Reducing Debt is Easier Accomplished than Argued

By Evan Carr

Gridlock

Fiscal cliffs and debt ceilings are hardly a surprise. It seems that we squeak by one only to be immediately confronted with the contentious politics of yet another debate. Uncertainty is incredibly disruptive for investors and households trying to plan for the future. Given reports for February indicating that consumer confidence and the housing market is up and jobless claims are down, we can only hope that the free market is beginning to ignore the political gridlock that threatens to prolong economic retraction. But it is unlikely.

Democrats and Republicans shoot back and forth, arguing vehemently for “more revenues” (read higher taxes) or “reduced spending” (read entitlement cuts). Yet both parties ignore the realities of these policies. Raising taxes during a recession is bad policy. Republicans are adamant that raising taxes during a recession will squeeze growth out of a struggling economy but there isn’t a shred of empirical evidence to back this up . The affects may actually be more psychological on the economy, affecting consumer confidence more so than established macro-economic policy (of which there is essentially none if you consider deficit spending Keynesians versus Austrian deregulationists). Still, raising taxes is bad for a fundamental reason. Raising taxes shirks responsibility for current spending habits. It says that are not willing to address the excessive bloat of our federal government.

Easy Money

Every president should have a short-hand list in the top drawer of the presidential desk in the oval office with a cool couple hundred billion dollars in cuts readily identified. It’s not rocket science. And whether you are President Obama, whose rhetoric is to raise taxes, or Speaker Boehner, who intends to slash and burn the budget at the expense of the poor, women, middle class and just about everyone, eliminating waste should be a no brainer. When the ideological divide is so large, why not start somewhere you can agree? Here’s a short list of smart cuts.

• Pay the correct amount. In 2011, the federal government wasted $64.6 billion of taxpayers’ money in improper payments: money paid in the wrong amount, to the wrong person, or for the wrong reason. 93 percent of these payments were in just 8 programs, including the Earned Income Tax Credit ($15.2 billion), and Unemployment Insurance ($13.7 billion).  Let’s assume we can only eliminated half of this fraud for a total of $32.3 billion per year. 
• Reduce Medicare fraud. Even if just 25 percent of the estimated $60 billion of Medicare fraud per year were eliminated, that would total $15 billion per year.   
• Keep projects on budget. The Government Accountability Office found that the Pentagon had cost overruns of $295 billion on 95 weapons systems. One has to wonder where that much money goes (it’s was a good day to be part of the military-industrial complex). Let’s assume just 10 percent of that waste could have been saved for $29.5 billion.
• End the War on Drugs, which has terrible social consequences and was estimated to cost $15 billion in 2010 alone. Dr. Jeffry Miron, a Harvard economist, has estimated combined savings of $10 billion to $14 billion. If just half of that sum were spent on treating the addict, not the criminal, the federal government could save $7 billion per year.
• Eliminate overlap. “A 2006 Defense Department study recommended a unified medical command, but nothing came of it. The idea could have saved taxpayers between $281 million and $460 million, the GAO said … Federal transportation issues now involve more than 6,000 workers at five agencies within the Transportation Department, running about 100 separate funding streams for highways, transit systems, rail and transportation safety (which costs) an estimated $58 billion annually … Through the years, several GAO reports have explored the issue of government redundancy, most recently reporting last month that nine federal agencies spend $18 billion a year on 47 separate job training programs. All but three of the programs overlap with others … the government used just 432 data centers in 1998, and consolidating the ones used today could save taxpayers up to $200 billion in the next decade ($20 billion per year)” (O’keefe 2011).  We’ll calculate the grand total at $90 billion per year give or take a billion or two. Let’s assume we can eliminate one-third of this for $30 billion per year. 
• End subsidies. This is a little more controversial and while any economist will tell you that subsidies amount to deadweight transfer for society, the government and Congress is determined to dole out massive amounts of cash to support industries and their favorite initiatives, which just so happen to be in their district. Eliminating subsidies, like the $83 billion bank subsidy, $24 billion in energy subsidies or $260 billion in agriculture subsidies between 1995 and 2010, would return markets to their competitive state. 
• Our Grand Total: $113.8 billion dollars, excluding subsidies, which is $28.8 billion more than sequestration’s $85 billion in painful, across the board cuts. 

The sequester is like using a wooden club. This approach is like using a scalpel. Which makes more sense? Now of course the above model is full of assumptions, albeit conservative and hopefully realistic estimates that only small portions of each identified waste could be eliminated, but its illustrative power is none the less effective. We do not have to aim right at the jugular as Republicans propose to achieve substantial savings. Significant services that people rely on can be spared, at least for now, while the annoying waste of bureaucracy, mismanagement and lack of oversight are addressed. There are plenty of other cuts or readjustments totaling billions upon billions, like adjusting the Home Mortgage Interest Deduction which typically benefits the wealthy ($30 billion in savings per year) or placing a 2 percent cap on tax expenditures ($200 billion in savings per year).

“Drop in the bucket” mentality

16 trillion dollars. That’s an unfathomable number. Just as we become desensitized to violence by exposure to it in our media, we are also desensitized to the immensity of numbers. Million. Billion. Trillion. This makes it a little easier to visualize. A common mentality holds that, “O, that program is just $100 million, that’s nothing when compared to the size of the total federal deficit.” And thus, the program does not get cut. Each drop in the bucket does in fact equal a bucket in sum. Earmarks and pork must go. Frivolous R&D must go. If the federal government cut just $2 billion of unnecessary funding to each state per year, that would total $1 trillion over a decade ($2 billion * 50 states * 10 years = $1 trillion). $1 trillion will support 2 million jobs for 10 years at $50,000 per year.

The only sacrosanct funding in the budget should be the funding that directly correlates with America’s prospects for the future. Education and research and development funding must not be cut blindly. Both have direct impact on the United States’ future as a globally competitive nation. Because many new technologies emerge out of public-private R&D partnerships, federal R&D expenditures must be examined line-by-line. There is undoubtedly billions of dollars in waste, that could be transferred over to projects that advance technologies and ideas (unpatented) that spillover into the stock of knowledge available to society as whole. This drives growth. Expanding the economy in the long run will reduce some, but not all, of the current fiscal pressure.

There is also an elephant in the room. Unfortunately, entitlement spending will have to be addressed. It is currently unsustainable. Every projection is sure of this. How we go about handling it is the subject of another post.

Politicians need the political will to address these wastes, even if it means bucking the special interests that feed their campaigns. Turning off the spigot that lavishes corporate America and Wall Street may not be easy, but neither is turning off the lights.

Evan Carr, a social entrepreneur, policy analyst and consultant, is the CEO/Founder of the New Logic Movement.