Approaches to Cutting Federal Spending

Share

Mr. Chairman and members of the committee, thank you forinviting me to testify today regarding the nation's fiscalfuture.

Unless today's massive deficit spending is reduced, the nationis headed for a fiscal calamity. The freedom and prosperity ofyoung people will be crushed by debt piling up at over $1 trilliona year.

Both parties are responsible for the deep fiscal hole we are in.The last president presided over the fastest annual average realgrowth in federal spending since Lyndon Johnson.1 Thecurrent president has embraced short-sighted and dangerousKeynesian economic theories, which favor large deficitspending.

Policymakers need to reverse course and begin cutting the budgetto stop the massive flow of red ink. Cato is building the websitewww.downsizinggovernment.orgto describe ways to cut spending in every federal department.

There are four types of reform we should pursue in cutting thebudget: restructuring the big three entitlements, terminatingunneeded programs, reviving federalism, and privatization. Thistestimony provides examples of each type of reform.

Restructuring the Big Three Entitlements

There are straightforward ways to slow the growth of SocialSecurity, Medicare, and Medicaid. For Social Security, initialbenefits could be indexed to the growth in general prices, notwages, as under current law. If we were to make that change, itwould reduce Social Security spending by roughly $60 billionannually by 2020 and rising amounts after that. That reform wouldencourage younger Americans to increase their personal savings,which would be beneficial for the nation's economic growth.Congress could support such a policy change with pro-savingsreforms to the tax code.

For Medicaid, a simple and dramatic reform would be to convertthe program into a block grant for the states. Block granting wasthe successful approach taken with federal welfare reform in 1996.A block grant would encourage the states to trim their Medicaidprograms, combat fraud and abuse, and pursue cost-effective healthcare solutions. Turning Medicaid into a block grant and freezingspending at the 2011 level would save federal taxpayers about $190billion annually by 2020.

For Medicare, I like the approach developed by Rep. Paul Ryan(R-WI) to fund elderly health care by way of vouchers.2The Ryan plan would provide retirees with a voucher averaging$11,000, which would be adjusted based on age, health status, andincome level. The voucher would grow in value over time based onthe blended growth rate of general inflation and medical inflation.That would restrain Medicare's growth compared to the baseline andgenerate large savings over time. The reform would help reducewaste and fraud in Medicare, while creating a range of incentivesto improve efficiency and quality in the overall health caresystem.

Terminating Unneeded Programs

The Cato website www.downsizinggovernment.orglists dozens of major programs that should be terminated, includingbusiness subsidies, housing subsidies, energy subsidies, and otherinefficient hand-outs. One high-priority area for cuts isagricultural subsidies.

The extensive federal welfare system for farm businesses iscostly to taxpayers and it distorts the economy.3Subsidies induce farmers to overproduce, which pushes down pricesand creates political demands for further subsidies. Subsidiesinflate land prices in rural America, and they can damage theenvironment and harm our international trade relations. The flow offederal subsidies also hinders farmers from innovating, cuttingcosts, diversifying their land use, and taking other actions neededto prosper in the global economy.

Farm subsidy programs effectively tax average families to fund asmall group of well-off farm businesses. The largest 10 percent ofrecipients receive about 72 percent of all subsidypayments.4 Furthermore, federal data for 2007 show thatthe average income of farm households was $86,223, or 28 percenthigher than the $67,609 average of all U.S. households.5We should end this welfare program for the well-to-do and saveabout $30 billion annually.

Reviving Federalism

Under the Constitution, the federal government was assignedspecific limited powers and most government functions were left tothe states. The Tenth Amendment to the Constitution embodiesfederalism, the idea that federal and state governments haveseparate areas of activity and that federal responsibilities were"few and defined," as James Madison noted.

Unfortunately, policymakers and the courts have mainly discardedfederalism in recent decades.6 Congress has undertakenmany activities that should be reserved to the states and theprivate sector. Grants-in-aid are a primary mechanism that thefederal government has used to extend its power into state andlocal affairs. Grants are subsidy programs that are combined withfederal regulatory controls to micromanage state and localactivities.

The number of different federal grant-in-aid programs for thestates soared from 463 in 1990 to more than 800 today.7The federal government spends more than $500 billion annually onaid to the states. State aid programs are notoriously bureaucraticand inefficient, and they stifle local innovation. Furthermore, byinvolving all levels of government in just about every area ofpolicy, the federal aid system creates a lack of governmentaccountability.

The federal government should start shedding properly state andlocal activities. A good place to start would be the Department ofEducation.8 The department funds about 150 differentsubsidy programs, which come with an array of regulations thatextend federal control over local schools, as under the No ChildLeft Behind law.9

Despite an enormous increase in federal K-12 spending in recentdecades, national academic performance has generally not improved.Math and reading scores have been largely flat, graduation rateshave stagnated, and researchers have found serious shortcomingswith many federal education programs.

Having quality K-12 education is a concern of most Americans,but that does not justify having a federal Department of Education.Canada provides an interesting comparison. It is a high-incomenation with an advanced economy, yet it has no federal departmentof education. Public education in Canada is the sole concern ofprovincial and local governments. That decentralized approach hasresulted in experimentation and innovation, including schoolvouchers and charter schools. International achievement datasuggest that Canadian students generally outperform U.S. studentsin reading, math, and science.10

The states need to recognize that federal aid is ultimatelyfunded by the taxpayers who live in the 50 states, and thus itprovides no free lunch. There is no important policy reason for thefederal government to be involved in K-12 education and other localactivities. Ending federal K-12 education spending would save about$60 billion annually.

Privatization

Governments on every continent have sold off state-owned assetsto private investors in recent decades.11 Airports,railroads, and many other assets have been privatized. The U.S.government privatized some activities during the 1980s and 1990s,but we lag behind other nations in realizing the potential of thistype of reform. Germany and the Netherlands, for example, haveprivatized their postal services, while Chile, Australia, and othernations have privatized their Social Security systems.

The Department of Transportation is a good target forprivatization reforms.12 Rising federal control overtransportation has resulted in the political misallocation offunds, bureaucratic mismanagement, and costly one-size-fits-allregulations on the states. The solution is to devolve DOTactivities back to state governments and the private sector.

The federal government should end highway aid, and the statesshould seek private funding for their highways. Virginia is addingtoll lanes on the Capitol Beltway, which are partly privatelyfinanced, and that state is also home to the Dulles Greenway, a14-mile private highway in operation since 1995. Ending federalhighway aid would accelerate the trend toward such innovativeprojects.

The federal government should end subsidies to Amtrak andhigh-speed rail. Amtrak has a poor on-time record, itsinfrastructure is in bad shape, and it carries only a tiny fractionof intercity passengers. Politicians prevent Amtrak from makingcost-effective decisions regarding its routes, workforce polices,and capital investments. Amtrak should be privatized to save moneyand give the firm flexibility to operate efficiently. As forhigh-speed rail, even in countries such as Japan and Francevirtually all high-speed rail lines are money losers, and theycarry only a small fraction of intercity passengers.

The federal government should end aid to airports, which are ownedby state and local governments. State and local governments shouldbe encouraged to privatize their airports and have them operatewithout subsidies. In recent decades, many airports have beenpartly or fully privatized in major cities such as Amsterdam,Auckland, Frankfurt, London, Melbourne, Sydney, and Vienna.

Finally, the air traffic control system should be privatized.The Federal Aviation Administration has a poor record inimplementing new technologies in a timely and cost-effectivemanner. Many nations have moved towards a commercialized ATCstructure, and the results have been very positive. Canadaprivatized its ATC system in 1996 in the form of a nonprofitcorporation, NavCanada, which has a very good record on safety andinnovation.

Conclusions

To some policymakers, the sorts of cuts discussed here will seemdrastic. But rising debt will eventually force policymakers to makeradical budget changes whether they like it or not. However, itwould be better to make needed reforms now before the federalgovernment's debt grows even larger.

Policymakers may hesitate to make budget reforms because ofconcerns regarding possible negative effects. But experience showsthat we usually underestimate the ability of individuals andcommunities to adjust after the withdrawal of government subsidies.Before the 1996 welfare reform, for example, opponents in Congressmade apocalyptical warnings about the supposed harm that would cometo low-income families. Yet the 1996 welfare reform turned out tobe a huge success, as most policymakers now concede.

Other nations have made dramatic fiscal reforms, and theyemerged stronger for it. New Zealand, for example, ended virtuallyall its farm subsidies in 1984, which was a bold stroke because thecountry is far more dependent on farming than the UnitedStates.13 The changes were initially met withresistance, but New Zealand farm productivity, profitability, andoutput have soared since the reforms.14 New Zealand'sfarmers have cut costs, diversified their land use, and developednew markets.

Another example is Canada, which allowed government spending tosoar to 53 percent of gross domestic product in the early 1990s.The high spending in turn caused government debt to jump to morethan 70 percent of GDP. But policymakers changed course andundertook dramatic reforms, which caused government spending anddebt to fall rapidly.15 The Canadian government cutprograms, privatized assets, consistently balanced its budget, andbegan to pre-fund its retirement system.

There is no reason why America can't undertake similar reforms.Budget cuts would strengthen the U.S. economy and expand personalfreedom to everyone's benefit. America became so prosperous becauseof our system of limited and decentralized government - not becauseof federal subsidy programs.

Thank you for holding these important hearings. I am happy tohelp the committee on these issues.

Chris Edwards
Manager of www.downsizinggovernment.org
Cato Institute
cedwards@cato.org


1www.cato-at-liberty.org/2009/12/19/george-w-bush-biggest-spender-since-lbj.
2 Rep. Paul Ryan (R-WI), House Committee on the Budget,"A Roadmap for America's Future, Version 2.0," January 2010.
3www.downsizinggovernment.org/agriculture/subsidies.
4 Environmental Working Group, Farm Subsidy Database,www.ewg.org/farm. This is a nine-year average, 1995 to 2003.
5www.ers.usda.gov/briefing/wellbeing/farmhouseincome.htm.
6www.downsizinggovernment.org/fiscal-federalism.
7 Chris Edwards, "Federal Aid to the States: HistoricalCause of Government Growth and Bureaucracy," Cato InstitutePolicy Analysis no. 593, May 22, 2007.
8www.downsizinggovernment.org/education/k-12-subsidies.
9 Chris Edwards, "Number of Federal Subsidy ProgramsTops 1,800," Cato Institute Tax and Budget Bulletin no.56, April 2009.
10 The 2006 Progress in International Reading LiteracyStudy included five Canadian provinces, and four outperformed theUnited States. The 2006 Program for International StudentAssessment tested Canadians as a whole, and the nation finishedahead of the United States in science, reading, andmathematics.
11www.downsizinggovernment.org/privatization.
12www.downsizinggovernment.org/transportation.
13 Chris Edwards and Tad DeHaven, "Save the Farms - Endthe Subsidies," op-ed, Washington Post, March 3,2002.
14 Vaudine England, "Shorn of Subsidies, New ZealandFarmers Thrive," International Herald Tribune, July 2,2005.
15 Chris Edwards, Jason Clemens, and Niels Veldhuis,"Great Right North," Washington Post, May 17, 2009.

Chris Edwards

National Commission on Fiscal Responsibility and Reform