texas governor Rick Perry’s “Cut, Balance, and Grow” plan is out. Dan Mitchell discussed Perry’s proposed tax reforms so I’ll offer my take on the proposed spending reforms:

  • Perry says he wants to “preserve Social Security for all generations of Americans” but state and local government employees would be allowed to opt-out of the program. Perry says that younger Americans would be able to “contribute a portion of their earnings” to a personal retirement account. I’d like to be able to completely opt-op without having to work in government. I suspect that other younger Americans who recognize that Social Security is a lousy deal will feel the same.
  • Other proposed reforms to Social Security include raising the retirement age, changing the indexing formula, and ending the practice of using excess Social Security revenues to fund general government activities. Proposing to put an end to “raiding” the Social Security trust fund might be a good sound bite for the campaign trail, but excess Social Security revenues will soon be a thing of the past anyhow. Bizarrely, Perry cites the Highway Trust Fund as “the model for how to protect funds in a pay-as-you-go system from being used for unrelated purposes.” As a Cato essay on federal highway financing explains, only about 60 percent of highway trust fund money is actually spent on highways. The rest is spent on non-highway uses like transit and bicycle paths. The bottom line is that the federal budget’s so-called “trust funds” generally belong in the same category as Santa Claus and the Toothy Fairy. Perry should just stick with calling Social Security a “Ponzi scheme.”
  • As for Medicare, Perry says reform options would include raising the retirement age, adjusting benefits, and giving Medicare recipients more control over how they spend the money they receive from current taxpayers. No surprises there.
  • I’m a little confused by Perry’s language on Medicaid reform. On one hand, he says that the 1996 welfare reform law should be used as the model. The 1996 welfare reform law block granted a fixed amount of federal funds for each state. On the other hand, Perry says “Instead of the federal government confiscating money from states, taking a cut off the top, and then sending the money back out with limited flexibility for how states can actually use it, individual states should control the program’s funding and requirements from the very beginning.” I believe that the states, and not the federal government, should be responsible for funding low-income health care programs (if they choose to offer such programs). However, I don’t think that’s what Perry is actually proposing.
  • Perry calls for a Balanced Budget Amendment to the Constitution and a cap on total federal spending equal to 18 percent of GDP. Federal spending will be about 24 percent of GDP this year. What agencies and programs would Perry cut or eliminate to reduce federal spending by 6 percent of GDP? He doesn’t really say. That leaves me to conclude that he embraces a BBA for the same reason that most Republicans embrace it: he wants to avoid getting specific about what programs he’d cut. One could argue that his entitlement reforms are sufficiently specific, but compared to Ron Paul’s plan, which calls for the elimination of five federal departments, Perry’s plan leaves too much guesswork.
  • Other spending reform proposals don’t make up for the lack of specifics on spending cuts. For example, Perry proposes to eliminate earmarks. That’s already happened. He says he’d cut non-defense discretionary spending by $100 billion, but that’s a relatively small sum and letting military spending off the hook is disappointing. Proposing to “require emergency spending to be spent only on emergencies” sounds nice but would a President Perry stick to it if Congress larded up “emergency” legislation for a natural disaster in Texas or some military adventure abroad?

In sum, there’s some okay stuff here, but I don’t think it’s anything those who desire a truly limited federal government can get excited about. That said, Perry could have done a lot worse.

Did Canada Steal Our Tenth Amendment?

Under the U.S. Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Tenth Amendment: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Those delegated powers are “few and defined,” noted James Madison.

But the Tenth Amendment has disappeared. No one has seen it in recent decades. But I’ve found some statistics that make me very suspicious that the Canadians stole the Tenth. Look at the pie charts below. The top pie shows that 71 percent of total government spending in the United States is federal, while 29 percent is state/local. (See BEA tables 3.1, 3.2, 3.3 for 2010 data).

Back when we still had the Tenth, that ratio was the other way around—like how the bottom chart looks for Canada today. In Canada, federal spending accounts for just 38 percent of total government spending, while provincial/local spending accounts for 62 percent. (See Canada Yearbook for 2010/11 data.)

Actually, the real culprit for the missing Tenth is not the Canadians, but the U.S. Congress. In recent decades, Congress has undertaken many activities that were traditionally reserved to state and local governments. A primary method has been through “grants-in-aid.” These are federal subsidies combined with regulatory controls that micromanage state and local affairs. In United States, federal grants are about 4.1 percent of GDP (in fiscal 2011), while in Canada they are about 3.3 percent of GDP.

Even more striking: while we’ve got a complex mess of more than 1,000 state grant programs, Canada seems to have just a handful, and they are simple block grants. As I understand it, Canada’s federal grants to lower governments mainly just include:

  • A health care block grant
  • A social services block grant
  • An “equalization” block grant to help the poor provinces.

There is a smattering of other aid, but that’s just about it. There are no federal subsidies for K-12 education in Canada, for example. There are a few large block grants and not much else.

On October 27, I’m on an Urban/Brookings panel looking at “What Can the United States Learn from Canada.” Perhaps we can learn how to get our decentralized federation back. While we’re at it, we could get some tips on how to cut government spending, as the Canadians did in the 1990s.

Tuesday Agriculture Links

Some interesting links on agriculture in the news today.

First, a terrific front-page article in the New York Times, about what my friend Vince Smith so accurately calls the “bait-and-switch” farmers are proposing in their offer to give up direct payments (subsidies that flow to farmers regardless of prices or production) in exchange for a new revenue insurance program.  As Vince so rightly points out, because the new revenue targets will be based on today’s current record crop prices, “If farm prices move back towards what are widely viewed as more normal levels than their current levels, farmers will be compensated for going back to business as usual.”  Vince blogs here about the proposed new revenue assurance program, and how it could end up costing us just as much as the current set of programs.

Farmers and their congressional sponsors are still blathering about “proportionality,” essentially saying that they should not have to contribute any more to budget cuts than any other area of the federal government. Here, for example, is a corn farmer, towing the party line:

“We are very much aware of the budgetary constraints of the federal government,” said Garry Niemeyer, an Illinois farmer who is president of the National Corn Growers Association. “We want to do our part as corn growers to help resolve those issues, but we only want to do our proportional part. We don’t want to have everything taken out on us.” [emphasis added]

This is wrong-headed. I’ve said it before, I’ll say it again: “proportionality” implies that everything the federal government currently does is equally valid. That is nonsense.  Some programs are legitimate, some less so. Some—like farm subsidies—not at all. Spending cuts should be made on the basis of legitimacy, not by some abstract formula equally applied. We should be reshaping (in a downward direction) the federal government here, not trimming a topiary hedge.

Second, Bloomberg.com has a good overview on the current state of the negotiations between the Congressional agriculture committees and the deficit-reduction supercommittee regarding the cuts to farm programs. The leaders of the agriculture panels have written a letter to the supercommittee, saying that cuts to agriculture programs should be limited to $23 billion and those cuts ”should absolve the programs in our jurisdiction from any further reduction.” So there.

Finally, here are Senators Mark Kirk (R-Ill.) and Sen. Jeanne Shaheen (D-N.H.)  on the wasteful and expensive sugar program.

The Biggest Budget in History

The Wall Street Journal notes today that the federal government spent more money in the just-concluded 2011 fiscal year than in any year in history, and no one noticed. What happened to all that austerity and all those spending cuts that we heard about all year? Well, some of us warned over the past year that they were all smoke and mirrors.

Now that the year’s over, you can see in this chart from the Journal that the federal government spent more and borrowed more in 2011 than in any previous year—$900 billion more than just four years ago, and $150 billion more than last year:

Strength vs. Stupidity

The New York Times weighs in this morning with a timely and sensible editorial on military spending. The main focus is on the increasingly outdated pay and benefits system for the nation’s troops. Some choice excerpts:

Military pay, benefit and retirement costs rose by more than 50 percent over the…decade (accounting for inflation). Leaving aside Afghanistan and Iraq, those costs now account for nearly $1 out of every $3 the Pentagon spends.

Much of that is necessary to recruit and retain a high-quality, all-volunteer military….But current military pay, pension systems and retiree health care benefits are unsustainable and ripe for reform.

[…]

The retirement system is both unfair and increasingly expensive. Most veterans, including many who have served multiple combat tours, will never qualify for even a partial military pension or retiree health benefits. These are only available to those who have served at least 20 years. Those who do qualify can start collecting their pensions as soon as they leave service, even if they are still in their late 30s, making for huge long-term costs.

So far, so good. Two essential points bear repeating.

First, the rise in military spending over the past decade has not been driven solely by the costs of the wars in Iraq and Afghanistan. Pentagon costs are growing, and the rate of growth is rising. Programmatic reform is needed to reign in those costs; avoiding stupid wars won’t solve the problem (although it won’t hurt).

Second, the current system disproportionately rewards individuals who stay in the service for 20-plus years, and undercompensates those men and women who serve several tours, but who do not qualify for military retirement. A better system would allow anyone who has served to retain some of what they paid (or what taxpayers paid for them) into a portable retirement account that they control. Private industry has been steadily moving away from a fixed-benefit, pension-style system for years. I have heard the arguments against such a move, but I don’t find them particularly convincing.

One point from the Times editorial, however, calls out for clarification. The editors claim on two separate occasions that current military spending patterns are “unsustainable.” They conclude:

The United States already has a comfortable margin of [military] dominance….The Pentagon’s ambitions expanded without limit over the Bush era, and Congress eagerly wrote the checks. The country cannot afford to continue this way, and national security doesn’t require it. (emphasis added)

The latter point, “national security doesn’t require it,” is crucial, correct, and should be repeated at every opportunity. The former assertion, “the country cannot afford” it, is false. Repeating that claim plays into the hands of the inveterate hawks who never saw a war, or a weapon system, that wasn’t deserving of more lives/money.

The hawks are correct to point out that the United States has in the past, and could in the future, choose to spend as much or more on our military. Current spending levels amount to about five percent of GDP (when including the costs of the wars), and military spending as a share of total government spending has been falling steadily for years. According to the hawks, it is other spending, or too little revenue, that is putting our children and grandchildren into debt.

I wish that the Times had spent more time hammering the point that such spending is unnecessary. Contrary to anecdote and the evening news, the international system is remarkably stable and peaceful. The United States need not spend more than we did at the height of the Cold War in order to be secure from most threats. And those few genuine threats to our security could be handled with a smaller, more efficient military—if we offloaded some responsibilities to other countries that have sheltered under the U.S. security umbrella for decades.

The Times doesn’t directly address that last point. By focusing most of their attention on programmatic reforms to pay and benefits, and a bit on costly procurement of unnecessary weapons, but not enough to the underlying flawed assumptions that drive military spending, the editors contribute to the misconception that the U.S. military should continue to be the world’s policeman, and find ways to do this on the cheap.

That is unfortunate. Spending more than we need to doesn’t make us stronger. Ignoring our favorable strategic circumstances is simply stupid. We spend too much on our military because we ask our troops to do too much. To spend less, we must do less. The good news is that we can. The bad news is that too few people understand that.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

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Federal Spending Hits $4.1 Trillion

If you looked at the new CBO report on the budget, you may have noticed that federal spending this year will be $3.6 trillion.

In fact, federal spending this year will top $4 trillion. But virtually all reporters and budget wonks (including me) routinely use the lower number when discussing total federal spending. I don’t think the higher $4 trillion number even appears anywhere in the CBO report.

The $3.6 trillion figure is “net” outlays. But “gross” outlays, or total spending, is quite a bit higher. The difference is caused by “offsetting collections” and “offsetting receipts.” These are revenue inflows to the government that are netted against spending at the program level, agency level, or government-wide level. Some examples are national park fees, Medicare premiums, and royalties earned on mineral deposits. There are hundreds of these cash inflows to the government that offset reported spending.

Details on these revenue offsets can be found in Chapter 16 of OMB’s Analytical Perspectives (pdf). In fiscal year 2010, net federal outlays were $3.456 trillion, but gross outlays were $4.057 trillion. Thus, gross outlays were 17 percent larger than widely reported net outlays.

In FY 2011, OMB expects gross outlays to be about 15 percent larger than net outlays. Thus, gross outlays this year will be $4.1 trillion, compared to net outlays of $3.6 trillion. As a share of GDP, gross outlays will be about 27.3 percent of GDP, compared to net outlays of 23.8 percent.

Accounting for offsets in this manner is a long-standing convention, but it is one of the sneaky ways that Washington tries to hide its large intrusion into the economy. Certainly, the CBO and OMB should include more prominent presentations of gross outlays in their regular budget updates.

For citizens and reporters, a rule-of-thumb to remember is that total federal spending is 3 to 4 percentage points of GDP larger than usually reported by officials.