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downsizing THE FEDERAL GOVERNMENT

CATO INSTITUTE

Contents

1. Introduction.........................................................12. Size and Scope of the Federal Government.............................73. Why Downsize?........................................................234. A Plan to Cut Spending and Balance the Budget........................375. Wasteful Programs....................................................516. Special Interest Spending............................................797. Actively Damaging Programs...........................................958. Fiscal Federalism....................................................1059. Privatization........................................................11910. Structural Reforms and Outlook......................................133Appendix 1: The Government and the Great Depression.....................149Appendix 2: Discussion of Selected Budget Cuts..........................157Notes...................................................................201Index...................................................................233

Chapter One

The federal government is running large budget deficits, spending too much, and heading toward a financial crisis. Federal spending increased by one-third in President George W. Bush's first four years, with large increases for agriculture, defense, education, health care, and other areas. Those increases have come just as the costs of federal entitlement programs are set to balloon when the baby-boom generation retires. Spending on the three main entitlement programs-Social Security, Medicare, and Medicaid-is expected to double from $1 trillion in 2005 to $2 trillion by 2015.

Where will the money come from? If government spending is not cut, average working families will face huge tax increases that dwarf anything seen in decades. Tax increases would damage the economy and be strongly resisted by the public. As a consequence, policymakers need to begin identifying programs in the federal budget that can be cut, transferred to the states, or privatized.

This book provides policymakers and the public with a detailed guide to federal budget reforms. It proposes eliminating more than 100 agencies and programs to reduce federal spending from 20 to 15 percent of the nation's economy. The country would be better off if the $2.5 trillion federal government were downsized. Cutting the budget would avert the looming federal financial crisis and give Americans a stronger economy and a freer society.

The Temptation to Tax

I came to Washington in 1990 to study economics and learn how the federal government works. My first lesson in government came from watching President George H. W. Bush reverse his famous "read my lips: no new taxes" pledge from the 1988 election campaign. Bush increased federal spending 16 percent in his first two years in office and by 1990 was faced with a slowing economy and a rising deficit. Deficits can be reduced by cutting spending, but the president and his budget adviser, Richard Darman, did not look very hard for programs to cut. At the same time, numerous Republicans were telling Darman privately that taxes should be raised.

What to do? Darman suggested that the administration hold a "budget summit" with the Democrat-controlled Congress. With a summit, the blame for a tax hike could be shared with the other party. The result was the 1990 budget deal, which was a victory for bipartisanship but a loss for American taxpayers.

That pattern has been repeated many times. Federal overspending, high deficits, perhaps a recession, and presto-an excuse for a tax hike. Usually, tax increases are coupled with promises of spending cuts. But such "cuts" are usually just reductions in future spending growth, and even those often fail to materialize. With the 1990 budget deal, the Bush administration claimed that there would be two and a half dollars of spending cuts for each dollar of tax increases. But the cuts to defense were against an inflated baseline, and there were no cuts to nondefense spending. Indeed, nondefense spending increased 15 percent in the two years following the budget summit.

Large budget deficits are likely to be an ongoing part of the fiscal landscape. That could mean damaging budget summits and tax increases in the future unless policymakers start making real spending cuts. George W. Bush has so far broken the pattern of the three previous presidents and resisted tax increases. But he has driven up spending and the deficit just a few years before growing numbers of the elderly will be demanding their promised, but unaffordable, Social Security and Medicare benefits. Unless spending is cut, budget summits and tax hikes will begin looking dangerously attractive as the flood of federal red ink turns into a tidal wave.

A Plan to Cut Spending and Balance the Budget

A Brookings Institution book on the looming federal financial crisis argued that "although tax increases are unpopular with those who favor smaller government, no one has suggested how to achieve balance without them." This book takes that as a challenge and provides a detailed plan to balance the federal budget without tax increases.

I analyzed programs across the entire budget and identified large savings. Chapter 4 provides a detailed list of programs that should be terminated, privatized, or devolved to the states to save $380 billion annually. These cuts could be phased in over 10 years. In addition, I propose changes to Social Security, Medicare, and Medicaid that would create growing savings over time, reaching $270 billion annually by 2015.

These reforms would balance the budget by 2011 and create growing surpluses after that, even with all of the Bush administration's tax cuts in place. The plan would reduce the size of the federal government from 20 percent of gross domestic product in 2005 to 15 percent by 2015.

The book examines the problems of federal programs in detail and provides a structure to help policymakers target the most needed spending cuts. I devote chapters to each of the following types of programs:

Programs that are wasteful, meaning duplicative, obsolete, mismanaged, ineffective, or subject to high levels of fraud and abuse (Chapter 5)

Programs that are for the benefit of special interests (Chapter 6)

Programs that actively damage society, such as by distorting the economy or harming the environment (Chapter 7)

Programs that should be devolved to state and local governments (Chapter 8)

Programs that should be privatized (Chapter 9)

Any given program may fall into one or more of those categories. Amtrak and the National Zoo, for example, are both mismanaged and good candidates for privatization. Amtrak's problem is that, as a federal agency, it is denied the flexibility it needs to innovate, cut costs, and earn a profit. At the National Zoo in Washington, bureaucratic mismanagement has led to a series of quality control scandals. Both of those institutions provide useful services and would probably survive, adjust, and even flourish if cut free from the government's yoke.

Other programs ought to be handed back to the states. Highway construction, for example, is properly a state function, and there is no economic or technical reason why federal funding is necessary. Indeed, federal highway money is wasted on low-priority projects in the districts of important members of Congress, while useful projects in congested states go unfunded. The solution is to devolve federal highway spending, and the gasoline taxes that support it, to the states. The states could more efficiently plan their own highway systems, and they could encourage growth in private toll highways to help reduce congestion.

Many federal agencies and programs ought to be terminated because of chronic mismanagement. Good examples include the Army Corps of Engineers, the Bureau of Indian Affairs, the Department of Energy, and the National Aeronautics and Space Administration. Those agencies are not crucial in a time of large budget deficits, and any useful functions they perform could be performed by private businesses and charities.

In the preface to a report by the Senate Committee on Government Affairs in 2001, Sen. Fred Thompson (R-TN) concluded that the federal government has "terrible" management and a "staggering" problem of waste, fraud, and abuse. No sooner does Congress try to patch up one mismanagement scandal when new ones erupt, suggesting that the government is simply too big for Congress to oversee adequately. By downsizing, policymakers could focus on improving performance in a limited range of core government services such as national security.

TC1[Public and Private Interests]TC1

Mismanagement is only one problem with the federal government. A bigger problem is that it does many things that make average citizens worse off. People who don't follow public policy might assume that there must be "a good reason" for existing programs, in the sense of a rational public purpose. It turns out that for many programs there is not. For example, economists widely agree that farm subsidies are counterproductive and should be repealed. The existence of farm subsidies cannot be explained by economic logic. Instead, subsidies exist because of the political logic of self-interested farm-state politicians and powerful farm lobbying groups, who reap benefits at the expense of average Americans.

During much of the 20th century the "public interest theory of government" held sway. The idea was that policymakers acted with the best interests of the general public in mind. Politicians and bureaucrats like to call themselves "public servants"; thus one might assume that they would act accordingly. The public interest theory of government probably reached its apex in the 1930s. President Franklin Roosevelt skillfully set up a contrast in the public mind of greedy businessmen on the one hand and a "brains trust" of enlightened Washington officials on the other.

However, experience with a large federal government since the 1930s shows that the public interest theory has little real-world explanatory power. Ill-conceived laws with little public support get enacted all the time. Many federal agencies perform poorly year after year, yet receive steadily growing budgets. Government officials often put career advancement, turf protection, and other personal factors ahead of the public interest.

The view that government officials put the public interest first took a nosedive after Watergate. In academia at about the same time, the public interest theory of government was being unseated by "public choice" theory, which holds that self-interested officials and lobbying groups are the key drivers of government policy. That theory explains the perverse results we often observe in government. Of course, the Founding Fathers were well aware that private interests would try to use government to the detriment of the general welfare. Accordingly, they created a constitutional framework that sought to limit federal power. Unfortunately, that framework was largely discarded in the 20th century-limits on federal power did not seem to be needed because the government was assumed to act in the public interest.

Today, Americans are more skeptical about government. There is also a renewed appreciation that even well-intentioned programs and regulations are poor substitutes for competitive private markets. The large expansion of the federal government between the 1930s and 1970s saw the birth of many failed, even disastrous, programs. Under "urban renewal" policies, for example, the government bulldozed inner-city neighborhoods across the country and warehoused millions of people in hideous, crime-infested high-rises. American cities are still recovering from the damage caused by the urban policies of 50 years ago. The task ahead is to mop up the mess left by all the failed federal interventions of the last century and to resurrect the framework of limited government that the Founders established.

What's Ahead

Chapter 2 examines the size and scope of the federal government and discusses recent increases in federal spending. Chapter 3 examines arguments in favor of downsizing the government. Chapter 4 presents a detailed plan to cut the budget by eliminating more than 100 agencies and programs and reducing entitlement spending. Chapters 5 to 9 describe in detail the problems that plague federal programs. Chapter 10 provides suggestions for structural reforms and discusses some reasons for optimism regarding budget restraint. Appendix 1 discusses how the government caused and sustained the Great Depression of the 1930s. Appendix 2 contains a department-by-department discussion of programs and proposed reforms.

Readers may not be convinced about every budget cut proposed here. But I hope they will be more skeptical the next time a politician promises to solve some problem in society by spending more taxpayer money. Given the poor record of the programs examined here, there should be a bigger burden on policymakers to prove that programs fill crucial needs that the private sector cannot meet. The federal government's legacy of failure suggests that policy questions ought to be approached with a strong presumption of laissez faire.

Some readers may argue that I have not given a balanced presentation of the benefits we derive from the federal government. That is true in a sense. James Beck, once a member of Congress and U.S. solicitor general, wrote a similar book about the government in 1932, Our Wonderland of Bureaucracy. He said that the purpose of his book was to "remind such Americans as are seriously interested in their governmental system, of some of its defects, and the author cheerfully leaves to the tellers of economic 'bed-time stories' the narration of the glories of federal bureaucracy."

I also leave the "bedtime stories" of how government programs are supposed to work to the politicians and lobbying groups. This book focuses on how federal programs actually work in the real world.

Chapter Two

A fundamental change in American democracy in the past century has been the massive growth in government at all levels. Federal, state, and local spending has increased from 8 percent of the nation's economy a century ago to 31 percent today. The federal government has grown particularly rapidly, and it has expanded into many areas that were formerly reserved to the states and the people. This chapter looks at the growth of the federal government, the broad scope of its activities, and Washington's culture of spending that has posed a hurdle to reform.

Growth of the Government

Federal spending increased from 2.8 percent of the nation's gross domestic product a century ago to 20.0 percent today. Spending on national defense was at high levels in the middle of the 20th century, but declined relative to GDP in recent decades, as shown in Figure 2.1. Spending on all nondefense programs soared from 1.8 percent of GDP in 1900, to 9.0 percent in 1950, to 16.0 percent today. Much of the added federal spending has been for traditionally state and local activities such as education. But state and local spending has not been displaced. Instead, it has also grown rapidly, particularly since 1950.

The growth of the federal government has been spurred by crises such as the two world wars and the Great Depression. Federal taxing and regulatory powers tend to expand during crises, but the government does not shrink to pre-crisis levels when troubles subside. That has caused a ratcheting up of the size of the government over the decades. During the Great Depression, the government claimed vast new powers to regulate the economy, and it created hundreds of new programs. Federal expansion in the 1930s dealt a severe blow to federalism, which had been a key constraint on government growth during the nation's first 150 years.

Programs from the 1930s and other eras linger on decades after their failures should have been obvious to policymakers. The folly of farm subsidies, for example, has been recognized for at least seven decades, but they have yet to be repealed. Some agencies become obsolete as society and technology change, but policymakers usually find new activities for them to engage in.

Occasionally, Congress does kill failed regulations and failed programs. But each new crisis provides opportunities for policymakers to demand more powers for the government and added spending. Acting rashly after 9/11, the government took control of the nation's airport security with an army of 45,000 new Transportation Security Administration bureaucrats. Only four years later, it is clear that this intervention was a big failure. The TSA is hobbled by poor performance, has low worker morale, and has made the news for scandalous overspending. The cost to hire TSA airport screeners after 9/11 soared from $104 million to $741 million due mainly to mismanagement. A government study in 2005 found that the five U.S. airports that still have private screeners did a better job than airports with TSA screeners. Clearly, government is no cure-all, and policymakers need to restrain their impulses to try and instantly "solve" every problem from Washington.

Scope of the Government

The federal government spent about $2,500,000,000,000 in 2005. After taking out the government's core functions of national defense and justice, it still spent $2,000,000,000,000, or roughly $18,000 for every household in the country. Clearly, the federal government has amassed a huge range of spending programs beyond its basic national security responsibilities.

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Excerpted from downsizing THE FEDERAL GOVERNMENTby CHRIS EDWARDS Copyright © 2005 by Cato Institute. Excerpted by permission.
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