Reducing federal debt will require Trump to take holistic approach

One of President Trump’s primary responsibilities in February is to propose a budget. He has identified a number of spending priorities, including a border wall, a more robust military, and an ambitious infrastructure plan. The president has also signaled that he would like a substantial tax cut for the middle class and corporations. This begs the question of how we will pay for the spending increases with less tax revenue.

One possible answer is that we will continue to do what we have been doing over the last two decades, which is to borrow. This year the gap between expenditures and revenues is expected to be about $559 billion. Borrowing money to pay for expenses now is not an appealing solution since it means that we saddle the next generation with debts. The U.S. government already owes more than $61,000 per person to its creditors. It pays about $220 billion a year in interest on the national debt.

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We might hope that new tax cuts will lead to dramatic economic growth and further hope that lower tax rates will counterintuitively lead to more revenue. Indeed, the president’s team argues that tax cuts will lead to higher income and higher income will lead to higher tax revenues even if tax rates are lower.  Most analysts conclude that this is a false hope. They conclude that President Trump’s plan will reduce tax revenue by substantially more than will be generated by economic growth.

 

One obvious way to pay for the increased spending and the reduced revenue is to cut spending. What is often missed, however, is that there is a right way to cut budgets and a wrong way. Three features characterize responsible budget cutting.

First, responsible spending reductions use a scalpel rather than a meat cleaver. Elected officials usually employ the cleaver in the form of across-the-board cuts rather than the scalpel of eliminating costly programs. Elected officials prefer not to eliminate whole programs because it is politically difficult. The government spends a lot of money because it has created a lot of programs. Each government program exists because at some point it was popular with congressional majorities, the president, and presumably the public. Cutting programs means disappointing voters and beneficiaries that still support these programs. It is much easier just to institute across-the-board spending cuts.

Across-the-board cuts give the illusion of seriousness in budget cutting but such efforts have bad side effects and are usually ineffective in the long run. When elected officials mandate cuts, government workers still have the legal obligation to implement the laws Congress has enacted. This means, federal officials are legally required to implement these programs but they have less money. This is a recipe for poor performance. Agency officials cannot eliminate poorly designed or duplicative programs. Rather, they have to do their best to carry out programs with fewer people and resources. And, what happens when budget cutting fervor subsides? Program directors come back to Congress and reasonably ask for more money to administer the programs Congress itself has asked them to implement. Congress usually complies.

One common justification for the meat cleaver approach is that there is waste, fraud, and abuse in government and every program could survive with fewer funds. While there is undoubtedly inefficiency, we should get three things straight. First, many federal programs are incredibly light on overhead. There just is not much to save.

Second, tighter budgets are no guarantee of greater efficiency. The causes of inefficiency remain whether budgets are large or small. Indiscriminate cuts do not guarantee that waste is removed instead of the portion of a program’s budget that is spent productively. In fact, cuts may make fewer resources available to pay officials to identify waste or pursue fraud.

Third, even if we eliminated all of the waste, fraud, and abuse in government, this would amount to a fraction of the deficit. The entire non-defense discretionary budget is only slightly more than the deficit, about $585 billion. If we eliminated all domestic agencies and fired all federal employees we would still have a deficit in most years. Any politician that tells you that we can balance the budget by eliminating waste, fraud, and abuse either does not understand the budget or they are purposefully deceiving you.

A second principle for budget cutting is that it should not be done on the backs of federal employees. Federal spending has quadrupled in real dollars since 1960 but the federal workforce is about the same size as it was then. The government is spending more but not because it has hired more government workers. On the contrary, the employees that work in government are doing more, a lot more. 

As John Diulio of the University of Pennsylvania points out, firing every federal employee would only save the federal government about $250 billion per year. To put this in perspective, the Department of Defense spends $350 per year buying goods and services from private contractors. Freezing and reducing the size of the workforce only leads to poorer performance as fewer and fewer people manage larger amounts of money and a greater number of programs with less help.

A final principle for budget cutting is that it must involve entitlement reform. The largest and fastest growing part of the budget is mandatory spending which includes interest on the debt and entitlement spending. About two-thirds of the budget is comprised of interest on the debt and entitlements like Social Security and Medicare. Expenses continue to grow because persistent deficits lead to accumulating debt and higher interest payments.

In addition, eligibility for entitlement programs is usually determined by fixed criteria like age. There are increasing numbers of elderly citizens and health care costs are increasing faster than inflation. The only way to reduce this spending is to change eligibility requirements or figure out a way to control health care costs. If we are to cut spending it makes sense to target the largest and fast growing portion of the budget.

David Lewis (David.e.Lewis@vanderbilt.edu) is the William R. Kenan, Jr. Professor of Political Science at Vanderbilt University and author of The Politics of Presidential Appointments (Princeton 2008).


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