February 12, 2003 | Backgrounder on Federal Budget
Weary taxpayers are looking to President George W. Bush and Congress to reduce the tax burden and set a course toward a balanced budget. The President has already proposed a bold plan to reduce the high tax rates currently weighing down the economy, and an overhaul of the 44,000-page U.S. federal tax code may also be proposed. Lower tax rates will reduce barriers to working, saving, and investing, and therefore promote long-term economic growth.
Taxing Americans less also means that Washington must learn to spend less. Lawmakers courageously restrained spending in the mid-1990s but have since abandoned fiscal responsibility in favor of bloated budgets that assume there is no problem bigger government cannot solve. For example:1
All government spending--even that financed by borrowing--must eventually be paid for with taxes. The real cost of government therefore is how much it spends, not how much it taxes. The lesson is clear: Over the long run, low taxes are possible only with low spending.
Tax reduction is not the only reason to take a fresh look at federal spending. Many government programs harm the economy because they centralize authority with politicians and bureaucrats in Washington at the expense of entrepreneurs and families. Non-deserving interests use government to secure benefits and perks that private individuals and businesses would not otherwise provide them.
Congress's last serious attempt to reduce wasteful spending occurred in 1995 and 1996, when the 104th Congress terminated several programs whose irrelevance was proven by how quickly they were forgotten. But Congress then committed several strategic errors, such as overreaching and shutting down the federal government in 1995. After President Bill Clinton deftly exploited theses mistakes, budget cutters overreacted to Clinton's tactics by completely abandoning the mission of smaller government. Federal spending subsequently skyrocketed as a paralyzed Congress decided that budget confrontations with the Clinton White House could never be won and should be avoided at all costs.
In 2003, reducing wasteful spending is more important than ever. Defense, homeland security, and expensive entitlements are stretching the federal government thin while a high tax burden is weighing down the economy. Yet, although President Clinton is no longer in office and budget-cutting strategies have improved, Congress and (albeit to a lesser extent) President Bush still maintain a reflexive fear of attacking wasteful spending.
It is time to step back and think about the role of government, the obligations of the private sector, and the delineation between federal and state responsibilities. For those interested in lean, effective government with low taxes, here are 10 guidelines to eliminate wasteful spending:
Interest groups are always ready to defend their special-interest subsidies. But taxpayers rarely fight this wasteful spending because they do not believe they will ever see the savings. Policymakers can organize taxpayers in opposition to wasteful spending by linking specific reforms and spending reductions to specific tax cuts, such as legislation to:
Congress should create an independent commission that would present Congress with a list of all duplicative, wasteful, outdated, and failed programs that should be eliminated--and earmark all savings to an immediate across-the-board income tax cut.2 The legislation would not be amendable, so members could not preserve their own special-interest programs. This is how the federal government handled military base closings in the 1990s. When faced with the clear decision between funding outdated government programs and reducing the tax burden, most taxpayers will encourage their representatives to let them keep more of their own money.
Only the federal government can handle national defense, international relations, and the administration of federal laws. But why should politicians in Washington decide what roads are built in Appleton, Wisconsin? Or what community development projects are undertaken in St. Louis, Missouri? Or how education dollars are spent in Cheyenne, Wyoming?
The federal government taxes families, subtracts a hefty administrative cost, and then sends the remaining tax revenues back to the state and local governments--with specific rules dictating how they may and may not spend the money. In that sense, the federal government is merely an expensive middleman, contributing little more than meddling mandates that constrain the flexibility that state and local governments need to address their own issues creatively.
No distant bureaucrat in Washington, D.C., can know what policies are best for every state and locality. One-size-fits-all federal mandates rarely succeed as well as flexible programs designed by state and local officials who are closer to the people affected. Moreover, legislators have little incentive to design programs that work beyond their home constituencies.
State and local governments, which often consider federal grants "free money," also lack sufficient incentives to spend this money well because they did not have to extract the taxes themselves (many seem to forget the high federal taxes that local residents paid for this "free money"). Consequently, local officials rarely object to federal grants for unnecessary projects.
Few local governments, for example, would consider taxing their own residents to fund the following pork-barrel projects found in the 2003 federal budget:3
The federal government can promote accountability, flexibility, and local control by eliminating many of the mandates on how state and local governments address their own issues, and by letting them raise their own revenues and create their own programs without meddling from Washington, D.C. Specifically, Congress should:
Over the past two decades, nations across the globe have reaped the benefits of privatization, which empowers the private sector to carry out functions that had been performed by the government. In the 1980s, British Prime Minister Margaret Thatcher saved taxpayers billions of dollars and improved the British economy by privatizing utilities, telecommunications, and airports. More recently, the former Soviet Union and China have seen the promise of privatization. The United States, however, has been uncharacteristically timid in recent years.
There is little economic justification for the government's running businesses that the private sector can run itself. Even when there is a compelling reason for government to regulate or subsidize businesses, it can do so without seizing ownership of them. Government failures are often larger than market failures; and anyone who has dealt with the post office, lived in public housing, or visited the local Department of Motor Vehicles understands how wasteful, inefficient, and unresponsive government can be.
Furthermore, government ownership crowds out private companies and encourages protected entities to take unnecessary risks. After promising profits, government-owned businesses frequently lose billions of dollars--and leave the taxpayers to foot the bill.
Entrenched opposition to privatization, which comes mostly from interest groups representing government monopolies, has been overcome elsewhere by (1) working with government unions and relevant interest groups to design privatization proposals; (2) offering low-cost stock options to current employees; and (3) assuring a transparent, open bidding process.
Candidates for privatization are numerous. Congress should:4
Government-owned enterprises are not the only candidates for privatization. In 2001, taxpayers were on the hook for the federal government's $242 billion in outstanding direct loans and $1,084 billion in outstanding guaranteed loans. Government loans typically undercut the financial services industry, which has sufficient resources to provide loans to businesses and individuals.
Even worse, government often serves as a lender of last resort to organizations that private banks do not consider qualified for loans, and the low-cost nature of government loans encourages recipients to take unnecessary risks with their federal dollars. Consequently, a high percentage of federal loans are in default, and taxpayers were saddled with $20 billion in direct loan write-offs and guaranteed loan terminations in 2001.5 Therefore, Congress should:
President Ronald Reagan once pointed out that "a government bureau is the closest thing to eternal life we'll ever see on earth." A large portion of the current federal bureaucracy was created during the 1900s, 1930s, and 1960s in attempts to solve the unique problems of those eras.
Instead of replacing the outdated programs of the past, however, each period of government activism has layered new programs on top of them. Ford Motor Company would not waste money today by building outdated Model T's alongside their current Mustangs and Explorers. Yet in 2003, the federal government still refuses to close down old agencies such as the Rural Utilities Service (designed to bring phones to rural America) and the U.S. Geological Survey (created to explore and detail the nation's geography).
Government must be made light and flexible, adaptable to the new challenges the country will face in the 21st century. Weeding out the failed and outdated bureaucracies of the past will free resources to modernize the government.
Status Quo Bias
Lawmakers often acknowledge that certain programs show no positive effects. Unfortunately, they also refuse to terminate even the most irrelevant programs. The most obvious reason for this timidity is a cautious aversion to fighting the special interests that refuse to let their pet programs end without a bloody fight.
A less obvious reason is that eliminating government programs seems reckless and bold to legislators who have never known of a federal government without them. Although thousands of programs have come and gone in the nation's 227-year history, virtually all current programs were created before most lawmakers came to Washington. For legislators budgeting and implementing the same familiar programs year after year, a sense of permanency sets in, and termination seems unfathomable.6 No one even remembers when a non-government entity addressed the problems.
The Department of Energy has existed for just one-tenth of the nation's history, yet closing it down seems ridiculous to those who cannot remember the federal government before 1977 and for whom appropriating and overseeing the department has been an annual ritual for years. Lawmakers need a long-term perspective to assure them the sky does not fall when a program gets terminated. For example, the Bureau of Mines and the U.S. Travel and Tourism Administration, both closed in 1996, are barely remembered today.7
Instead of just assuming that whoever created the programs decades ago must have been filling some important need that probably exists today, lawmakers should focus on the future by asking themselves the following question: "If this program did not exist, would I vote to create it?" Because the answer for scores of programs would likely be "no," Congress should:
Congress must also provide stronger financial management oversight for federal programs, which are losing billions of dollars every year from mismanagement. The following examples of inexcusable waste make a convincing case for reform:
There is no justification for taxing waitresses and welders to subsidize Fortune 500 CEOs. Mistargeted programs, such as $85 billion in annual corporate welfare spending, come in many forms--direct payments, low-cost loans or insurance, subsidized services--but they all provide these services to special interests that are neither entitled to nor in need of such assistance.
These programs harm the economy. Operating subsidies and loans to private businesses overtax productive sectors of the economy and redistribute that money to less productive sectors, based on the fallacy that it will somehow create jobs. Programs subsidizing start-up companies represent a misguided attempt by government to pick the market's winners and losers.
In addition, research subsidies for profit-seeking businesses (which already have an incentive to fund their own profitable research) merely displace private research funding with taxpayer funds; and emergency grant and loan programs encourage businesses to take irrational risks with the assurance that taxpayers will cover any losses. Congress therefore should:
Government's layering of new programs on top of old ones inherently creates duplication. Having several agencies perform similar duties creates administrative waste and confuses program beneficiaries who must navigate each program's distinct rules and requirements.
A small degree of overlap is inevitable. Some agencies are defined by whom they serve (veterans, Native Americans, urbanites, rural families), while others are defined by what they provide (housing, education, health care, economic development). So when these agencies' constituencies overlap, as they do in veterans housing or rural economic development, each relevant agency will often have its own program. With 342 separate economic development programs, the federal government needs to make consolidation a priority.
Consolidating duplicative programs will save money and improve government service. Merging related block grants will give states better flexibility to target their funds. The new Department of Homeland Security provides one example of a successful consolidation of separate agencies and programs. A recently announced consolidation of the 22 different federal payroll systems into just two will save $1.2 billion over the next decade. At the state level, governors such as Virginia's Mark Warner are proposing consolidations that will save hundreds of millions of dollars.
Except for those that should be eliminated altogether, Congress should consolidate the following sets of programs:17
Government programs should not be bloated bureaucracies shepherding recipients into one-size-fits-all programs. Voucher programs, which allow individuals to purchase goods and services on the open market rather than receiving them from the government, have two distinct advantages:
Some policymakers believe that low-income individuals cannot be trusted to make intelligent economic decisions with their vouchers, implying condescendingly that government employees know best how to run the lives of poor families. Those worrying that private markets could not accommodate the influx of voucher-wielding families fail to recognize that vouchers create markets by strengthening demand and thereby inducing new supply.
Food stamps provide the model for a successful voucher program.18 Instead of building a bureaucracy to grow and distribute government food to low-income families, the program simply provides families with vouchers to purchase food themselves. Housing vouchers that subsidize private rent costs have proven better for low-income families than dilapidated, dangerous public housing. Most child-care programs subsidize the private facilities parents choose instead of forcing them into government-fun facilities. Federal student loan programs exist as a type of education vouchers.
Vouchers can provide choice without bureaucracy in many other areas. Medicare and Medicaid could be made more like the Federal Employees Health Benefits Program (FEHBP), in which federal employees choose between competing private health plans with the federal government subsidizing the premium. Congress could provide school vouchers to families in Washington, D.C. More public housing programs can be replaced with rent vouchers.
Budget cutters often commit the tactical error of settling for small reductions or lengthy phase-outs of obsolete programs instead of immediately terminating them. They mistakenly believe that securing small program reductions now will allow them to come back and cut the program more next time.
But leaving obsolete programs in place simply creates an opportunity for future Congresses to restore funding. Furthermore, retaining the programs leaves the bureaucracy in place and allows it to enlist interest groups in a counteroffensive against spending reductions. The old line that "those attacking the throne had better kill the king on the first shot" applies to government programs as well.
In the 1980s, President Reagan successfully terminated only 12 of the 94 programs he proposed eliminating. Congress would often block the terminations by negotiating slight reductions and lengthy phase-outs, waiting a few years for the President's focus to shift elsewhere and then restoring the programs to their original funding.19 Similarly, members of the 104th Congress who proposed ending federal subsidies to programs such as
AmeriCorps and the Corporation for Public Broadcasting were persuaded to settle for slight spending reductions and a promise to cut more later--and the budgets of those programs have since rebounded to all-time highs.
One must never assume that spending reductions today will be followed up with additional reductions later. Retaining a program means retaining a bureaucracy dedicated to self-preservation, interest groups dedicated to aiding the bureaucracy, and a budget line item that Congress can easily attach a larger number to next year.
The President should try to eliminate wasteful programs in his budget. Legislators should also examine every line item in the President's budget appendix and terminate programs lacking sufficient explanations or justifications.
The federal budget process contains several procedural biases that make it difficult to restrain spending. Congress can create an environment conducive to fiscal responsibility if it will:20
Difficult times present opportunities for leaders to chart a new course. During World War II, President Franklin Roosevelt reduced non-defense spending by 36 percent to save resources. Policymakers funded the Korean War by immediately reducing non-defense spending by 25 percent.
In 2003, defense, homeland security, and expanding entitlements are placing enormous demands on taxpayers and on the economy. Congress and the President should seize this opportunity to refocus the federal government on the programs that matter most. In the end, a government that attempts to do everything will do nothing well.
Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
1. All figures are adjusted for inflation and set in 2001 dollars. See Brian M. Riedl, "How Washington Increased Spending by Nearly $800 Billion in Just Four Years," Heritage Foundation Backgrounder No. 1581, September 4, 2002, at http://www.heritage.org/Research/Budget/BG1581.cfm.
3. For more examples of pork-barrel spending, see the Heritage Foundation's appropriations watch, at http://www.heritage.org/Research/Features/Appropriations/index.cfm. Also, see Ronald Utt and Christopher Summers, "Can Congress Be Embarrassed into Ending Wasteful Pork-Barrel Spending?" Heritage Foundation Backgrounder No. 1527, March 15, 2002, at http://www.heritage.org/research/budget/bg1527.cfm.
4. Many of these policy proposals, as well as others throughout this paper, were inspired by Scott Hodge and John Barry, "How Washington Wasted Your Money in the 1995 Appropriations Bills," Heritage Foundation Backgrounder No. 1008, October 28, 1994.
6. Daniel Kahneman, a winner of the 2002 Nobel Prize for Economics, refers to the tendency to value what we possess much more than what we do not possess as the "endowment effect." For example, people may be indifferent to what mug they purchase but, once owning it, will not be willing to sell that mug for any less than several times the price paid for it. The endowment effect explains why people will not part with personal items that they know they will never use. It also helps explain why people who are indifferent to creating a government program will nonetheless fight to preserve it later. The stress of giving something up (or terminating a program) is much greater than the joy of acquiring it (or creating a program). See Daniel Kahneman, Jack Knetsch, and Richard Thaler, "The Endowment Effect, Loss Aversion, and Status Quo Bias: Anomalies," Journal of Economic Perspectives, Vol. 5, No. 1 (1991), pp. 193-206.
7. For other terminated programs long since forgotten, see Ronald D. Utt, "A Progress Report on Closing Unneeded and Obsolete Independent Federal Agencies," Heritage Foundation Backgrounder No. 1072, March 13, 1996, at http://www.heritage.org/research/governmentreform/bg1072.cfm.
8. For the frequently updated numbers of federal advisory committees and commissions, see http://fido.gov/facadatabase/rptgovtstats.asp.
9. The federal government calls this spending "unreconciled transactions." See the U.S. Department of the Treasury, 2001 Financial Report of the United States Government, p. 110, at http://www.fms.treas.gov/fr/.
11. Testimony of Janet Rehnquist, Inspector General, U.S. Department Health and Human Services, before the Senate Appropriations Subcommittee on Labor, HHS, and Education, June 12, 2002, at http://oig.hhs.gov/testimony/docs/2002/020611fin.pdf.
16. U.S. General Accounting Office, Travel Cards: Air Force Management Focus Has Reduced Delinquencies, but Improvements in Controls Are Needed, GAO-03-298, December 20, 2002, p. 4, and Travel Cards: Control Weaknesses Leave Navy Vulnerable to Fraud and Abuse, testimony before House Government Reform Committee, GAO-03-148T, October 8, 2002, p. 8.
17. Examples compiled from "Government at the Brink: Urgent Federal Government Management Problems Facing the Bush Administration," Senate Governmental Affairs Committee, June 2001, and U.S. General Accounting Office, Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap, GAO/AIMD-97-146, August 1997.