Over a year old now, but this post is still relevant -
Spending Cuts Even Democrats Can Support
By Jeffrey Alan Miron
Most economists agree that large and persistent budget deficits are bad for the economy. Deficits mean government borrowing, which implies higher interest rates, lower investment, reduced capital accumulation, and slower growth. A few economists endorse an alternate view -- Ricardian equivalence -- which holds that private saving offsets government dissaving, making government deficits irrelevant. But this offset seems to be only partial, so the U.S. fiscal outlook is indeed bleak. This especially reflects the looming imbalances in Social Security and Medicare.
When it comes to reducing the deficit, however, economists divide into two camps. Those on the Republican side endorse tax cuts, even while decrying deficits. These economists argue that taxes are an independent evil because they distort economic behavior. And these economists suggest current deficits can help restrain future spending.
Economists in the Democratic camp regard tax cuts as folly. These economists downplay the distortions caused by taxes, and they claim that starving the beast does not work. Many also paint scary scenarios of financial market meltdown from ever-increasing U.S. borrowing.
In addition, Democratic economists suggest there is no expenditure to cut because most of the budget is national defense, entitlements, and interest payments on the debt.
Reasonable economists can disagree about the magnitude of distortions caused by taxes, as well as on whether continued borrowing will cause a financial crisis. And reasonable economists are understandably skeptical about starving the beast, since the substantial increase in expenditure following the Bush tax cut is at odds with this hypothesis.
But the claim that government expenditure cannot be cut is dead wrong. I offer here a list that Democratic economists should embrace. The numbers after each item are the approximate annual savings in 2006 dollars.
* Agricultural Subsidies: Everyone's favorite whipping boy, and for good reason. These subsidies are a handout to rich farmers, and they raise food prices for everyone. $20 billion.
* Social Security for the Well-Off: Social Security is not means-tested; people with substantial retirement income get full benefits. This is insanity; recipients did not "save" the benefits they receive; these benefits come from taxes paid by current working generations. Cut Social Security expenditure, say, 20% by introducing a modest degree of means-testing. $100 billion.
* Medicare for the Well-Off: Same deal as with Social Security. Raise premiums, deductibles, and co-pays in a means-tested manner to save 20% of current expenditure. $60 billion.
* Higher Education for the Well-Off: State governments currently operate colleges and universities in a manner that makes no distributional sense. Children of millionaires pay the same highly subsidized tuition as children in poverty. State governments should emulate the private sector by setting a high tuition rate and then offering discounts on a means-tested basis. $50 billion.
* Pork: Although many "bridges to nowhere" are small potatoes, the number of potatoes is large. A recent accounting by Taxpayers for Common Sense estimated 2005 earmarks at $24 billion; most of this is pure pork. Adding big ticket items like manned space flight, Amtrak subsidies, mass transit boondoggles like the Big Dig, senseless flood control projects undertaken by the Army Corps of Engineers, and subsidized disaster insurance, not to mention state and local pork, would easily yield substantial savings. $70 billion.
The grand total from this list is $300 billion annually, roughly the deficit projected for 2006. Normal economic growth would therefore mean surpluses in the near future, should these cuts occur. To deal fully with the impending imbalances in Social Security and Medicare requires one more policy change, but it is again one Democratic economists should endorse: an increase in the normal eligibility year to 70 and then indexing of the retirement age to life expectancy.
Note that my list of cuts is consistent with Democratic views on redistribution; it does not cut a penny from programs for the poor. And my list does not address substantial but controversial programs that I personally would eliminate (drug prohibition and the Iraq war, for starters).
Instead, my cuts are ones every economist should endorse, regardless of party affiliation. This expenditure is either welfare for the well-off or pure waste. So it ought to be cut even if taxation is non-distorting and even if the budget is in surplus.
Democratic economists will no doubt claim these cuts are politically unlikely. That is correct. But that is precisely why Democratic economists, and all other economists, should use their blogs, and their op-eds to highlight the enormous scope for welfare-enhancing cuts in government expenditure.
Jeffrey Alan Miron is an economist at Harvard University.
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