Setting Priorities for Budget Cuts

President Bush seems sincerely determined to avoid a tax increase. But unless he leads a new effort to cut federal spending, the pressure to reduce the deficit via new tax proposals may overwhelm his resolve.

There is an ambivalence--likely quite unintentional--in the Bush Administration’s action to date on the two sides of the budget. When the subject of revenues comes up, the President is the solid conservative anxious to avoid increasing the proportion of the national income flowing through the federal Treasury.

But when the spending side of the budget comes up, a much more liberal--some would say “enlightened”--George Bush comes to the fore. Of course, increases in federal appropriations for fighting acid rain, homelessness, illiteracy, savings and loan bankruptcies and nuclear waste are all worthy undertakings.

But expanding such outlays increases the gap between federal revenues and expenditures. Identifying new priorities is only the first and easiest step in reordering budget priorities. The process is not complete, however, until the second and more difficult action is taken--cutting back programs that are to be assigned lower priority.

Virtually all who have examined the details of the federal budget--be they Republicans, Democrats or independents--conclude that many things on which the federal government spends money are not worth the cost. These marginal items benefit individual localities, specific industries or particular interest groups. That is why they are in the budget. But, from the viewpoint of the nation as a whole, they are a poor investment.

Budget cutting should be guided by two principles: fairness and effectiveness. To be fair, it should be very broadly based. An old Budget Bureau adage comes to mind: Good budgeting is the uniform distribution of dissatisfaction. No federal department or agency should be off limits to the budget cutter.

The second principle is based on the fact that America competes in an increasingly global marketplace. Government spending is now dominated by outlays that promote consumption. Very small portions of the federal budget are devoted to investment. A new budget restraint effort should focus on cutting items that do not promote a stronger economy.

On the basis of these two principles, we can identify numerous candidates for budget cutting. Because conservatives are often criticized for beginning their search for budget cuts with Social Security, Medicare, and other “entitlements,” let us save them for last.

We can start by identifying low-priority subsidies to business. This notion will shock some conservatives who always assume that the term subsidies must be preceded by the word farm. The fact is that a variety of federal agencies award credit subsidies to a relatively few lucky enterprises.

Cut Selective Subsidies

Government credit is provided at interest rates below those that the Treasury pays for the money it borrows--and often substantially lower than the interest rates charged to unsubsidized borrowers (the rest of us). Federal agencies providing these goodies include the Rural Electrification Administration (which has run out of farmers who do not have electricity), the Export-Import Bank (which subsidizes foreign companies competing against American firms), the Small Business Administration (which picks lucky smaller companies) and the Department of Commerce (which picks larger firms).

Agricultural price supports, a multibillion-dollar annual drain on the Treasury, are justified by the plight of the family farm. However, most of the benefits of the Agriculture Department’s largess go to the largest, wealthiest farmers. Supporting farm prices gives special advantage to the largest farms whose low costs arise from economies of scale.

Another candidate for budget cutting is subsidies awarded by the Department of Labor, such as those provided by the Davis-Bacon Act. A vestige of the Great Depression, this law increases the cost of government construction projects by setting a floor under, rather than a ceiling over, costs. It requires the secretary of labor to determine the level of construction wage rates that “prevail” in the area of any government-financed project. The government can award contracts only to companies that pay those “prevailing” wages.

The Department of Labor has been known to use the Pittsburgh area’s high wage levels to set the standard for rural Appalachia. Ditto for using Boston’s high levels in rural Maine. Where the department does not have its own data, it has used union wage scales.

No analysis of budget cutting would be complete without special attention to the Pentagon. The truly large examples of waste do not include the hammer purchased for $125 but are the multimillion-dollar weapons that Congress regularly adds to the military budget in order to favor the constituencies of a few powerful members. Paying retirement benefits to healthy 38-year-olds is an example of both fiscal and economic waste. So is the congressional requirement for the military to do the equivalent of “carrying coals to Newcastle.” Our European bases are required to stockpile U.S.-mined coal even though the local product is much cheaper.

We have saved the biggest targets for budget cuts for last--the entitlements. This category is supported by arguably the most politically powerful group in Washington--the American Assn. of Retired People. Although howls of outrage are heard every time the point is made, public policy treats senior citizens better than “junior citizens.” The average worker is not fully protected against inflation, but every Social Security recipient is. Adjusting benefits by less than the full cost of living--a “diet” COLA (cost of living allowance) would save the Treasury billions.

The typical Social Security recipient did not pay for the bulk of his or her monthly check (even when the employer contribution is included, plus interest). The largest part of the monthly benefit is a gift from the working generation. Like other gifts, it should be fully taxable. If it were, low-income Social Security recipients would not pay any federal income tax, but middle and upper income beneficiaries would.

The potential budget cuts presented here are meant to whet the appetite for a tough-minded review of all federal spending. So long as the federal budget remains a mechanism for converting private investment into publicly sponsored consumption, tax increases are hardly the desirable response to our budget deficit woes.