Part IX

The flagship issue for many conservatives in our country right now is to reduce cost and size of government. So let's take on this issue and see how effective cutting government spending would be at reducing the deficit. As you have seen in the previous posts we cannot balance the budget by increasing revenue alone. Government spending will have to be reduced. Now the simple answer would be to cut cost by 62% and viola the would problem solved, but unfortunately it is not that simple. Congress cannot simply cut certain spending because it is mandatory spending (see part IV for explanation of this). To reduce mandatory spending there would have to be major reforms to current programs. So for my analysis I am going to take a few issues off the table because they are issues that cannot simply be “cut” they would have to be “reformed” which is a whole other issue (and I will address them in separate post). Additionally, since I will look at cutting military in a separate post I will not address the military budget at this time. I felt like it was appropriate to draw a distinction between defense spending and nondefense spending because many conservative politicians that talk about cutting the budget but very few are enthusiastic about reducing the size of the military. So I wanted to take their point of view and see how the numbers pan out.

So before I take an ax to the federal budget here is a list of the funding I will consider off limits:

Social Security: $754 billion
Medicare and Medicaid $719 billion
Department of Defense: $691 billion
Interest on the national debt: $413 billion*

Now it is worth nothing that I am not considering all mandatory spending off limits just these issues. Some mandatory spending can be cut rather easily, for example the cost of living pay increase was suspended for civilian federal employees in 2010 and there was not much negative reaction to it because it effects a relatively small part of the population. But you can imagine the reaction if the congress tried to reduce Social Security payments or Medicare coverage because it effects millions and millions of people.

All right let's get cutting! With the above issues off the chopping block we could balance the budget with an across the board cut of 119.1%. Again we butt up against a mathematical impossibility. So if we eliminated the entire federal government except the programs listed above and the national debt payment we would still be in the hole $404 billion.

Ouch! So what does this mean? It means that any politician who tries to sell you that a smaller government is the answer to the deficit and is not willing tackle Social Security, Medicare and Medicaid reform or is unwilling to touch Department of Defense, they are either pandering to you or are uniformed. That is not to say that the government should not or cannot reduce spending in other areas, on the contrary it will be a necessary part of balancing the budget. But shrinking the size of government without going after these larger issues will produce little results in regards to balancing the budget.

But let's not put that ax away yet! Despite the fact that the majority of government spending is tied up in a few major programs that does not mean that cutting spending in other areas would not add up and play a significant role in balancing the budget. But the hard question is what do we cut?

It is popular for the media to target politician’s salaries or pensions or pet projects that affect a very specific area. But realistically this would accomplish almost nothing when it comes to balancing the budget. If we are going reduce the deficit we are going to have make cuts to programs that are big enough to make a difference on the balance sheet. So lets take a look at the top ten most expensive programs in 2010 other than Social Security, Medicare and Medicaid, the Department of Defense and interest on the national debt (It may surprise you):

1. Unemployment Insurance programs: $156 billion (though it is worth noting that in 2007 before the recession it was $35 billion)

2. Food stamps: $70 billion

3. The Earned Income Tax Credit (a tax credit to employed people with low wages): $54 billion

4. Disability Compensation and Pensions for veterans $47 billion.

5. Hospitals and medical care for veterans: $41 billion.

6. The National Institutes of Health: $32 billion.

7. Building and maintaining highways: $30 billion

8. GSE purchase programs (this is part of the Housing and Economic Recovery Act of 2008, it is to help the banks offer mortgages during the recession): $30 billion

9. Financial assistance for students pursuing higher education: $30 billion.

10. Section 8 rental assistance (Subsided rent for people with low income) $27 billion.

These programs along with Social Security, Medicare and Medicaid and the Department of Defense make up 83% of the federal budget and of the remaining 17% there is not a single program that is larger than $23 billion or 0.6 percent of the total annual budget.

So what do we cut? The popular response by politicians and the media is “pork barrel” or wasteful spending but if look at the top ten most expensive programs outside of Social Security, Medicare and Medicaid and the Department of Defense, 68% of money spent goes to assisting those who lost their jobs, the poor and the disabled. Not exactly pet projects. The problem with targeting specific programs is that we often determine the value of a program based on how much it impacts us. I think this is why Congress has had such a hard time balancing the budget over the years. The debate always gets bogged down with which programs should be targeted for cuts and inevitably either nothing gets done or they go after minor programs everyone can agree on leading to penny wise and pound foolish policies are adopted. Public Radio is a good example of this. Recently there has been a lot of debate about whether or not the federal government should fund public radio. Now it is a valid discussion to question whether or not the government should be subsidizing a radio station. But the fact of the matter is that in 2010 National Public Radio received about 11 million dollars in federal funds or in other words 0.00031% of the federal budget and if the issue was really about the budget there would be bigger fish to fry. To put things in perspective lets go back to my example of the US government as a middle class household. Let's think of Congress as the adults of this household, they are $341,064 in debt and have $2,588 in bills they cannot pay each month. The 26 cents that one spouse donates to NPR each year is the least of their concerns.

But let's look at this from a more goal-oriented perspective. To save the bickering on what should be cut, what would happen if Congress just instituted a 10%** budget reduction to every agency equally (except Social Security, Medicare, Medicaid and the Department of Defense) and let the chip fall where they may?

By the numbers:

Percentage this idea could reduce the federal budget deficit by: 8.4%

Total dollar amount this idea could cut the deficit by: $109.6 billion

So what is the verdict? Without tackling the major expenses of Social Security, Medicare, Medicaid and the Department of Defense cutting spending would only have a mild effect. I would look at it like this, let's say you are leasing a really nice car for $500 a month and you spend $50 a month eating at restaurants. It is true that you will save money if you stop eating out, but that is not the source of your problem.

*Technically only $196 billion of taxpayer money went to paying off the national debt. The rest was covered by the investment from the Treasury Department. Since in my example the Treasury Department was closed due to lack of funds there was no one to buy and sell these investment bonds the $217 billion in interest was not made.

** If 10% does not seem high enough it is important to note that the overall federal budget has not decreased by one cent since the end of the Korean War, so a 10% reduction would be huge by historical standard.