I know the title today is a little cruel but I believe it is true. The Federal government's debt that the political class has run up over the decades is now at shocking levels, levels that may take generations of future Americans to pay off. The issue was a major factor in the recent midterm elections and every politician in Washington is tripping over themselves to prove they can cut the budget. But since they got us into the budget mess in the first place, do we really think they are the right people to get us out of it?
An article in the October 29, 2010 issue of Businessweek does not think so. According to the article and Alice Rivlin, who sits on the President's commission to recommend ways to reduce government spending:
- The commission has excluded Medicare from their discussions, analyses, and recommendations even though it is one of the biggest and fastest growing part of the Federal budget.
- Most Republicans on the commission are dead set against any recommendations that would raise taxes.
- Democrats on the panel are dead set against any recommendations that would change Social Security.
- According to Rivlin, the commission is paralyzed by politics, even though its final report is due in only three weeks.
- Given the division on the commission, and the fact that 14 out of 18 commission members must endorse a recommendation for it to be accepted for consideration by Congress, the odds of any concept being enacted is next to nothing.
Now take this discouraging news and consider a November 20, 2010 Associated press article where the two co-chairmen of the President's deficit reduction commission revealed some of their current thinking on how to reduce the deficit:
- According to the article, both suggested that their recommendations will be unpopular and go nowhere in Congress. This raises the question then why even bother?
- One of their suggestions is to raise the full retirement age to 68 in 2050 and 69 in 2075. How does putting off these changes for at least forty years solve the short term and intermediate term national debt problem?
- Wealthier Social Security recipients would receive smaller Social Security payments. Good idea but when would this change be implemented, the next century? Talk about not taking a firm stand.
- The article also sounds the bell of pessimism that the Businessweek article predicted, namely that few if any of the commission's recommendations will be endorsed by the 14 required commission members, making the chance of any recommendation getting to Congress very low.
Even if all of the current commission proposals were implemented, the Federal budget would not be balanced by 2015, an original objective of the commission. Given that one Democratic congressman was already quoted as saying: "This is not a proposal I could support," regarding the commission's Social Security recommendations, the balanced budget by 2015 objective is pretty far away from reality.
There were several other potential recommendations in the article that the commission might propose but each has a serious flaw. One option is to eliminate all Congressional earmarks, an action that would save upwards of $20 billion a year. However, since earmarks really serve as a clandestine way for politicians to fund their election campaigns, unless this recommendation is coupled with significant election campaign reform, our politicians are unlikely to give up this source of revenue for their perpetual re-election.
Another recommendation is to eliminate the the deduction for the interest charged within mortgage payments. However, given the horrible financial shape of the housing market today, removing this benefit of owning a home would surely heap further ruin on an industry that is dragging down the economy. Thus, unless you can get the housing industry healthy enough to absorb another shock, this is also a nonstarter, at least in the short run.
A third additional recommendation is to increase the gasoline tax by $.15 a gallon to fund transportation programs. Two things wrong with this proposal. First, how is this a deficit reduction recommendation? This expands government spending and has nothing to do with deficit reduction. Second, this proposal needs to be part of a bigger strategy as it relates to having a much wider national energy policy that takes into account energy independence, global warming, infrastructure. This is a tactic in search of an overarching strategy which does not exist.
A final recommendation is to freeze Federal pay levels for three years and reduce the Federal workforce by 10%. Recent studies have shown most Federal governments employees are much better paid with richer packages than their private sector counterparts so this recommendation fits into today's reality. Given that the Federal payroll has expanded significantly under the Obama administration and we are theoretically going to trim back the size of government, a 10% reduction in the workforce also seems fair and doable, with the right leadership, a big if.
Given what we know about the President's deficit reduction commission, from both the AP story and the Business week article, it is not unfair to say it will be a failure. First, politicians are already moaning about how these cuts will affect their constituents, putting any proposal in the hole out of the gate. Second, it does not appear that there is a comprehensive strategy behind how the commission went about their business. These proposals all look disconnected and disjointed. There is a short term, immediate proposal to freeze Federal worker pay but the commission won't touch Social Security for another forty years. In forty years, most of the baby boomers will be dead, how is that effective? They want an increased gas tax which fits no overall energy strategy or structure, very disconnected.
And finally, none of these potential recommendations show any kind of creative thinking. In fact many of them are already in "Love My Country, Loathe My Government:"
However, all is not lost. Many smart Americans are working on this issue in one form or another. They are not burdened by political office so they can come up with the right ideas, not the politically acceptable ideas. The U.S. Public Interest Research Group and the National Taxpayers Union recently issued a joint extensive report, highlighting their fine analysis on how to cut Federal spending. Their analysis shows that if their recommendations were implemented, they would result in over $600 billion in cost savings by 2015. Their general suggestions include better government operations in addition to outright cancellation of some non-vital government programs. Their underlying data came from a wide range of authoritative sources and their recommendations are detailed, specific, and actionable.
Nowhere near all of their recommendations are listed below but consider their creativity, originality and detailed analyses (savings are for the years from 2010 through 2015):
1) Save $1 billion by eliminating the Market Access Program which subsidizes advertising for private American companies in overseas markets. These companies include McDonalds, Nabisco,, Fruit of The Loom and Mars. This is nothing but corporate welfare, let the companies themselves and their shareholders pay for their own advertising.
2) Save almost $23 billion by eliminating refundable tax credits for ethanol, another corporate welfare program for large oil companies that blend gasoline with corn based ethanol. Given we now have ample evidence that ethanol as a fuel additive is bad economic and environmental policy, eliminate this program immediately.
3) Save $135 billion by finally implementing the acquisition reforms identified by the bipartisan Defense Acquisition Panel.
4) Save $34 billion by finally eliminating Homeland Security contracts the Defense Contract Audit Agency has already identified as unnecessary and corrupt.
5) Save almost $36 billion by ending the process that orders obsolete spare parts and supplies for the Defense Logistics Agency, save $18 billion by ending the process that orders obsolete spare parts and supplies for the Army, save almost $38 billion by ending the process that orders obsolete spare parts and supplies for the Navy, and save over $93 billion by ending the process that orders obsolete spare parts and supplies for the Air Force.
6) Reduce the backlog of buildings owned by the Federal government that are not utilized or are underutilized. Currently, the Federal government has a mind boggling 55,000 buildings that are not utilized or are underutilized, worth over $96 billion.
Enough, their fine work goes on and on on, eventually saving American taxpayers over $600 billion. As you can see from this short list, none of these cuts would have more than an absolute minimal effect on the average American. They would be a painless way to finally reducing the size of government.
The other encouraging aspect of their work is that these two organizations usually represent different sides in all political debates and issues. They have come together despite the fact "our organizations have often differed about the proper regulatory scope of government and a host of tax policies" and "we are united in the belief that we spend far too much money on ineffective programs that do not serve the best interests of the American people." If only our political class could act so maturely and responsibly.
But they are not the only smart people in the room of deficit reduction. The Cato Institute is undergoing a detailed, line by line, department by department review of every aspect of the Federal government in search of cost savings. Their work so far is outstanding. Not only to they tell you what should be cut from the Federal budget, but why it should be cut, how much should be cut from a department, and who or what would fill the void if the government support or program went away. The brief list below does not do their work justice but does give some examples of their detailed analyses and recommendations:
1) Reduce the Commerce Department's budget by over $2 billion a year by taking a number of action which include eliminating many private sector support programs that should be paid for by the private sector, if at all.
2) Phase in Defense Department changes that would eventually save the American taxpayer about $150 billion a year. These savings would be attained by reducing the number of troops by one third while at the same time repurposing the remaining forces for the current and likely future threats to the country, not the old, obsolete ones. Cato also recommends many of the foreign deployed troops be brought back to within America.
3) Eliminate the Federal Department of Education. Although it spends over $107 billion a year, test scores and the education quality of American students has steadily gotten worse despite the $107 billion. Cato would recommend that the department be disbanded and the $107 billion budget be sent back to the states who could not do any worse job of educating America's youth and hopefully, could do a better job.
4) Cato would also totally eliminate the Department Of Energy, saving $38 billion a year. Although the 1970s oil and energy crises happened over thirty years ago, the Department of Energy still has not developed a rational and strategic national energy policy for the country. The most heavily subsidized energy projects they have funded over the years have been duds. Cato would transfer any defense energy related work over to the Defense Department and save the rest of the Department Of Energy's budget to pay down the deficit. Given the department has not done anything right or worthwhile after three decades, we can pretty safely assume that it will not reverse that trend of failure anytime soon.
5) The Cato study also does a nice job of quantifying what the savings would be per U.S. household. Just these four departments' savings would be worth just under $3,000 a year per U.S.household. None of these savings proposals would impact many households but would put almost $3,000 in their pockets every year and would be a great, annual economic stimulus.
Please go to Cato's website to fully explore their excellent work. They are probably about half way through the Federal department organization chart with more savings to come. As with the U.S. Public Interest and Research Group and the National Taxpayers Union work, the Cato work is in-depth, quantifiable, and actionable compared to what we have seen from the President's commission on deficit reduction which is simplistic, general, and nonactionable, at this point in time.
But wait, there is more hope. We know from the Business Week article cited above that Ms. Rivlin sits on the President's commission. However, she also sits on another, non-political panel that predates the President's commission. This other panel's focus is also deficit reduction and is described in the article as a "shadow deficit commission." It's sponsored by the Bipartisan Policy Center, contains both Democrats and Republicans, and is actively meeting. This shadow panel is actively and aggressively addressing the Federal benefit programs of Medicare and Social Security and the testy issue of raising taxes. Again, smart people willing to take on difficult analyses and challenges.
Just a reminder, why is all this work necessary. Consider the following facts form the Business Week article:
- U.S. government spending is on an unsustainable path with the 2010 fiscal deficit of $1.3 TRILLION accounting for an unacceptable 8.9% of the total economy.
- Between 1960 and 2000, national debt as a percentage of GDP averaged 37%. By 2020 it will be 78% of GDP if nothing is changed.
- Medicare spending is currently $519 billion a year or 3.6 % of GDP. It will likely grow to $929 billion by 2020 and will be insolvent within seven years if nothing is done to reverse current trends.
- Social Security will rise from 4.8% of GDP to 6.1% by 2035.
If these debt and deficit issues are not addressed quickly, confidence in the U.S. government fiscal solvency would rise, forcing the Treasury Department to pay higher rates on its bonds, which could trigger another economic downturn or recession which would bring greater unemployment which would bring more debt...
The real question it not how to bring fiscal sanity to the Federal government. Alice Rivlin, the Cato Institute, the U.S. Public Interest Research Group, the National Taxpayers Union have already done the heavy lifting and analysis. The only thing required is the intestinal fortitude of the political class to stand up, show a little courage and finally show some leadership.
That is why many of the newly elected representatives are going to Washington, to fix this problem. If they cannot join with the current incumbents and the President to work through this issue, for the good of the country, then we need to make sure that the 2012 elections are another bloodbath for incumbents, including the President. The numbers are reality, the numbers do not lie. Americans want this change, hopefully the politicians are smart enough, for once, to do it.
