Magazine | November 29, 2010, Issue

What to Cut

Twelve spending-reduction priorities for the new Congress

If the 2010 election produced any conservative mandates, they are to create jobs and to rein in soaring spending and deficits. Republicans should begin implementing this agenda by extending the 2001 and 2003 tax cuts and paring back a government that now spends a staggering $30,000 per household annually.

Despite liberal claims to the contrary, rising spending — not declining revenues — drives America’s long-term deficits. Once the economy recovers, revenues are projected to return to their historical average of 18 percent of the economy — even if all tax cuts are extended. Federal spending — rising from its historical average of 20 percent of the economy to a projected 26 percent by the end of the decade — is the moving variable.

Nearly all of this new spending will come from Social Security, Medicare, Medicaid, and interest on the debt. Combined and adjusted for inflation, these annual expenditures will rise from $1.6 trillion to $3 trillion over this decade. Therefore, budget reform must include putting Social Security and Medicare on a fixed long-term budget with a capped growth rate.

Yet major entitlement reforms would be phased in slowly. In the meantime, Congress should enact government-wide spending caps that gradually return spending to 20 percent or less of GDP.

After a $727 billion spending increase since 2007, there is no shortage of programs to cut to meet that 20 percent target. The 112th Congress should target programs based on their economic impact, their cost, and the feasibility of reforming them. It should build credibility with the public by including cuts in the federal government’s spending on itself, unpopular earmarks, and even traditional conservative spending programs. Conservatives could begin with the following twelve projects:

One. Freeze and reform federal pay. Before Washington asks Americans to tighten their belts, it must tighten its own. While some federal employees are undercompensated, the average federal employee receives 30 to 40 percent more in total compensation than the equivalent private-sector worker; all this extra pay adds up to $47 billion. Lawmakers should freeze federal pay until it can be fundamentally reformed.

Similarly, Congress should cut its own budget and salaries to 2008 levels, pare back the surging federal travel budget (not every federal conference has to be in Maui), suspend acquisition of federal office space, competitively outsource more federal work, and require federal employees to fly coach domestically.

Two. Ban earmarks. These symbols of waste and corruption cannot be salvaged. Taxpayers will never accept Social Security and Medicare reforms if they believe the savings will go toward bridges to nowhere. Beyond costing $20 billion annually — a non-trivial sum, even if it’s just under 1 percent of the federal budget — earmarks encourage lawmakers to vote for budget-busting bills and divert  their attention from higher priorities.

Republicans should not leave unelected Washington bureaucrats to distribute federal dollars to fund local projects in place of earmarks. Rather, grants can be distributed by formula to state and local governments, which are in a much better position than Washington, D.C., to decide where to put their streetlights.

Three. Ban corporate welfare. Even before bailing out Wall Street, Washington spent more on corporate welfare than on homeland security. The public will not trust conservatives to reform middle- and lower-income entitlement programs unless they are also willing to stop granting special favors to their friends in business. A free market means that businesses rise and fall on their own, without politicians’ picking winners and losers.

#page#Most corporate-welfare spending is buried in obscure projects with harmless-sounding names like the “Technology Innovation Program.” Rather than terminate each program individually, Congress could ban subsidies for (but not contracts with) businesses that have gross revenues above a certain level.

Four. Reform farm subsidies. The $25 billion farm-subsidy system is a case study in economic illiteracy. It subsidizes growers of five crops (wheat, cotton, corn, soybeans, and rice) even if they’re millionaires while bypassing producers of nearly all other farm products even if their income is meager. It simultaneously pays some farmers to grow more of their crops (through subsidies) and other farmers to grow less (through a conservation program). Overall, subsidies harm small family farms, taxpayers, consumers, the environment (by encouraging over-planting to maximize subsidies), trade (by inviting retaliation against farm protectionism), impoverished nations (by undercutting their farmers), and even our health (by subsidizing corn and soy, which are often used to create sugary and fatty foods, rather than healthier fruits and vegetables). About how many programs can we say that?

The defeat of more than half the members of the House Agriculture Committee presents an opportunity for reform. The policy challenge is not farmer poverty (the average farmer significantly outearns the average worker) but rather income instability (farmers can earn very little in bad years). Replacing farm subsidies with improved crop insurance and new Farmer Savings Accounts (in which farmers can save tax-free in good years, and from which they can withdraw tax-free in bad years) will help family farmers smooth out the fluctuations in their income at minimum taxpayer cost.

Five. Recall unspent stimulus funds. The economic failure of the stimulus has become a political disaster for Democrats. Most stimulus dollars have been spent or obligated, yet perhaps $60 billion could still be recalled in areas including energy, transportation, and state aid. If the president vetoes an outright recall of unspent stimulus funds, Congress could instead use them to offset any new spending the White House requests.

Six. Vote to repeal Obamacare. The president’s inevitable veto should not dissuade conservatives from passing legislation to repeal the recent health-care law. Such a vote would leave no doubt as to where conservatives stand, and would force Democrats to go on the record before the 2012 election.

Conservatives can also attack Obamacare piece by piece, by refusing to fund discretionary bills to implement the law and by offering legislation to block or delay its implementation.

Seven. Repeal CLASS. Buried in Obamacare is a massive new long-term-care program known as Community Living Assistance Services and Support (CLASS). Like Social Security, CLASS will run initial surpluses (a $70 billion surplus in the first decade will be raided to cover up Obamacare’s deficits) before falling into deep deficit afterward.

The Congressional Budget Office, the Medicare chief actuary, and the American Academy of Actuaries have all acknowledged that CLASS is financially unsustainable. Even Senate Budget Committee chairman Kent Conrad (D., N.D.) called CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” (He then proceeded to vote for Obamacare.)

If CLASS is allowed to begin enrolling participants in the next couple of years, it will almost surely collapse within two decades. The resulting taxpayer bailouts could cost trillions.

#page#Eight. Return highway spending to states. Washington collects the 18.4 cent–per–gallon gas tax, subtracts a hefty administrative fee, and then returns the funds to state governments with numerous strings attached. These strings include thousands of earmarks, as well as requirements to divert highway dollars into bike paths, museums, and prevailing-wage regulations. There is no reason for Washington to decide where to build a road in Appleton, Wis.

Congress should eliminate the middleman and allow states to opt out of the federal-highway program. In return for agreeing to maintain their interstate highways, these states could collect and retain the federal gas tax themselves.

Nine. Defund high-speed-rail projects. The Obama administration has provided $8 billion to states for high-speed-rail projects and promised more funding later. Yet high-speed rail is extraordinarily expensive (California received $2.3 billion for a new project that some estimate will cost $81 billion), and cash-strapped states will certainly seek more federal funding. Moreover, these projects are estimated to reduce the average travel time by as little as 30 minutes compared with driving, and to lower auto ridership by as little as 1 percent. Congress should follow the voters’ backlash against these projects by cancelling their funding.

Ten. Trim Pell Grants. After doubling Pell Grant spending from $16 billion to $32 billion since 2008, President Obama proposes to give it entitlement status and spend $52 billion by 2020. Fiscal reality demands that lawmakers instead return funding to 2008 levels.

Concerns about whether students will be able to afford college are unfounded. Over the past three decades, student-aid increases have been one of the causes — not the result — of tuition increases. The more aid students receive, the higher colleges raise tuition to capture that aid.

Higher student-loan limits for low-income families are a fairer way of guaranteeing college access. There is no justification for taxing waitresses and welders so that future college graduates — who will outearn them by $1 million over their lifetime — won’t be burdened by the typical $24,000 student loan.

Eleven. Reduce aid to states. Over the past decade, federal aid to state and local governments has surged, rising 129 percent faster than inflation. Endless bailouts have made Washington one of the top sources of state revenue. These bailouts allow profligate states to delay their inevitable belt-tightening and instead be subsidized by the taxpayers of responsible states.

There is no compelling reason for Washington to finance state-level education, justice, and economic-development expenditures — especially through failed programs such as COPS and firefighter grants. State and local governments should be empowered to address local problems with local solutions — financed and held accountable by local voters.

Twelve. Reduce waste. Although the budget cannot be balanced by cutting waste alone, Congress should not ignore this low-hanging fruit. For instance, Washington runs 342 overlapping economic-development programs, lost $98 billion last year to program payment errors, and recently spent $33 million enhancing the Kennedy family image through the Edward M. Kennedy Institute for the Senate, the John F. Kennedy Presidential Library and Museum, and the Rose Kennedy Greenway.

*   *   *

Conservatives should harbor no illusions that cutting spending is easy. However, by carefully selecting its targets, Congress could save as much as $3 trillion over the next decade and lay the groundwork for Social Security, Medicare, and Medicaid reform.

– Mr. Riedl is the Grover M. Hermann Fellow in Federal Budgetary Affairs at the Heritage Foundation.

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