Tag: spending cuts

Obama’s Fiscal Commission: The Good and Bad

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform released a draft report yesterday on how to reduce federal budget deficits.

Despite the liberal savaging the report is taking as some sort of conservative plot, its proposals are really center-left in orientation. That said, there is some good stuff in the report, which will be useful for incoming Republicans looking to tackle the budget mess.

Good Ideas and Positive Directions

The report provides a menu of possible spending cuts for incoming Republican members of Congress to consider, particularly Tea Party members, who proposed to cut the budget during their campaigns.

The report proposes to reduce spending from 25 percent of GDP currently to 21 percent over the long run. That’s a good start, but we need to pursue deeper cuts, as discussed on www.downsizinggovernment.org. After all, federal spending was just 18 percent of GDP in President Clinton’s last two years in office.

I like that the report suggests a broad array of budget cuts, including defense, nondefense, and entitlement programs. Everything needs to be cut, including programs traditionally defended by both liberals and conservatives.

The report proposes to cut $200 billion from discretionary spending by 2015 from Obama’s proposed spending that year of $1,309 billion. That’s a 15 percent cut. However, the word “cut” needs to be qualified because discretionary outlays were $1,041 billion in the pre-stimulus year of 2007, and they were just $615 billion in the pre-Bush year of 2000.

The report recommends an array of Medicare and Social Security cuts. That’s great, but the report doesn’t include the fundamental structural reforms—such as Social Security individual accounts and Medicare vouchers—that are needed to reduce costs and provide benefits to the broader economy, such as boosting savings and improving health care quality.

The direction of the proposed tax reforms is positive. The co-chairs propose to reduce or repeal narrow deductions and other special tax benefits, while reducing marginal tax rates. The idea to treat capital gains and dividends as ordinary income, however, reveals a faulty understanding of the proper tax treatment of capital.

The report proposes to cut the corporate tax rate from 35 percent to 26 percent, while moving to territorial treatment for foreign investment. It suggests making “America the best place to start and run a business and create jobs.” That’s a laudable goal, but to fulfill it we need to bring the rate down to, say, 15 percent.

The report’s goal of reducing the damaging buildup of federal debt is laudable. Government overspending is the nation’s primary fiscal problem, but spending financed by debt creates an array of problems that are additionally troubling.

Bad Ideas and Shortcomings

The report proposes to raise taxes by $1 trillion over the next decade. But the federal budget crisis is caused by overspending not undertaxing. The election results showed that most Americans understand that, but the message hasn’t penetrated the beltway yet.

The report’s discretionary spending cuts are timid. For example, farm subsidies are cut by just $3 billion, just a fraction of their annual cost of about $20 billion. Farm prices and farm incomes are at high levels these days, so now would be a good time to repeal farm subsidies completely.

The report characterizes tax deductions and exemptions as “spending in the tax code.” That is becoming common parlance in Washington, but it is incorrect. Yes, the mortgage interest deduction and other narrow benefits distort the economy and ought to be abolished, but they also reduce the flow of revenues to Washington, which is a good thing.

The report makes faulty and naïve arguments often heard from centrists about government “investments.” While we need to cut spending, we also need to “invest in education, infrastructure, and high-value R&D” the report says. But why does the federal government need to be involved in education? Why can’t we privatize infrastructure investment? If certain R&D is so “high-value,” wouldn’t the private sector do it?

Along the same lines, the report calls for the creation of a “Cut-and-Invest Committee” to move spending from “outdated” programs to “high-priority long-term investments.” That’s just naïve. The government will never be an efficient allocator of resources, and that’s why we need to shrink it, not just make it run better.

Finally, the commission should have placed more emphasis on fundamental restructuring of government, and not just spending trims. This is true with the entitlement proposals. But also with areas such as infrastructure spending—we don’t need higher gas taxes and government spending for infrastructure, we need privatization.

Co-Chairmen of Obama’s Fiscal Commission Unveil Real Tax Increases and Fake Spending Cuts

I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger.

The proposal unveiled yesterday by the Co-Chairman of President Obama’s Fiscal Commission is a good example. If you read through their report, it sounds like there are lots of spending cuts. But they never explain that these supposed cuts are really just reductions in previously-planned increases.

Here’s the bottom line. As shown in the graph, it is quite simple to balance the budget (and permanently extend all of the 2001 and 2003 tax cuts) if politicians simply limit spending growth. You can balance the budget within a few years with an overall cap on spending at current-year levels. But if you prefer a more moderate approach, you can let spending increase 2 percent each year and balance the budget by the end of the decade.

The proposal from the Fiscal Commission, incidentally, does not balance the budget - even though they have a big tax increase (which they assume will have zero negative impact on economic performance).

So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.

In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.

Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.

This Week in Government Failure

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

  • Unfortunately, the party favored by tea party supporters at the moment has no interest in shuttering the Department of Education.
  • Columnist Robert Samuelson is right: the Obama administration’s high-speed rail dreams “represent shortsighted, thoughtless government at its worst.”
  • Attention GOP: the electorate wants spending cuts, and they will support the policymakers who take the lead on cuts if they are pursued in a forthright and serious-minded manner.
  • New Republican members of Congress will be looking for ways to cut the budget deficit and also to increase economic growth. One way to do both is to privatize government assets.
  • Will the House Republican leadership embrace spending cuts proposed by their own members in the conservative Republican Study Committee?

Boehner Endorses More Medicare Spending: Meet the New Boss, Same as the Old Boss?

While flipping through the radio on my way to pick my son up from school yesterday afternoon, I was dumbfounded to hear Congressman John Boehner talk about repealing Obama’s Medicare cuts on Sean Hannity’s show.

I wasn’t shocked that Boehner was referring to non-existent cuts (Medicare spending is projected to jump from $519 billion in 2010 to $677 billion in 2015 according to the Congressional Budget Office). I’ve been dealing with Washington’s dishonest definition of “spending cuts” for decades, so I’m hardly fazed by that type of routine inaccuracy.

But I was amazed that the presumptive future Speaker of the House went on a supposedly conservative talk radio show and said that increasing Medicare spending would be on the agenda of a GOP-controlled Congress. (I wondered if I somehow misinterpreted what was being said, but David Frum heard the same thing)

To be fair, Boehner also said that he wanted to repeal ObamaCare, so it would be unfair to claim that the interview was all Bush-style, big-government conservatism. But it is not a positive sign that Boehner is talking about more spending before he’s even had a chance to pick out the drapes for his new office.

GOP: Cut Whaling History Subsidies, Save Nation

House Republican Whip Eric Cantor’s “YouCut” project has released a new video that attempts to visually underscore the impropriety of sticking future taxpayers with a mountain of federal debt.

The video begins with a voice saying “You wouldn’t do this to your child’s piggy bank” followed by visuals of a child’s piggy bank being smashed with a hammer. The voice then says:

But Democrat controlled Washington is leaving a $13 trillion debt for your children and future generations. It’s time Washington got its fiscal house in order. Start changing the culture of spending in Washington by voting on YouCut today.

That’s a wee bit disingenuous considering that Republicans and Democrats alike are responsible for the massive federal debt.

More frustrating is the fact that the GOP leadership rhetoric of grave concern is completely at odds with the party’s tiny proposed reforms. In Cantor’s YouCut commentary he says “America is at a critical crossroads, and the choices we make today will determine the kind of country we leave to our children and grandchildren.”

Now let’s look at this week’s proposed GOP spending cuts. A website banner says “CLICK HERE TO VOTE FOR THIS WEEK’S FIVE CUTS,” but takes the viewer to the YouCut page where they’re offered three spending cut options:

1. Terminate Taxpayer Funding of National Public Radio. The site says this would achieve “Savings of Tens of Millions of Dollars (potentially in excess of a hundred million dollars).” NPR shouldn’t receive taxpayer funding – and not just because it canned Juan Williams. But couldn’t the House GOP leadership have at least offered up the $500 million Corporation for Public Broadcasting that subsidizes NPR for cutting?

2. Terminate Exchanges with Historic Whaling and Trading Partners Program. The site says this would save $87.5 million over ten years.

3. Terminate the Presidential Election Fund. This would achieve a whopping projected savings of $520 million over ten years.

America is at a “critical crossroads” and the GOP leadership is offering to cut whaling history subsidies? Congress is bankrupting the nation and the possible next Speaker of the House – “never a details man” – can’t even specify what he would cut in the budget.

It’s pathetic.

Cutting Government the Canadian Way

I blogged about how Canadian government spending cuts since the mid-1990s coincided with strong economic growth.

Let’s take a closer look at the spending cuts. The chart shows Canadian federal spending from 1984 to 2009 in actual, or nominal, dollars. Spending includes all “discretionary” and “entitlement” programs, as we would call them, but excludes interest payments. (Data are here).

Spending peaked in the early 1990s, and it relied on massive deficit finance. As a result, interest costs were spiralling out of control. The prime minister and his finance minister–members of the center-left Liberal Party–decided to reverse course and start cutting.

They cut spending from $123 billion in in 1995 to $111 billion in 1997, a 10 percent reduction. Then they held spending at roughly the lower level for another three years. With the Canadian economy growing–due to pro-market reforms such as free trade with the United States–this amount of restraint was enough to start a virtuous cycle of falling interest costs and a shrinking government as a share of GDP.

Cutting total non-interest spending by 10 percent would be like cutting President Obama’s 2011 annual budget by $360 billion. Cato analysts could do that pretty easily, but for some reason American politicians–even of the conservative variety–so far seem to be alot more spineless than the politicians elected by Celine Dion and Anne Murray.

Canadian spending did grow during the past decade, but much less than U.S. government spending. Between 2000 and 2009, total Canadian federal spending increased 47 percent, but total U.S. federal spending rose 97 percent.

From a libertarian point of view, Canada’s spending cuts were modest. But the Canadian experience illustrates that a lot of progress can made if even modest cuts are made and then spending is constrained to grow at a slower rate than the overall economy.

For more on the Canadian fiscal reforms, see The Canadian Century by Brian Lee Crowley, Jason Clemens, and Niels Veldhuis.

More on Phony Defense Spending Cuts

On Saturday the Washington Post published a letter I wrote chastising their editorialists for inventing defense budget cuts:

The Aug. 12 editorial “Mr. Gates’s rough cuts” and David S. Broder’s Aug. 12 column, “Gates’s budget warning shot,” applauded the defense secretary for his plans to cut spending even though the plans will do no such thing. As Mr. Broder wrote, Mr. Gates proposed closing the U.S. Joint Forces Command and shedding contractors and generals in the Pentagon’s employ. But neither piece noted that these proposals are part of a plan to shift some Pentagon spending from administration to force structure – not to cut total spending.

The impetus for the cost-shifting plan is the White House’s reluctance to increase Pentagon spending by more than 1 percent above inflation for the next few years. Rapid growth in procurement and personnel spending makes that increase insufficient to cover the military’s programmatic costs.

Bloated administrative overhead is a good place to find funds for that end. But taxpayers gain nothing.

Mr. Gates has requested substantial increases in defense spending every year that he has been secretary. He opposes spending cuts, even after the wars end, even though the United States now spends more on defense than at any time during the Cold War, adjusting for inflation. He openly hopes that these proposals to heighten administrative efficiency deflect pressure to cut spending. By pretending that these changes do so, The Post helps shield Pentagon spending from scrutiny.

The point is straightforward: Stop confusing reforms explicitly intended to prevent spending cuts with real spending cuts.

The Post, however, repeated the error that my letter complained about in the title they gave it both online (“Will the defense cuts do what Robert Gates says they will?”) and in the actual newspaper (“Scrutinizing Mr. Gates’s Defense Budget Cuts”). The editor has yet to respond to my email noting the irony.

I wrote more on the media’s failure to portray these reforms accurately for the National Interest’s new Skeptics blog. (Chris Preble and I have already discussed this topic here.)

The Post’s editorial page typifies the fawning coverage that the Washington commentariat gives Gates.  He has a knack for getting even otherwise discerning analysts to portray him as a pragmatist/ realist/ conservative even as he asks Congress to increase a defense budget that is already larger than at any point during the Cold War and advocates endless nation-building warfare in Afghanistan. The keys to his success, I say, are (a) appearing moderate in contrast to the rest of the foreign policy elites in his party, which is easy, (b) skillful management that distracts people from his embrace of policies that are not realistic, pragmatic, or conservative, and (c) eloquently saying things that contradict his actions.

Fareed Zakaria’s latest column, for example, asserts that the only two conservatives in Washington are Gates and the portrait of Eisenhower hanging in his office. Like many, Zakaria is taken with Gates’ recent speech at the Eisenhower library, which praised Ike for restraining defense spending and avoiding intervention in Vietnam. It was such a good speech that you can almost forgive those that fail to note the irony of Gates’ sounding like someone proposing defense cuts and exiting Afghanistan.