by Chris Edwards, Cato Institute

April 2011

Introduction
Reducing Spending over 10 Years
Spending Cut Details
Subsidies to Individuals and Businesses
Aid to State and Local Governments
Military Expenses
Medicare, Medicaid, and Social Security
Privatization
Conclusions
 

Introduction

Federal spending is soaring, and government debt is piling up at more than a trillion dollars a year. Official projections show rivers of red ink for years to come unless policymakers enact major budget reforms. Unless spending is cut, the United States is headed for economic ruin.

The results of the 2010 elections made clear that Americans want an end to the spending spree in Washington. People fear that today's spendthrift policies may lead to large tax increases and a lower standard of living for themselves and their children. The public has given Congress marching orders to start cutting spending and rein in debt.

Policymakers should implement an emergency plan of cuts to defense, domestic, and entitlement programs. This essay proposes spending cuts of more than $1 trillion annually by 2021, which would balance the budget without resorting to damaging tax increases. Federal spending would be reduced to 18.0 percent of gross domestic product by 2021 under the plan, which compares to President Obama's projected spending that year of 24.2 percent of GDP.

Each of the spending cuts proposed here would make sense whether or not the government was running deficits. That's because many federal programs reduce individual freedom and cause economic distortions. If these programs were cut, resources would flow from lower-return government activities to higher-return activities in the private sector.

In recent decades, the federal government has expanded into hundreds of areas that should be left to state and local governments, businesses, charities, and individuals. That expansion is sucking the life out of the private economy and creating a top-down bureaucratic society that is alien to American traditions. Cutting federal spending would enhance civil liberties by dispersing power from Washington.

The need to cut spending and debt is urgent. Numerous committees, think tanks, and members of Congress have proposed plans to tackle ongoing deficits, including the House Budget Committee, the House Republican Study Committee, Senator Rand Paul (R-KY), and President Obama's National Commission on Fiscal Responsibility and Reform. The various plans are not in agreement about the role of taxes in reducing deficits, but there is fairly broad support for substantial spending cuts, particularly cuts to entitlement programs.

The plan presented here does not include tax increases. Official budget projections show that federal debt is exploding because spending is at abnormally high levels. With the 2001 and 2003 tax cuts in place, and with continued relief from the alternative minimum tax, federal revenues are expected to rise to at least 18 percent of GDP in coming years, which is about the average over recent decades. By contrast, it is federal spending—currently at more than 24 percent of GDP—that is above normal levels. During the last two years of the Clinton administration a decade ago, federal spending was just 18 percent of GDP.

Some analysts claim that cutting government spending would hurt the economy, but that idea is based on faulty Keynesian theories. In fact, federal spending cuts would shift resources from often mismanaged and damaging government programs to the more productive private sector, thus increasing overall GDP. Consider Canada's experience. In the mid-1990s, the country faced a debt crisis caused by runaway government spending—similar to our current situation. The Canadian government changed course and slashed total spending 10 percent in just two years and then held it roughly flat for another three years.¹ The Canadian economy did not sink into recession, but was instead launched on a 15-year economic boom.

Policymakers shouldn't think of spending cuts as a necessary evil needed to reduce debt. Rather, the government's fiscal mess is an opportunity to make reforms that would spur growth and expand individual freedom. The plan below includes a menu of spending cut options for Congress, and further reforms are described at www.DownsizingGovernment.org.
 

Reducing Spending over 10 Years

This section illustrates how a reduction in spending could eliminate the federal budget deficit over 10 years. It shows projections of revenues and spending as a share of GDP based on the March 2011 Congressional Budget Office estimates.² My projections for revenues assume the extension of the 2001 and 2003 income tax cuts, extension of alternative minimum tax relief, and repeal of the tax increases in the 2010 health care law.³ My projections for spending adjust the CBO baseline to include more realistic assumptions regarding troop reductions in Iraq and Afghanistan and the extension of the Medicare "doc fix."⁴

In Figure 1, the bottom line shows that federal revenues with tax relief in place are expected to rise to 18.0 percent of GDP by 2021 as the economy recovers and resumes normal growth. The top line shows President Obama's proposed spending based on his fiscal 2012 budget.⁵ As a share of GDP, spending is expected to dip the next few years as funding from the 2009 "stimulus" bill peters out and war costs fall, but spending is expected to start rising again after that. That high spending path would lead to higher taxes, higher debt, or both.

Figure 1.
Projected Federal Revenues and Spending Percent of GDP

The middle line in the chart shows spending under the balanced budget plan. Under this plan, spending cuts of more than $1 trillion annually by 2021 would be phased in over 10 years.⁶ Those cuts would generate substantial interest savings by 2021, and total federal spending would fall to 18.0 percent of GDP—the same level as federal revenues that year. With those cuts, federal public debt would peak at 75 percent of GDP in 2013 and then fall to 64 percent of GDP by 2021.
 

Spending Cut Details

Table 1 lists the proposed annual cuts for the balanced budget plan. By 2021, these include $150 billion in defense cuts and $490 billion in cuts to Medicare, Medicaid, Social Security, and the 2010 health care law. The table also includes other discretionary and entitlement cuts valued at $445 billion in 2011. With the assumed revenues, all these spending cuts would be saving the government $260 billion in annual interest costs by 2021.⁷ All in all, total spending in 2021 under this plan would be about $1.4 trillion lower than under either the CBO baseline or the president's budget.

As a technical note, most of the figures in Table 1 are outlays for fiscal 2011 from President Obama's fiscal 2012 budget.⁸ These cuts are expressed in 2011 dollars, but I've assumed that the value of these cuts would grow over time at the same rate as discretionary spending in the CBO baseline. The cuts in Table 1 marked with an asterisk are expressed in 2021 dollars and are generally based on CBO estimates.

The reforms listed in the table are deeper than the "duplication" and "waste" items often mentioned by federal policymakers, such as earmarks. The reality is that the nation faces a fiscal emergency, and we need to cut hundreds of billions of dollars of "meat" from federal departments, not just the obvious "fat." If the activities to be cut are useful to society, then state governments or private groups should fund them, and those entities would probably be more efficient at doing so.

The cuts in Table 1 are illustrative of how to begin getting the federal budget under control. Further reforms are needed in addition to these cuts, particularly structural changes to Medicare. But the important thing is to start cutting right away because the longer we wait, the deeper the pile of debt we will have to dig out from.

Table 1 includes cuts to individual and business subsidies, cuts to state aid, cuts to military expenses, cuts to the growth in entitlement programs, and privatization of federal activities. The sections following the table discuss these various types of cuts, and further analysis of the cuts is available at www.DownsizingGovernment.org.

Subsidies to Individuals and Businesses

The federal government operates more than 2,000 separate subsidy programs, a doubling of subsidy programs since the mid-1980s.⁹ The scope of federal activities has greatly expanded in recent decades, along with the size of the federal budget. The federal government subsidizes farm businesses, retirees, school lunches, rural utilities, the energy industry, rental housing, public broadcasting, job training, foreign aid activities, foreign purchases of weapons, urban transit services, and many other types of activities and people.

Each subsidy program costs money, generates a bureaucracy, spawns lobby groups, and encourages more people to demand freebies from the government. Individuals, businesses, and nonprofit groups that become hooked on federal subsidies essentially become tools of the state. They lose their independence, they have less incentive to innovate, and they shy away from criticizing the government.

Table 1 includes cuts to subsidies in agriculture, commerce, energy, housing, foreign aid, and other areas. These cuts wouldn't eliminate all of the unjustified subsidies in the federal budget, but they would be a good start. Government subsidies are like addictive drugs, undermining America's traditions of individual reliance, voluntary charity, and entrepreneurialism.
 

Aid to State and Local Governments

Under the Constitution, the federal government was assigned specific limited powers, and most government functions were left to the states. To ensure that people understood the limits on federal power, the Framers added the Constitution's Tenth Amendment: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." The amendment embodies federalism, the idea that federal and state governments have separate areas of activity and that federal responsibilities are supposed to be "few and defined," as James Madison noted.

Unfortunately, policymakers and the courts have mainly discarded federalism in recent decades. Congress has undertaken many activities that were traditionally reserved to state and local governments through the mechanism of "grants-in-aid." Grant programs are subsidies that are combined with federal regulatory controls to micromanage state and local activities. In fiscal 2011, federal aid to the states will total $625 billion, which will be distributed through more than 1,100 separate programs.¹⁰

The theory behind grants-in-aid is that the federal government can operate programs in the national interest to efficiently solve local problems. However, the federal aid system does not work that way in practice. Most federal politicians are consumed by the competitive scramble to maximize subsidies for their states, regardless of efficiency, fairness, or any appreciation of overall budget limitations.

Furthermore, federal aid stimulates overspending by state governments and creates a web of complex federal regulations that destroy state innovation. At all levels of the aid system, the focus is on regulatory compliance and spending, not on delivering quality public services. The aid system destroys government accountability because each level of government can blame the other levels when programs fail. It is a "triumph of expenditure without responsibility."

The federal aid system is a roundabout funding system for state and local activities. It serves no important economic purpose. By federalizing state and local activities, we are asking Congress to do the impossible—to efficiently plan for the competing needs of a diverse country of more than 300 million people.

The grants-in-aid system should be dramatically cut. Policymakers need to revive federalism and begin to terminate grant programs. Table 1 includes cuts to grants in the areas of agriculture, education, health care, justice, and transportation. The justice grants, for example, are for funding such items as bulletproof vests for local police.¹¹ There is no reason why such activities should not be funded at the city or county level.
 

Military Expenses

Cato Institute defense experts Christopher Preble and Benjamin Friedman have proposed a lengthy list of cuts to U.S. military spending totaling $1.2 trillion over 10 years.¹² Within 10 years, their proposal would reduce spending by about $150 billion annually, based on a strategy of restraint and reduced intervention abroad.

In proposing their plan, Preble and Friedman argue that the United States would be better off taking a wait-and-see approach to distant threats, while letting friendly nations bear more of the costs of their own defense. They note that U.S. policymakers support many extraneous missions for the military aside from the basic requirement to defend the nation. There is no doubt that America's military budget is bloated. Even aside from the wars in Iraq and Afghanistan, Department of Defense spending roughly doubled between 2001 and 2011.¹³
 

Medicare, Medicaid, and Social Security

The projected growth in Medicare, Medicaid, and Social Security is the main cause of America's looming fiscal crisis. Budget experts and policymakers across the political spectrum understand the need to restructure these programs. The reforms listed in Table 1 include repealing the 2010 health care law and some initial efforts to control health care and Social Security costs.

For Social Security, the growth in initial benefits would be indexed to prices rather than wages, which would slow benefit growth over time. The proposal would save $41 billion annually by 2021 and growing amounts after that, according to the CBO.¹⁴ The plan also includes a CBO option to modestly raise the program's normal retirement age.¹⁵

Medicaid should be converted from an open-ended matching grant program to a block grant, which would provide a fixed amount of funds to each state but allow state policymakers more program flexibility. That was the successful approach used for welfare reform in 1996. Converting Medicaid to a block grant would reduce federal costs, while encouraging innovation and cost reductions by the states. Setting the Medicaid block grant at the 2011 level of Medicaid spending would result in saving more than $200 billion annually within a decade.

The plan includes some modest Medicare changes based on CBO estimates, including increasing deductibles for services and increasing premiums for Part B to cover 35 percent of the program's costs.¹⁶ The plan would repeal the 2010 health care law, including the higher revenues and spending. It further assumes that the Medicare improper payment rate, which is at least 10 percent, would be cut in half.

However, much larger reforms to the program are needed. Cato scholars have proposed moving to a system based on individual vouchers, personal savings, and consumer choice for elderly health care.¹⁷ The House Budget Committee has similarly proposed a plan to convert Medicare into a consumer-driven health system.¹⁸ Such reforms would create strong incentives for providers and patients to improve system quality and efficiency.
 

Privatization

In recent decades, governments around the world have sold off state-owned assets to private investors.¹⁹ Airports, railroads, electric utilities, post offices, and other assets have been privatized. Privatization generally leads to reduced costs, higher-quality services, and increased innovation in formerly moribund government industries.

There are many federal assets that should be privatized. Table 1 includes the privatization of Amtrak, the air traffic control system, and the Army Corps of Engineers. Such reforms would reduce federal budget deficits and help spur economic growth.

Consider the nation's air traffic control system, which is run by the Federal Aviation Administration.²⁰ The FAA has struggled to expand capacity and upgrade its technology, and its modernization efforts have often fallen behind schedule and gone over budget. A series of incidents in 2011 indicated that the agency has serious workforce management problems. The air traffic control system needs major improvements to meet rising travel demands, but the FAA may not be capable of meeting the challenge.

The good news is that a number of countries have restructured their air traffic control systems and provide good models for U.S. reforms. Canada privatized its air traffic control system in 1996, setting up a private, nonprofit corporation, Nav Canada. The company is self-supporting from charges on aviation users. The Canadian system has received high marks for sound finances, solid management, and investment in new technologies.²¹ Aside from those advantages, a privatized system in the United States would save about $6 billion a year in general fund taxpayer costs.
 

Conclusions

Official projections show that without reforms federal spending will soar to more than 40 percent of GDP by 2050, and even higher after that. State and local spending comes on top of that, with the result that governments would consume more than half of the entire U.S. economy.

However, it seems inconceivable that voters and taxpayers would let the government grow to anywhere near that large. Indeed, the results of the 2010 elections indicate that there is already widespread disapproval of big government. It is also unlikely that the government would be able to raise taxes much above current levels to support higher spending because of our increasingly globalized economy.²²

The upshot is that we will have to make major spending cuts sooner or later, and it would be better to make them sooner before we accumulate even more debt. Policymakers can start with the menu of cuts presented here, and then they should pursue other reforms such as restructuring Medicare. Leaders of other industrial nations have pursued vigorous cost-cutting when their government debt got out of control, and there is no reason why our political leaders shouldn't do the same.

Proposed Spending Cuts

by Chris Edwards

June 2010

Most Department of Transportation activities are properly the responsibility of state and local governments and the private sector. There are few advantages in funding infrastructure such as highways and airports from Washington, but there are many disadvantages. Federal involvement results in political misallocation of resources, bureaucratic mismanagement, and costly one-size-fits-all regulations imposed on the states.

The Federal Highway Administration should be eliminated. Taxpayers and highway users would be better off if federal highway spending and gasoline taxes were ended. State governments could more efficiently plan their highway systems without federal intervention. The states should look to the private sector for help in funding and operating highways, and they ought to move forward with innovations such as expressways with electronic tolling.

The Federal Transit Administration should be eliminated. Federal transit subsidies have caused local governments to make inefficient transportation choices. Federal aid favors rail systems, which are more expensive and less flexible than bus systems. The removal of federal subsidies and related regulations would spur local governments to discover more cost-effective transportation solutions, such as opening transit markets to private operators.

Air traffic control should be removed from the federal budget, and the ATC system should be set up as a stand-alone and self-funded agency or private company. Many nations have moved towards such a commercialized ATC structure, and the results have been very positive with regard to efficiency and safety. Canada's reform in the 1990s to create a private nonprofit ATC corporation is a good model for the United States to follow. U.S. ATC is currently overseen by the Federal Aviation Administration, which has serious funding problems and a poor record on implementing new technologies. Moving to a Canadian-style ATC system would help solve these problems and allow our aviation infrastructure to meet rising aviation demand.

Amtrak has provided second-rate rail service for decades, while consuming almost $40 billion in federal subsidies. It has a poor on-time record, and its infrastructure is in bad shape. As a government agency, it is hamstrung in its decisionmaking regarding routes, workforce polices, capital investment, and other aspects of business. Amtrak should be privatized to give it the management flexibility it needs to operate in a more efficient and competitive manner.

The table shows that federal taxpayers would save about $85 billion annually by closing down the agencies and programs listed. The department would retain its current activities regarding highway safety, aviation safety, and some other regulatory functions. Those functions could be reformed as well, but the most important thing is to end federal subsidies for transportation activities that would be better handled by the states and private sector. America should take heed of the market-based reforms being implemented abroad, and pursue similar solutions to its transportation challenges.

Proposed Spending Cuts

by Chris Edwards

June 2011

The Department of Labor's budget is dominated by unemployment insurance (UI) costs, which have soared in recent years. The UI system should be reformed because it raises hiring costs, encourages unemployment, and reduces incentives to save. One reform option would be to switch to a UI system based on personal savings accounts, as the nation of Chile has done. Another option would be for the federal government to fully devolve UI to the states.

Aside from UI, the largest spending area in the department is employment and training services for unemployed workers. Taxpayers have been funding these activities since the 1960s, yet the Government Accountability Office says that "little is known about the effectiveness" of the programs. The reality is that federal employment and training programs don't fill any critical need that private markets don't already fill in the modern economy. Congress should terminate these programs, including Trade Adjustment Assistance, Job Corps, and other programs under the Workforce Investment Act.

Congress should downsize the Department of Labor's regulatory activities. The Occupational Safety and Health Administration, the Wage and Hour Division, and other agencies impose a thick web of rules on America's employers. The main issue is not the federal budget costs of these agencies, but the damage to the economy caused by unneeded regulations such as the federal minimum wage.

Congress should also reform federal labor union laws. The 1932 Norris-LaGuardia Act and the 1935 National Labor Relations Act empower unions with unwarranted privileges such as "collective bargaining," which is a euphemism for monopoly unionism. These laws are premised on the misguided idea that businesses and workers are enemies with opposite interests. They are also inconsistent with individual rights to freedom of association. Another misguided labor law is the 1931 Davis-Bacon Act, which pushes up the costs of federal construction projects. None of these union laws make sense in today's economy, and they should be repealed.

The following table shows that devolving unemployment insurance to the states and terminating employment and training programs would reduce federal spending by $143 billion annually. In addition, Congress should cut Department of Labor regulatory activities, but savings from regulatory reforms are not estimated here.

Proposed Spending Cuts

by Chris Edwards and Tad DeHaven

May 2010

Federal housing and urban programs have an eight-decade legacy of scandals, economic distortions, and social damage. Housing and urban infrastructure are properly the responsibilities of local governments and the private sector, and there is no need for federal involvement. The Department of Housing and Urban Development has created more problems than it has solved, and it should be closed down.

Federal urban renewal and public housing projects of the mid-20th century paved over neighborhoods and herded inner-city residents into high-rise concrete boxes. These projects quickly fell into disrepair and were overcome by crime and disorder. It was a spectacular government failure, but federal taxpayers are still spending about $9 billion a year on public housing subsidies. Those subsidies should be ended, and remaining public housing projects should be privatized or bulldozed.

Federal rental assistance programs should also be ended. Project-based and tenant-based rental subsidies cost taxpayers about $27 billion annually. Like public housing, rental subsidies encourage dependency on the government, discourage self-improvement, and stifle renewal in city neighborhoods. Rental assistance programs and public housing both rest on the myth that private markets can’t provide adequate housing for lower-income Americans.

Community development subsidies should be ended to save taxpayers about $13 billion annually. With today’s huge budget deficits, it makes no sense for the federal government to fund purely local projects such as parking lots and museums. Besides, only local policymakers can properly judge the merits of local projects when they balance a project's benefits with the local tax costs.

Housing finance programs designed to subsidize homeownership have created serious economic distortions that played a major part in the recent financial meltdown and recession. These programs encourage people who can’t afford homes to nonetheless buy homes and get too far into debt. Housing finance markets would work more efficiently without federal subsidies. HUD’s activities in this area should be phased-out to save taxpayers about $12 billion annually.

The table shows that federal taxpayers would save $63 billion annually by closing down HUD, or about $530 for every household in the nation. Also, the low income housing tax credit should be ended as an unneeded subsidy to developers worth about $5 billion per year. As HUD programs are cut, policymakers should also eliminate building, zoning, and other regulatory barriers that stand in the way of markets providing low-cost dwellings for moderate-income families.

Proposed Spending Cuts

by Chris Edwards

September 2010

The Department of Health and Human Services encompasses a giant and sprawling collection of agencies and programs. Its 2010 budget of $869 billion represents almost one-quarter of total federal spending. The department operates more than 400 different subsidy programs, including the massive and fast-growing Medicare and Medicaid programs.

The projected growth in Medicare and Medicaid will create a national fiscal disaster in coming decades unless the programs are restructured and cut. Unfortunately, the 2010 health care law expanded federal health spending and will likely make America's looming fiscal crisis worse.

Eventually, policymakers will have to control rising federal debt, and that means they will have to downsize HHS programs. Medicare should be converted to a system based on individual vouchers and competitive coverage options. Medicaid should be turned into a state block grant with a fixed level of federal funding. The 2010 health care law should be repealed and other HHS programs should be terminated, as listed below.

Medicare and Medicaid

Rep. Paul Ryan (R-WI) has proposed a detailed plan to convert Medicare and Medicaid into consumer-directed health systems by replacing current programs with tax credits and vouchers. Rather than the government reimbursing doctors and hospitals, the government would provide payments directly to individuals, who would purchase health insurance in private markets. The Ryan plan incorporates refundable tax credits for all Americans under age 65 and vouchers for the elderly and low-income populations. The budget effects of the proposal were examined by the Congressional Budget Office, and so the plan provides a useful illustration of the cost savings possible from market-oriented health reforms.

The Ryan plan would repeal the current tax exclusion for employer-provided health insurance and replace it with a refundable tax credit of $2,300 per adult, $1,700 per child, and a maximum of $5,700 per family. The tax credit would be used to cover the costs of either individual or employer-based health insurance for people under age 65.

Individuals age 65 and over would purchase private health insurance with the aid of a federal voucher. Individuals with lower incomes would purchase private health insurance with the aid of the federal tax credit and a voucher. The reforms would essentially convert Medicare and Medicaid from defined benefit to defined contribution plans. That would allow policymakers to directly restrain program costs without having the government ration health care services.

If individuals receiving tax credits and vouchers purchased health insurance costing less than the federal payment, they would put the excess in a tax-free medical savings account. If individuals purchased an insurance plan costing more than the federal payment, they would chip in the extra. Either way, individuals would be encouraged to make efficient purchasing decisions.

To restructure Medicare, the Ryan plan would provide retirees with a voucher averaging $11,000, which is the current average Medicare spending per beneficiary. The reform would only affect people who are age 55 and younger today. When those individuals start reaching age 65 after 2020, they would receive the Medicare voucher instead of benefits under the current program structure.

The Medicare voucher would grow in value after 2010 based on the average growth rate of general inflation and medical inflation. The dollar values of the vouchers would be adjusted to reflect the age of a beneficiary, income level, and health status. Poorer and sicker persons would receive higher subsidies. The low-income elderly under the Ryan plan would receive an additional payment to their medical savings accounts to cover out-of-pocket health expenses.

To restructure Medicaid, the Ryan plan would provide low-income individuals with both a refundable tax credit and a voucher to purchase private health insurance. People below the poverty line would receive a $5,000 voucher, while those with incomes between the poverty line and twice the poverty line would receive a smaller voucher amount. State taxpayers—who currently pay a portion of the costs of Medicaid—would pay a portion of the costs of the new Medicaid vouchers.

An alternative approach to reforming Medicaid would be to convert it to a block grant for the states. The states would receive a fixed grant from the federal government with few strings attached, allowing them to experiment with more efficient ways of delivering health subsidies to low-income families. This approach is probably preferable to the Ryan voucher approach because it would likely result in less federal micromanagement of state health care markets and more state innovation.

However, both the voucher and block-grant approaches to reforming Medicaid would create strong incentives to improve efficiency in health care markets, and both reform approaches would allow federal policymakers to directly clamp down on explosive Medicaid spending growth.

Other HHS Spending

Aside from Medicare and Medicaid, HHS operates a huge array of health and nonhealth programs. Essays on this website describe the problems with some of these programs and the advantages of terminating them. As Medicare and Medicaid spending expand, taxpayers will be less able to afford funding all the other HHS subsidy programs.

Table 1 lists HHS programs aside from Medicare and Medicaid that could be terminated. These programs have one thing in common: they are all state grant programs. The federal government raises the money from taxpayers who live in the 50 states and then dispenses it back to the states to administer these programs. That roundabout way of financing government programs makes no sense. Why don't the states just fund their own programs and cut out the inefficient middleman in Washington?

Elsewhere I have examined why federal grants to state governments are an ineffective and bureaucratic way to try and solve society's problems. For example, an authoritative HHS report on Head Start in 2010 conceded that the program produced few if any long-term benefits to participating children. The HHS activities listed in Table 1 that are worthwhile would be better handled by state and local governments or the private sector.

The proposed terminations in Table 1 would save taxpayers $81 billion annually. Even with these cuts, HHS would still spend about $61 billion annually aside from Medicare and Medicaid. Remaining HHS activities would include the Centers for Disease Control, the National Institutes of Health, and the Food and Drug Administration. These agencies could probably use reforms as well, and thus the cuts in Table 1 are not the only possible reforms to the HHS budget.

Long-Term Projections

Table 2 shows projected HHS spending in coming decades as a share of gross domestic product. The top rows of the table show CBO projections of business-as-usual spending with no major policy changes.⁷ The bottom rows of the table show the effects of the reforms discussed here.

Under a business-as-usual scenario, the CBO projects that Medicare and Medicaid spending will explode as a share of GDP in coming decades. By contrast, under the Ryan reforms for those two programs outlined here, the CBO projects that spending growth would be dramatically slowed.

The cost of the 2010 health care legislation is listed as a separate line item. By 2020, the CBO expects that the legislation will increase net government spending by about 0.4 percent of GDP. I have assumed—probably optimistically—that the cost of the legislation would remain at a constant share of GDP after that.

Without reforms, I've assumed that "Other HHS Spending" would remain at 1.0 percent of GDP in future years. For the reform scenario, I've assumed that the cuts listed in Table 1 would be phased in by 2020, which reduces this portion of the budget to about 0.4 percent of GDP by 2020 and beyond.

For the tax-credit part of Ryan's plan, the table shows only the outlay portion, meaning the cash payments to individuals who don't have any tax liability. The outlay portion is about one-third the overall value of the tax credits under his plan.

The tax credits and vouchers under the Ryan plan would grow at the average rate of the consumer price index and the inflation rate for medical care. That would restrain the growth rate in federal subsidies below the currently projected growth rates of Medicare and Medicaid, thus producing large savings over time. Medicare spending would continue rising as a share of the economy under the Ryan plan for a few decades, but then start falling. Medicaid spending would start falling as a share of the economy right away.

Note that similar Medicaid savings could be achieved by turning the program into a state block grant, which is probably a preferable reform. Block grants could be set to grow at the same overall rate as the vouchers under the Ryan plan or at a slower rate. Both the voucher and block grant reform approaches would allow policymakers to directly restrain the growth of federal Medicaid subsidies, while creating incentives to improve efficiency in low-income health care delivery.

Without federal spending reforms, budget projections show federal government debt soaring in coming decades to multiple times the size of the U.S. economy, which would be disastrous. The key driver of the debt explosion will be federal health programs unless they are restructured. The reforms proposed here would help avert a fiscal calamity and create a sustainable path for federal debt, while improving the quality and efficiency of the nation's health care system.

by Chris Edwards and Tad DeHaven

May 2010

Department of Commerce business subsidies should be abolished, including technology subsidies, handouts to fishermen, and minority business aid. The private sector does not need government help to prosper, it just needs the government to provide a stable environment with low inflation, modest taxation, and limited regulation.

The department's economic development funding should be eliminated. Since the 1960s, the Economic Development Administration has subsidized a range of activities that would be better funded by local governments and the private sector. By funding such activities through the EDA, members of Congress become preoccupied with delivering benefits to their hometowns, which diverts their attention from truly national issues.   

The International Trade Administration should be terminated. While trade plays a crucial role in America’s prosperity, the ITA carries out unneeded and sometimes damaging activities. To an extent, the agency operates under the mercantilist fallacy that exports should be supported by the government and imports should be blocked. The agency’s anti-dumping activities hurt U.S. consumers and businesses, generate huge fees for lobbyists, and encourage retaliation by other governments.

The table shows that federal taxpayers would save about $2 billion annually by terminating and privatizing these activities or devolving them to the states. Under the proposal, Commerce would retain responsibility for statistical functions, patents and trademarks, and various scientific and oceanic activities. Reforms could be pursued in those activities as well, but the table indicates some high priority cuts to begin overhauling the department.
 

Proposed Spending Cuts

by Chris Edwards

May 2010

Department of Energy research activities should be terminated. The private sector is entirely capable of funding its own research into coal, natural gas, nuclear power, solar power, and other forms of energy. Businesses will fund new technologies when there is a reasonable chance of commercial success, as they do in other private industries.

Federal energy subsidies impose a burden on taxpayers, and they can be counterproductive if they steer the marketplace away from the most efficient energy solutions. Furthermore, federal energy research has a track record of poor management, cost overruns, and wasteful boondoggles.

The Strategic Petroleum Reserve and the Power Marketing Administrations should be privatized. The Federal Energy Regulatory Commission should be terminated. Ending all these activities would save taxpayers about $18 billion annually, as shown in the table.

The bulk of the Department of Energy’s activities are defense-related. Those activities, which total about $19 billion annually, should be moved to the Department of Defense. That would allow for a more transparent presentation of defense costs in the budget, and it would allow the Department of Energy to be abolished.