March 10, 2004 | Backgrounder on Federal Budget
Following a multi-year spending spree that pushed federal spending above $20,000 per household and the budget deficit up to nearly $500 billion, lawmakers are finally seeking ways to control federal spending. President George W. Bush's 2005 budget provides a positive first step by proposing to freeze most non-security discretionary spending at 2004 levels.
Reducing federal spending is extraordinarily difficult. Even the most wasteful programs are passionately supported by armies of recipients, administrators, and lobbyists. Yet avoiding these difficult decisions only makes the problem worse. The baby boomers will soon collide with Social Security and Medicare to produce a sea of red ink, leading to a near doubling of all taxes or the termination of most federal programs. Lawmakers need to get spending under control immediately while laying the groundwork for comprehensive Social Security and Medicare reforms.
As lawmakers work to bring federal spending under control, they should avoid the following common traps:
Belt-Tightening Budgets Versus Priority Budgets
Following several "expansion budgets," President Bush has moved the debate in a more responsible direction by proposing a "belt-tightening budget" that asks most agencies to accept a near-freeze in discretionary spending. But would most families trying to cut costs simply freeze each expenditure equally? Or would they fully fund priorities like food, the mortgage payment, and insurance while completely eliminating unaffordable luxuries such as vacations and entertainment?
Most families would choose this "priority budget" over a "belt-tightening budget," and so should government. A priority budget would ask lawmakers to fully fund a few top priorities, such as defense, homeland security, and a few domestic programs, and then terminate such unaffordable luxuries as the approximately $60 billion in corporate welfare spending; the $20 billion pork-project budget; $100 billion (at least) in waste, fraud, and abuse; and hundreds of ineffective, outdated, and unnecessary programs.
Belt-tightening budgets are certainly preferable to the expansion budgets of the past few years. However, reducing a program's funding without correspondingly adjusting its structure, goals, and duties can lead to ineffective government. Better a few vital activities performed well than a multitude of activities performed poorly.
President Bush proposes terminating 65 programs at a savings of $4.9 billion. (See Appendix 1.) Although a step in the right direction, these low-priority terminations represent only 0.2 percent of all federal spending. By contrast, a priority budget would:
Time to be Bold
Congress last attempted to enact a priority budget 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 these mistakes, budget cutters overreacted to Clinton's tactics by completely abandoning the mission of smaller government. By 1998, federal spending was growing once again 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 2004, national defense, homeland security, and entitlement challenges make spending reform more important than ever. 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, the following are 10 guidelines for getting spending under control.
GUIDELINE #1: Build a constituency for limited government and lower taxes.
Interest groups are always ready to defend their special-interest subsidies. Taxpayers rarely fight 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:
Using the military base closing commission as a model, 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.1 To prevent Members from preserving their own special-interest programs, the legislation should not be amendable. When faced with a clear decision between funding outdated government programs and reducing the tax burden, most taxpayers would encourage their representatives to let them keep more of their own money.
GUIDELINE #2: Turn local programs back to the states.
Only the federal government can handle national defense, international relations, and the administration of federal laws. But why should politicians in Washington decide which roads are built in Appleton, Wisconsin? Or which community development projects are funded 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 governmentswith 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 which 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 2004 federal budget:2
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 letting them raise their own revenues and create their own programs without meddling Washington bureaucrats and politicians. Specifically, Congress should:
GUIDELINE #3: Privatize activities that could be performed better by the private sector.
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 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 republics 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 to run 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 a 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, leaving 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) ensuring a transparent, open bidding process.
Candidates for privatization are numerous.4 Congress should:
Government-owned enterprises are not the
only candidates for privatization. In 2003, taxpayers were on the
hook for the federal government's $249 billion in outstanding
direct loans and $1,184 billion in outstanding guaranteed loans.
Government loans typically undercut the financial services
industry, which has sufficient resources to provide loans to
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 $17 billion in direct loan write-offs and guaranteed loan terminations in 2003.6
GUIDELINE #4: Terminate failed, outdated, and irrelevant programs.
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 built 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. However, in 2004, 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. Regrettably, they also refuse to terminate even the most irrelevant programs. The most obvious reason for this timidity is an 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 a federal government without them. Although thousands of programs have come and gone in the nation's 228-year history, virtually all current programs were created before most lawmakers came to Washington. For legislators who are charged with budgeting and implementing the same familiar programs year after year, a sense of permanency sets in, and termination seems unfathomable.7 No one even remembers when a non-government entity addressed the problems.
The Department of Energy, for example, has existed for just one-tenth of the country'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 is terminated. For example, the Bureau of Mines and the U.S. Travel and Tourism Administration, both closed in 1996, are barely remembered today.8
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:
GUIDELINE #5: Improve financial management and reform wasteful programs.
Congress must 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:
The government's own auditors, as well as outside watchdog groups, have recommended specific reforms to:
GUIDELINE #6: Terminate corporate welfare and other mistargeted programs.
There is no justification for taxing waitresses and welders to subsidize Fortune 500 companies. Mistargeted programs, such as approximately $60 billion in annual corporate welfare spending, come in many formsdirect payments, low-cost loans or insurance, and subsidized servicesbut they all provide services to which special interests are not entitled and that they do not need.
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. Emergency grant and loan programs encourage businesses to take irrational risks with the assurance that taxpayers will cover any losses.
Congress therefore should:
GUIDELINE #7: Consolidate duplicative and contradictory programs.
Government's layering of new programs on top of old ones inherently creates duplication. Having several agencies perform similar duties is wasteful and confuses program beneficiaries who must navigate each program's distinct rules and requirements.
Some overlap is inevitable because some agencies are defined by whom they serve (e.g., veterans, Native Americans, urbanites, and rural families), while others are defined by what they provide (e.g., housing, education, health care, and economic development). When these agencies' constituencies overlap, as 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 more 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 (D) are proposing consolidations that will save hundreds of millions of dollars.
Except for those that should be eliminated altogether, Congress should consolidate the following sets28 of programs:
GUIDELINE #8: Convert several remaining programs into vouchers.
Government programs should not be bloated bureaucracies that shepherd 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, condescendingly implying 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.29 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 that parents choose instead of forcing them into government-run 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. More public housing programs can be replaced with rent vouchers.
GUIDELINE #9: Terminate programs rather than trimming them or phasing them out.
Budget cutters often commit the tactical error of settling for small reductions or lengthy phaseouts 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 be eliminated. Congress would often block the terminations by negotiating slight reductions and lengthy phaseouts, waiting a few years for the President's focus to shift elsewhere and then restoring the programs to their original funding.30 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 to which Congress can easily attach a larger number next year.
GUIDELINE #10: Utilize the "ideas industry" for specific proposals.
Those seeking specific proposals to reduce wasteful spending have several options available:
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 that lack sufficient explanations or justifications.
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. Those spending cuts required difficult choices, and lawmakers rose to the challenge.
In 2004, bold steps are again needed to rein in spending. The choices will be as difficult as those of the past, but that is what budgets are about--setting priorities. Congress and the President should seize this opportunity to refocus the federal government on the programs that matter most. Otherwise, the American people will face higher taxes, fewer jobs, less economic growth, and less effective government.
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. Heritage Foundation research assistant Keith Miller contributed to this paper.
1. During the 108th Congress, Senator Sam Brownback (R−KS) introduced S. 837 and Representative Todd Tiahrt (R−KS) introduced H.R. 3213 to establish such a commission.
2. For more examples of pork-barrel spending, see Brian Riedl, "Another Omnibus Spending Bill Loaded with Pork," Heritage Foundation WebMemo No. 377, December 2, 2003, at www.heritage.org/Research/Budget/wm377.cfm. See also Ronald Utt and Christopher Summers, "Can Congress Be Embarrassed into Ending Wasteful Pork-Barrel Spending?" Heritage Foundation Backgrounder No. 1527, March 15, 2002, at www.heritage.org/Research/Budget/BG1527.cfm.
3. Where applicable, the 2004 outlays and classification--mandatory or discretionary--are listed for each program recommended for reform. Discretionary programs, such as defense, are appropriated annually by Congress. For most mandatory programs, such as Social Security, lawmakers set eligibility and benefit levels, and the spending totals are determined by the number of participants. Note that implementing a given recommendation may not immediately save this outlay amount, as reforms may take a few years to work through the system. Furthermore, privatization savings may depend on asset sales or whether the government contracts with the private sector to perform the privatized activity. Some recommendations overlap, so adding up all savings in this paper may overstate the potential savings of these proposals.
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.
5. Unless otherwise noted, all amounts listed after each program refer to the estimated 2004 outlays. This is not necessarily the amount that would be immediately saved from enacting the recommendation. See footnote 3 for further details.
6. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2005: Analytical Perspectives, pp. 105-106.
7. 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 up something (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.
8. 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 www.heritage.org/Research/GovernmentReform/BG1072.cfm.
9. The U.S. Geological Survey research functions could be transferred to the National Science Foundation.
10. Unless otherwise noted, all amounts listed after each program refer to the estimated 2004 outlays. This is not necessarily the amount that would be immediately saved from enacting the recommendation. See footnote 3 for further details.
11. Programs that collect revenues (such as loan repayments, fees, or money from product sales) can occasionally make a profit, or have "negative spending levels." These negative spending levels are often rare occurrences and do not mask that program's long-term cost.
12. Unless otherwise noted, all amounts listed after each program refer to the estimated 2004 outlays. This is not necessarily the amount that would be immediately saved from enacting the recommendation. See footnote 3 for further details.
13. At a minimum, Congress should end new enrollments in the program and not renew expiring contracts.
14. For the frequently updated numbers of federal advisory committees and commissions, see General Services Administration, Federal Advisory Committee Act database, at fido.gov/facadatabase/rptgovtstats.asp.
15. See Paul Weinstein Jr., "A Return to Fiscal Responsibility: A Progressive Plan to Slash the Deficit," Progressive Policy Institute, February 4, 2004, pp. 8-9, at www.ppionline.org/documents/deficit_plan_0104.pdf.
16. The federal government calls this spending "unreconciled transactions." See U.S. Department of the Treasury, 2003 Financial Report of the United States Government, p. 126, at www.fms.treas.gov/fr.
17. Office of Management and Budget, Budget of the United States Government, Fiscal Year 2005, p. 51.
18. Janet Rehnquist, Inspector General, U.S. Department Health and Human Services, testimony before the Subcommittee on Labor, Health and Human Services, and Education, Committee on Appropriations, U.S. Senate, June 12, 2002, at oig.hhs.gov/testimony/docs/2002/020611fin.pdf.
19. "OMB Says U.S. Overpaid $20 Billion to Health Providers, Others, in 2002," Bureau of National Affairs Daily Report for Executives, June 3, 2002.
20. Committee on Governmental Affairs, U.S. Senate, Government at the Brink: Urgent Federal Government Management Problems Facing the Bush Administration, June 2001, p. 26.
21. Associated Press, "GAO Sting Targets Lax Student Loan Oversight," January 21, 2003.
22. Michael Grunwald, "How Corps Turned Doubt into a Lock," The Washington Post, September 13, 2002.
23. The 300 employees randomly sampled had charged $5.8 million in personal purchases over six months in late 2001 and early 2002. Applying that sample to all 55,000 USDA credit card holders over a full year calculates to $2.1 billion, or 3 percent of the USDA's 2002 budget. U.S. Department of Justice, Office of Inspector General, Adequacy of Internal Controls over the Individually Billed Travel Card Program, Report No. 50601-05-HQ, June 19, 2003, at www.usda.gov/oig/webdocs/50601-05-HQ.pdf.
24. 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 Committee on Government Reform, U.S. House of Representatives, GAO-03-148T, October 8, 2002, p. 8.
25. Amounts in this section refer to the annual net losses from the waste. See Brian M. Riedl, "How Congress Can Achieve Savings of 1 Percent by Targeting Waste, Fraud, and Abuse," Heritage Foundation Backgrounder No. 1681, August 28, 2003, at www.heritage.org/Research/Budget/BG1681.cfm.
26. Unless otherwise noted, all amounts listed after each program refer to the estimated 2004 outlays. This is not necessarily the amount that would be immediately saved from enacting the recommendation. See footnote 3 for further details.
27. Data from the Environmental Working Group (www.ewg.org) show that two-thirds of farm subsidies are granted to the largest 10 percent of agribusinesses and farmers. The $8 billion reflects two-thirds of the estimated total 2004 farm subsidies.
28. Examples are from Committee on Governmental Affairs, U.S. Senate, Government at the Brink, 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.
29. Although food stamp overpayments are a problem, the program still provides more choice and efficiency than it would if it were providing government-grown food.
30. See Scott Hodge and John Barry, "The 10 Percent `Revolution': House Spending Bills Fall Short of Overhauling Government," Heritage Foundation Backgrounder No. 1053, September 14, 1995.