Rand Paul, the incoming Senator from Kentucky, won an impressive underdog victory in the November midterms with his passionate insistence that Washington needs to cut taxes, slash spending, and balance its annual budget. But he never really said how the government should do that.
Now's the time. The Republicans who took control of the House of Representatives and gained seats in the Senate are clearly channeling voter disgust with reckless federal spending and a government drunk on debt. John Boehner, the incoming Speaker of the House, pledged after the elections to pursue "smaller, less costly, and more accountable government." But promises and complaints are the easy part. Economically, there are plenty of ways to rein in spending and resize the government. The catch is, just about all of them will cause pain for somebody. The question nobody wants to answer is who should feel it most.
Paul himself illustrates the mismatch between the urge to cut spending and the discomfort it will cause. While calling for a balanced budget within five years, for example, Paul—an eye surgeon who receives much of his income from Medicaid and Medicare payments—has complained about proposed cuts in federal payments to doctors, arguing that "physicians should be allowed to make a comfortable living." He also favors an extension of the Bush tax cuts—which would add nearly $4 trillion to the debt over the next decade—even if Congress doesn't come up with offsetting cuts or new revenues to pay for it. Heck, the old, wasteful Congress could have done that.
To be fair, Paul won't be sworn into the Senate until January, and he correctly points out that the government's annual budget is a monstrosity that no simple country doctor can master without a staff of analysts. So he deserves a couple of months to come up with a plan. Still, the basic steps needed to balance the budget and rein in the debt are fairly clear, because a small number of programs account for a huge portion of government spending. So those are the ones that must be tackled under any serious plan to shrink government. Here's how to tell if small-government advocates are faking it when they talk about cutting federal spending:
They refuse to target the big four. Medicare, Medicaid, Social Security, and national security account for 58 percent of all federal spending. Here's the tally for each:
Social Security: 19.4 percent of federal spending
National security: 19.3 percent
Medicare: 12.3 percent
Medicaid: 7.4 percent
The latest annual deficit is about $1.3 trillion, or about 34 percent of all federal spending. That's roughly equal to all spending on national security and Medicare combined. And the total national debt is about $14 trillion. That's all of the big four programs combined, times seven.
Since the big four programs are so big, there's no way to tackle the deficit or the debt without cutting or restructuring them. Yet these are also the programs that tend to be most popular with voters and politicians alike. Defense spending is notoriously hard to cut, since it's synonymous with patriotism and linked to jobs in virtually every state. The other three programs are entitlements, which means that unless Congress changes the law, the money goes out of federal coffers automatically, without Congressional approval. And they're only going to grow, since they're linked to the cost of healthcare—which is rising much faster than overall inflation—and to the surge in retirements as Baby Boomers age.
One of the few politicians who has a plan to target these is Rep. Paul Ryan, a Republican from Wisconsin who's likely to chair the House Budget Committee once Republicans take over. His "Roadmap for America's Future" would phase in cuts in Medicare and Social Security spending by putting new limits on government payouts and making individuals more responsible for the money spent on their behalf. Yet there was no mention of Ryan's plan in the Republicans' "Pledge To America," which helped guide their midterm campaign strategy, and few candidates mentioned it while campaigning. If they're serious about cutting spending, maybe now they will.
They target feel-good cuts that don't add up to much. The Pledge To America vows to "stop out-of-control spending and reduce the size of government," highlighting a few ways to do this. Here are some of the main suggestions, along with my estimates of the total amount of federal spending involved:
Reclaim unspent stimulus funds: About $50 billion, which is less than two-tenths of 1 percent of annual spending.
Cut Congress's budget: The total budget for the legislative branch is about $5.4 billion, so if you defunded Congress completely, you'd cut federal spending by less than one-tenth of 1 percent.
Cap discretionary spending: The stuff that Congress chooses to spend money on every year—roads, national parks, NASA, the State Department—accounts for about 35 percent of federal spending. If it stayed fixed instead of rising, the soaring cost of entitlements would still send the debt skyrocketing. If you eliminated all discretionary spending, however, you could balance the budget, and if you did it for 10 years straight you'd come close to paying down the entire national debt. But you'd also throw millions of people out of work and trigger a depression, so it might be counterproductive.
I could go on, but why bother? Targeting small-bore programs might win rhetorical points, but it's almost meaningless given the total amount of federal spending. President Obama learned this lesson in April 2009, when he was lampooned for ordering his Cabinet agencies to come up with a combined $100 million in savings out of their budgets. One blogger noted that that's the equivalent of a typical family cutting back by two cups of coffee—per year.
They favor tax cuts but don't say how to pay for them. Everybody wants lower taxes, but America can't afford tax cuts. In fact, to pay down the debt, we probably need tax increases. This is already playing out in many states, where property and income taxes are going up to cover huge holes in state and local budgets. That crunch could worsen as federal aid to the states dries up. And as the national debt continues to swell, America comes closer and closer to the day when investors start to question the safety of U.S. government securities, which finance our deficit spending. When that happens, U.S. borrowing costs will go up and tax hikes will follow. The shock to the economy could make the 2008 recession seem mild.
Yet many Republicans want unfunded tax cuts, which would add to the debt. It's possible to cut taxes today in order to stimulate the economy, while enacting a longer-term plan to recoup the lost revenue in the future. That approach is favored by Congressional Budget Office director Doug Elmendorf and others. But doing the first without the second is simply reckless—yet that's the way politicians constantly seeking reelection tend to operate. Voters could do more to keep politicians honest by asking a simple question every time they hear somebody call for tax cuts: How do you plan to pay for them? And when the answer is "cut government," don't forget to ask how.