PrintFebruary 23, 2010
Recovery via Spending Cuts, Low Taxes, and Cheaper Government
There is an 800-pound gorilla in the room, and the 535 members of our Congress have done their best for several years to ignore him. However, he is getting bigger and bigger, and he can't be ignored any more. The same 800-pound gorilla can be seen from time to time at the Tea Parties and may be responsible for several Congressional "retirements" that have been announced.
Misguided policies have squandered many billions on "saving" a few businesses "too big to fail" or too essential for other partisan political reasons. Money that has come back from these businesses or that wasn't initially spent is being squandered in new "stimulus" efforts rather than being used to reduce the deficit or debt. Terrible and wasteful government spending is hastening the government into a box created by the entitlement programs everyone loves -- Social Security and Medicare -- and slammed shut by the interest payments that will be required to service the humongous debt created by too much government and too little economic growth.
We cannot go on and on with deficit spending. We are already at the point where we cannot tax our way out of the debt trap, and even with a relatively robust recovery, the current level of government spending will still create deficits. There is only one way out that prevents monetizing the debt and creating inflation that will make us a banana republic: Drastic cuts in spending.
The misguided Keynesian-style, prime-the-pump approach hasn't worked. The current recession has lasted too long and caused too much trouble for most of us (and untold misery for some). Recessions as corrections for bubbles and other artificial inputs to economic performance need not be long, drawn-out affairs.
Drastically reduced government spending and lower taxes would leave money in the economy in private hands (remember that even now, a large proportion of the workforce, approaching 90%, is gainfully employed) that will take advantage of the deflating housing and other bubbles when the excesses have been wrung from them. Whatever asset-deflation there is would happen quickly rather than slowly. Stability would come faster, and recovery would take place sooner. This would benefit the economy as a whole and the large majority of the people. It would also raise tax receipts sooner without enacting any new taxes.
Those who speculated or overextended themselves toward the end of the bubble would be hurt. But those people are hurt now, along with a large number of others who must suffer just because government is preventing the bubbles from deflating faster.
There is also an opportunity here for smart government leaders to make changes in government structure that would make government cheaper to run in the future -- rather than the present course of building in more expense for the future. Now is the time to permanently reduce the size of government, more rationally group services, eliminate whole departments, and cease entire functions.
President Obama has proposed a spending freeze for 13% of the government to begin next year. This is way too little and way too late. Freezing spending of only part of the government at levels that are already too high is not enough. And this activity should have started a year ago (or many years ago), not a year from now.
Making government smaller (and building in savings for the future) faces some real difficulty, built into the system by entitlements. Social Security and Medicare in particular eat up so much of the budget that those two items are by themselves almost twice as big as the two most legitimate functions of the central government: defense and foreign affairs. The rate of growth of entitlements almost guarantees that the federal government must restructure these items or stop doing almost everything else.
Function | Title | FY 20051 ($ million) |
050 | National Defense | 423,098 |
150 | International Affairs | 29,569 |
250 | General Science, Space and Technology | 24,459 |
270 | Energy | 1,883 |
300 | Natural Resources and Environment | 30,286 |
350 | Agriculture | 22,353 |
370 | Commerce and Housing Credit | 8,092 |
400 | Transportation | 69,494 |
450 | Community and Regional Development | 12,949 |
500 | Education, Training, Employment and Social Services | 91,817 |
550 | Health | 248,780 |
570 | 293,574 | |
600 | Income Security | 342,324 |
650 | 516,457 | |
700 | Veterans Benefits and Services | 65,444 |
750 | Administration of Justice | 40,781 |
800 | General Government | 19,392 |
900 | Net Interest | 177,909 |
920 | Allowances | (798) |
950 | Undistributed Offsetting Receipts | (63,108) |
Total: | 2,354,755 | |
Note 1: Estimated budget authority as presented in the president's budget (in million USD).
Many of the government functions in the above table are performed partly in one department and partly in another. Some savings could be achieved by performing these functions in the same department. The Department of Energy could be dissolved and its functions that are not already in the Defense Department could be moved there. The Department of Education could be dissolved and its functions picked up by the states. The Department of Agriculture could be closed, and all agricultural subsidies could be stopped. The other functions of agriculture could be picked up by the states. Medicaid and all other federal "welfare programs" could become wholly state-funded and administered programs with no federal input or control. And so on. However, since it will be difficult, to say the least, to quickly get control of Social Security and Medicare, the quick fix will have to take place in other areas, and the only fix that will be effective is to stop doing almost everything.
Kicking the problem down the road to the next Congress or the next administration is not an option any longer. The real culprits here are Social Security and Medicare, but the political departments of government (president and Congress) will find it hardest to quickly fix those programs. The federal government may eventually have to perform only the Defense, Foreign Affairs, and major entitlement (Social Security and Medicare) parts of government and relegate all the rest to the states or to private enterprise. The Congress has created this problem by taking on more than it can handle. Now it is time to bite the bullet and shed government activity. Can the Congress do that? Only if the people demand it loudly and often and at the ballot box in November.
Jeff Scribner is president of ASI Enterprises, Inc., an investment bank in Raleigh, North Carolina serving primarily small- and medium-sized business. E-mail: jscribner@asienterprises.com.
