Mr. Chairman and members of the committee, thank you for inviting me to testify today. My comments will examine the need to cut spending, the causes of budget waste, and the reasons why aid to the states is particularly inefficient.
The Need to Cut Spending
Without major reforms, federal spending and debt are expected to soar in coming years. The “alternative scenario” from the Congressional Budget Office (CBO) shows that spending will grow from 20 percent today to 32 percent by 2040, while debt held by the public will grow from 74 percent to 170 percent.1
Those projections are disturbing enough, but they are optimistic for a number of reasons:
- Policymakers may continue to break the discretionary spending caps.
- The United States may face unforeseen wars and military challenges.
- The economy may have another deep recession.
- Future presidents and congresses may launch new spending programs.
- Interest rates may be higher than projected, thus pushing up interest costs.
- Rising spending and debt will suppress economic growth. That negative effect is not accounted for in CBO’s basic scenarios after the first decade.
These factors create major negative risks to our fiscal outlook. So policymakers should be prudent and begin to cut wasteful spending as soon as possible. “Wasteful” spending includes cost overruns, improper payments, and other types of mismanagement. But more broadly, waste includes spending that has a low value compared to the added tax burden created to fund it. And waste includes federal spending on activities that would be handled more effectively at lower cost by the states.
Causes of Waste in Federal Spending
In recent years, federal performance has been “dismal” and federal failure “endemic,” concluded Yale University law professor Peter Schuck in his 2014 book, Why Government Fails So Often.2 He examined dozens of federal programs and found that many were not delivering promised results, had large amounts of fraud and abuse, and intruded on activities that the private sector could perform better.
Schuck found that “many, perhaps most, governmental failures are structural. That is, they grow out of a deeply entrenched policy process, a political culture, a perverse official incentive system, individual and collective irrationality, inadequate information, rigidity and inertia, lack of credibility, mismanagement, market dynamics, the inherent limits of law, implementation problems, and a weak bureaucratic system.”3
Schuck is right: the problems are structural, and they have plagued the government since the beginning. A federal effort to run Indian trading posts starting in the 1790s, for example, was beset with inefficiency.4 During the 19th century, the Bureau of Indian Affairs was rife with fraud and corruption, while the Army Corps of Engineers was known for cost overruns and pork-barrel spending.5 And in the early 20th century, the government had a hard time closing unneeded Army forts, post offices, and Treasury assay offices because of parochial politics.6 The government is far larger today, and so the waste has multiplied.
Here are some of the structural reasons for federal waste:7
- Huge Size. The government has more than 2,300 subsidy and benefit programs, and all of them are susceptible to waste, fraud, and other types of inefficiency.8 Remarkably, the federal budget at $4 trillion is 100 times larger than the budget of the average-size state government. Federal spending is far too large for auditors and oversight committees to adequately monitor or review. Waste has ballooned as the government has grown larger.
- Absence of Profits. Unlike businesses, federal agencies do not have the straightforward and powerful goal of earning profits. So agencies have little reason to restrain costs, improve the quality of their services, or increase their management effectiveness. Many federal activities are monopolies, and that further reduces their incentive to operate efficiently.
- Absence of Losses. Unlike in the private sector, poorly performing federal activities do not go bankrupt. There are no automatic correctives to programs that have rising costs and falling quality. In the private sector, businesses abandon activities that no longer make sense, and about 10 percent of all U.S. companies go out of business each year.9 By contrast, “the moment government undertakes anything, it becomes entrenched and permanent,” noted management expert Peter Drucker.10
- Output Measurement and Transparency. Business output can be measured by profits, revenues, and other metrics. But government output is difficult to measure, and the missions of federal agencies are often vague and multifaceted. That makes it hard for Congress and the public to judge agency performance and to hold officials accountable for results. While businesses interact with customers, suppliers, and capital markets, federal agencies are often insular and less open to outside feedback, and that makes them more vulnerable to failure.
- Rigid Compensation. Federal employee pay is based on standardized scales generally tied to longevity, not performance. The rigid pay structure makes it hard to encourage improved efforts or to reward outstanding achievements. The pay structure also reduces morale among the best workers because they see the poor workers being rewarded equally. Furthermore, the best workers have the most incentive to leave, while the poor workers will stay, decade after decade.
- Lack of Firing. Disciplining federal workers is difficult because of strong civil service and union protections. When surveyed, federal employees themselves say that their agencies do a poor job of disciplining poor performers.11 Govexec.com recently noted, “There is near-universal recognition that agencies have a problem getting rid of subpar employees.”12 Just 0.5 percent of federal civilian workers get fired each year, which is just one-sixth the private-sector firing rate.13 The firing rate is just 0.1 percent in the federal senior executive service, which is just one twentieth the firing rate of corporate CEOs.14
- Red Tape. Federal programs are loaded with rules and regulations, which reduces operational efficiency. One reason for all the rules is to prevent corruption and fraud, which are concerns because the government hands out so many contracts and subsidies. Another reason is that there is no profit goal in government, and so detailed rules provide an alternate way to monitor workers. Finally, government workers themselves have reasons to favor red tape: if they follow detailed rules, they can “cover their behinds” and shield themselves from criticism.
- Bureaucratic Layering. Research has found that American businesses have become leaner in recent decades, with flatter managements.15 By contrast, the number of layers of federal management has greatly increased. Paul Light of the Brookings Institution found that the number of layers, or ranks by title, in the typical federal agency has jumped from 7 to 18 since the 1960s.16 Light argues that today’s “over-layered chain of command” in the government is a major cause of failure.17 Overlaying stifles information flow and makes it harder to hold anyone accountable for failures.
- Political Appointees. At the top of the executive branch is a layer of about 3,000 full-time political appointees.18 Political leadership of federal agencies has some benefits, but it also contributes to failure. Administrations come into office eager to launch new initiatives, but they are less interested in managing what is already there. Political appointees may think that they know all the answers, and so they repeat past mistakes. The average tenure of federal political appointees is short — just two and half years — and so they shy away from tackling longer-term, structural reforms.19 Another problem is that many appointees are political partisans who lack management or technical experience.
Some of these problems could be reduced by procedural reforms in Congress and management reforms in the executive branch. But as long as the federal government is so large, it will continue wasting many billions of dollars. So the best way is improve federal management and reduce waste is to greatly reduce the government’s size.
Aid to the States Is Particularly Inefficient
While our biggest fiscal challenges stem from Medicare and Social Security, another area to find savings is aid to state and local governments, which costs more than $600 billion a year. There are more than 1,100 different aid-to-state programs, including those for education, transit, housing, economic development, and welfare.20
Aid to the states is particularly susceptible to waste for a number of reasons:
- Misallocation. In markets, the price mechanism and supply and demand allocate resources efficiently across the nation. The government has no such mechanism, and so federal aid is distributed based on guesswork and parochial politics. Allocating resources from Washington for local activities, such as schools, is less efficient than each state balancing the costs and benefits of its own spending programs.
- Bad Incentives. State and local governments have an incentive to overspend when the funds come “free” from the federal government. As for federal policymakers, they are often more focused on securing spending for their states than on ensuring money is spent efficiently with high-quality results.
- One Size Does Not Fit All. Americans have diverse needs and beliefs. Some programs make sense for some states, but not for others. Yet the federal aid system requires that all the states pay for programs created in Washington. Furthermore, aid comes with top-down regulations that raise costs and stifle local innovation. The states are supposed to be laboratories of democracy, but federal aid undermines that.
- Intense Bureaucracy. Federal aid is not a costless injection of funding to the states. It engulfs government workers in unproductive activities such as proposal writing, program reporting, regulatory compliance, auditing, and litigation. Many of the 16 million people employed by state and local governments must deal with complex federal regulations related to the plethora of aid programs.
- Policymaker Overload. Federal lawmakers have jam-packed schedules, and they simply do not have the time to properly oversee the vast aid system. Nor are lawmakers experts in the hundreds of local policy areas that federal aid supports. Furthermore, the more time lawmakers spend on local issues, the less time they have to ensure that money is being spent efficiently on properly federal activities, such as defense.
So federal aid is a roundabout and inefficient way to fund state and local activities, and it should be cut. Here are some suggested areas for savings:
Urban Transit. The federal government will spend about $13 billion on urban transit in 2015.21 Federal aid is heavily tilted toward the capital costs of transit systems, not the operating costs. That bias induces local governments to favor expensive rail systems, rather than cheaper and more flexible bus systems.22 Federally funded rail lines are prone to cost overruns and optimistic ridership projections.23
Without federal aid, states and cities would make more efficient investment choices using their own funding, and they would have more incentive to control project costs. Ending federal aid would also encourage cities to experiment with private and entrepreneurial transit options.
Disaster Aid. The Federal Emergency Management Agency (FEMA) provides aid for disaster preparedness, response, and relief. FEMA’s budget fluctuates, but spending has trended upward in recent decades. The agency will spend about $14 billion in 2015.24
FEMA’s response to some major disasters has been slow, disorganized, and profligate, as was the case with Hurricane Katrina.25 Despite such failures, the federal government has become more involved in natural disasters in recent years, even smaller localized events. The number of federal disaster declarations — which trigger the flow of federal funding — soared from 29 in the 1980s, to 74 in the 1990s, to 127 in the 2000s, and to 128 so far in the 2010s.26
This is a troublesome development. Federalism is supposed to undergird America’s system of handling natural disasters, but growing federal intervention is undermining the role of the states and private institutions. FEMA is very bureaucratic, and its activities can slow state and local disaster relief and rebuilding. The Government Accountability Office (GAO) found that the share of FEMA relief spending going toward paperwork has risen substantially over the years.27
FEMA’s aid to states for preparedness is also known for wastefulness. Annual grants of $2.8 billion are used by local governments to pay for such items as vehicles, equipment, and conferences.28 FEMA money is “free” to local governments, and so they tend to squander it. A report by former Senator Tom Coburn described how cities have used preparedness grants to buy armored vehicles, hovercrafts, underwater robots, and other fancy equipment that is little used.29
State and local governments should handle most natural disasters by themselves, and they can do so more efficiently without FEMA intervention. Cutting FEMA aid for natural disaster preparedness and relief would save billions of dollars a year.
Employment and Training.The federal government spends $8 billion or more a year on 47 different employment and training programs.30 In a 2011 report, the GAO said “little is known about the effectiveness of employment and training programs we identified.”31 That is remarkable — taxpayers have been funding these sorts of programs for decades, yet federal auditors are still not sure whether or not they work.
There are few, if any, roles that the federal government can fill in employment and training that the states and private sector cannot fill. Even though millions of Americans have been out of work in recent years, relatively few of them have used federal employment and training services.32 Instead, individuals looking for jobs and training these days rely on personal connections, the myriad of Internet resources, temporary staffing agencies, private education firms, and other market institutions.
Federal aid for employment and training programs tends to be spent inefficiently by local employment agencies and private contractors. A report by former Senator Tom Coburn cataloged the waste, fraud, and abuse of federal aid dollars in these programs by local administrators.33 Congress should terminate these programs as ineffective and obsolete, and allow the states to go their way with workforce development.
Economic Development Administration (EDA). The Department of Commerce EDA provides subsidies to state and local governments, nonprofit groups, and businesses in regions that are economically distressed. At least that was the original idea, but political pressures intervened, and today the EDA spreads subsidies widely across the nation.34
The EDA will spend about $453 million in 2015 on a hodgepodge of activities, such as local road and sewer projects, construction and rehab of buildings, and direct business subsidies.35 A June 1 press release from EDA, for example, announced an $862,557 grant to a company in Loveland, Colorado, to rehab an old building to house artist’s businesses.36 A May 8 press release announced a $2 million grant to Chester County, South Carolina, for a local sewer upgrade needed by a business.37 These might be worthy projects, but what are the advantages to the economy of federal involvement? There are none. Federal intervention will simply add more bureaucracy to such projects.
The agency often claims that its projects generate high returns, but if that were true then local governments and businesses would eagerly tackle them by themselves. The EDA often claims that its spending creates “multiplier effects,” but that ignores the negative multipliers that are generated from the higher taxes needed to fund the projects.
The EDA has funded many dubious projects over the years. The agency was a frequent target of former Democratic Senator William Proxmire and his “Golden Fleece Awards.”38 Back in the 1980s, Proxmire argued that the EDA “deserves to die.”39 Congress should follow though, and eliminate the EDA.
Community Planning and Development (CPD). The Department of Housing and Urban Development will spend about $11 billion on CPD in 2015.40/sup> Like EDA spending, CPD spending is a hodgepodge of subsidies for purchasing properties, construction and repair of facilities, and aid to nonprofits and businesses.41 Funding goes for such projects as shopping malls, parking lots, museums, colleges, theaters, swimming pools, and auditoriums. CPD activities reflect the 1960’s optimism that federal experts could efficiently fix local urban problems. But that top-down approach has not worked.
CPD funds were originally supposed to go to high-poverty areas, but the subsidies are spread widely today, even to high-income areas. The 2009 federal budget noted that the formula for CPD grants “has not been updated in over 30 years and as a result, many lower-income communities receive less assistance than wealthier communities.”42 A 2013 report by Reason Foundation also documented this problem, and it highlighted the corporate welfare aspects of CPD spending, such as subsidizing marinas and breweries.43
CPD activities should be funded by local governments or the private sector, not the federal government. Only local officials — using their own funding — can properly balance the costs and benefits of local projects. Congress should end CPD and save $11 billion annually.
School Lunch and Breakfast. The Department of Agriculture will spend about $16 billion on the school lunch and breakfast programs in 2015.44 The programs illustrate a classic problem with aid programs — because the funding comes from Washington, local administrators have little incentive to control costs and reduce waste and abuse.
The improper payment rate for the school lunch program in 2013 was 15.7 percent, while the rate for the breakfast program was 25.3 percent.45 Those rates of error and fraud are huge, and they amount to improper payments of at least $2.6 billion annually.46 Many families claim benefits that they are not eligible for, for example, by falsely stating their income.
Schools strongly encourage participation, and families are not required to submit supporting documents when they apply, such as tax returns or paystubs.47 Schools have strong incentives to maximize the number of kids on the lunch and breakfast programs because it affects the amount of resources they receive from other federal and state programs, such as Title 1 education grants.48 As for school districts, they have little incentive to verify eligibility, and are only required to check three percent of applications each year.49 Because these benefits go to about 100,000 schools, there is no way that officials in Washington can oversee the spending effectively.
School lunch and breakfast programs should be devolved to state and local governments. If they were relying on their own funding, they would have stronger incentives to improve efficiency and reduce waste.
Federal debt is piling up and spending is expected to soar in coming years. Projections show rivers of red ink unless policymakers enact reforms. The main problem is rapid growth in the major entitlement programs. But federal policymakers should tackle waste in every department to help solve our fiscal challenges.
A great place to start would be to cut aid-to-state programs. When the federal government takes over state and local activities, it generates bureaucratic waste and inefficiency, which ultimately harms the economy and reduces our standard of living. A decentralized approach where the states are left free to fund their own activities would lead to better governance for the whole nation.
Thank you for holding these important hearings.
Editor of www.DownsizingGovernment.org
cedwards [at] cato.org
1 Congressional Budget Office, “The 2014 Long-Term Budget Outlook,” July 2014. This is the “extended alternative fiscal scenario.” Spending for 2015 is the current estimate.
2 Peter H. Schuck, Why Government Fails So Often (Princeton, NJ: Princeton University Press, 2014), pp. 371, 372.
3 Peter H. Schuck, Why Government Fails So Often (Princeton, NJ: Princeton University Press, 2014), p. 372.
4 Burton W. Folsom Jr. and Anita Folsom, Uncle Sam Can’t Count (New York: Broadside Books, 2014), Chapter 1.
5 For Indian Affairs, see Chris Edwards, “Indian Lands, Indian Subsidies, and the Bureau of Indian Affairs,” DownsizingGovernment.org, Cato Institute, February 2012. For the Army Corps, see Chris Edwards, “Cutting the Army Corps of Engineers,” DownsizingGovernment.org, Cato Institute, March 2012. And see Chester Collins Maxey, “Log-Rolling,” Thesis for Master of Arts, University of Wisconsin, 1914.
6 Chester Collins Maxey, “A Little History of Pork,” National Municipal Review, December 1919.
7 These issues are explored in detail in (forthcoming) Chris Edwards, “Why the Federal Government Fails,” Cato Institute, July 2015.
8 Program count from www.cfda.gov.
9 Brian Headd, Alfred Nucci, and Richard Boden, “What Matters More: Business Exit Rates or Business Survival Rates?” BDS Brief 4, U.S. Bureau of the Census, 2010.
10 Peter F. Drucker, “The Sickness of Government,” The Public Interest, 1969, p. 12.
11 Paul Light’s research cited in Peter H. Schuck, Why Government Fails So Often (Princeton, NJ: Princeton University Press, 2014), p. 322.
12 Eric Katz, “Firing Line,” Government Executive, January–February 2015.
13 Andy Medici, “Federal Employee Firings Hit Record Low in 2014,” www.federaltimes.com, February 24, 2015. And see Chris Edwards, “Federal Firing Rate by Department,” Cato Institute, June 6, 2014.
14 For the SES firing rate, see Eric Katz, “Lower-Ranking Feds Are Nine Times More Likely to Be Fired than Senior Execs,” www.govexec.com, June 3, 2014. For the CEO firing rate, see Lucian Taylor, “Comment” on Stephen N. Kaplan, “Executive Compensation and Corporate Governance in the United States,” in Cato Papers on Public Policy 2 (2012), p. 163.
15 Raghuram Rajan and Julie Wulf, “The Flattening of the Firm,” National Bureau of Economic Research, Working Paper 9633, April 2003.
16 Paul C. Light, “Perp Walks and the Broken Bureaucracy,” op-ed, Wall Street Journal, April 26, 2012.
17 Paul C. Light “A Cascade of Failures,” Brookings Institution, July 2014, p. 11.
18 James P. Pfiffner, “Presidential Appointments and Managing the Executive Branch,” Political Appointee Project, undated, www.politicalappointeeproject.org. This figure is in addition to White House staff.
19 For the 2.5 years statistic, see James P. Pfiffner, “Presidential Appointments and Managing the Executive Branch,” Political Appointee Project, undated, www.politicalappointeeproject.org.
20 Chris Edwards, “Fiscal Federalism,” DownsizingGovernment.org, Cato Institute, June 2013. And see Chris Edwards, “Federal Aid to the States: Historical Cause of Government Growth and Bureaucracy,” Cato Institute, May 2007.
21 Budget of the U.S. Government, FY2016, Analytical Perspectives, Table 29-1. This is the total for the Federal Transit Administration.
22 Randal O’Toole, “Urban Transit,” DownsizingGovernment.org, Cato Institute, June 2010. And see Randal O’Toole and Michelangelo Landgrave, “Rails and Reauthorization,” Cato Institute Policy Analysis no. 772, April 21, 2015.
23 Randal O’Toole and Michelangelo Landgrave, “Rails and Reauthorization,” Cato Institute Policy Analysis no. 772, April 21, 2015.
24 Budget of the U.S. Government, FY2016, Analytical Perspectives, Table 29-1.
25 Chris Edwards, “The Federal Emergency Management Agency: Floods, Failures, and Federalism,” DownsizingGovernment.org, Cato Institute, December 2014.
26 FEMA keeps a count at www.fema.gov/disasters/grid/year. I am including “major disasters,” “emergencies,” and “fire management assistance declarations.”
27 Government Accountability Office, “Federal Disaster Assistance: Improved Criteria Needed to Assess a Jurisdiction’s Capability to Respond and Recover on Its Own,” GAO-12-838, September 2012, pp. 40, 41.
28 Budget of the U.S. Government, FY2016, Analytical Perspectives, Table 29-1.
29 Office of Senator Tom Coburn, “Safety at Any Price: Assessing the Impact of Homeland Security Spending in U.S. Cities,” December 2012.
30 The $8 billion figure is the estimated 2015 outlays for budget function 504. See Budget of the U.S. Government, FY2016, Historical Tables, Table 3.2. For the number of programs, see Government Accountability Office, “Multiple Employment and Training Programs,” GAO-11-92, January 2011.
31 Government Accountability Office, “Multiple Employment and Training Programs,” GAO-11-92, January 2011.
32 Chris Edwards and Daniel J. Murphy, “Employment and Training Programs: Ineffective and Unneeded,” DownsizingGovernment.org, Cato Institute, June 2011.
33 Office of Senator Tom Coburn, “Help Wanted: How Federal Job Training Programs Are Failing Workers,” February 2011.
34 Tad DeHaven, “Economic Development Administration,” DownsizingGovernment.org, Cato Institute, February 2009.
35 Estimated outlays for 2015 from Budget of the U.S. Government, FY2016, Analytical Perspectives, Table 29-1.
36 Economic Development Administration, press release, June 1, 2015, www.eda.gov/news/press-releases/2015/06/01/co.htm.
37 Economic Development Administration, press release, May 8, 2015, www.eda.gov/news/press-releases/2015/05/08/sc.htm.
38 Tad DeHaven, “Economic Development Administration,” DownsizingGovernment.org, Cato Institute, February 2009.
39 United Press International, “Proxmire’s Golden Fleece Goes to Jobs Program,” December 17, 1986.
40 Budget of the U.S. Government, FY2016, Analytical Perspectives, Table 29-1.
41 Tad DeHaven, “Community Development,” DownsizingGovernment.org, Cato Institute, June 2009.
42 Budget of the U.S. Government, FY 2009, Appendix, p. 553.
43 Victor Nava, “Crony Capitalism and Community Development Subsidies,” Reason Foundation, June 2013.
44 Budget of the U.S. Government, FY2016, Appendix, p. 160.
45 Government Accountability Office, “School-Meals Programs,” GAO-14-262, May 2014, p. 15.
46 Government Accountability Office, “School-Meals Programs,” GAO-14-262, May 2014, p. 15.
47 Government Accountability Office, “School-Meals Programs,” GAO-14-262, May 2014, p. 9.
48 David N. Bass, “Fraud in the Classroom,” EducationNext.org, Winter 2010.
49 Government Accountability Office, “School-Meals Programs,” GAO-14-262, May 2014, p. 14.