Control Spending To Grow The Economy

Milton Friedman used to say, “keep your eye on one thing and one thing only: how much government is spending because that’s the true tax”. Judged against this criterion, despite the recent tax reforms, the U.S. economy is still taxed too much.

At the federal level, Congress recently passed another massive $328 billion spending package, the national debt has now surpassed $22 trillion, and (without changes) the long-foreshadowed day of reckoning for Social Security is approaching.

In its latest financial status report, the Social Security Administration has projected that, due to rising costs, taxes will be enough to pay for only 75 percent of scheduled benefits by 2035. The financial future for Medicare and Medicaid is just as bleak. On their current path, these programs are simply unsustainable.

It’s long past time to bring government spending under control. If not, despite the current strong economy – real GDP grew 3.2 percent in the first quarter of 2019 – ultimately, the government’s profligate spending will diminish America’s long-term economic growth prospects. Growth prospects will suffer because, due to the current size and composition of government spending, the value created by additional expenditures from individuals and businesses is greater than the value created by additional expenditures from the government.

This is where the “15 Percent Solution” comes in. Right now, Washington spends about 24 percent of national income. To maximize economic growth, Congress should control the growth of spending until it reaches between 14 and 16 percent of national income.

Many would argue that such a fundamental transformation could only work in theory; Congress cannot really control the growth in spending enough and still fund core priorities like Medicare and Social Security. But, the experience of Canada shows that such a transformation is possible.

Two decades ago, Canada was facing a fiscal and debt crisis but implemented fundamental reforms that cut government spending, balanced the budget, and encouraged a growth renaissance. If Canada can transform itself, then certainly the U.S. can as well. The latest report in the Pacific Research Institute’s “Beyond the New Normal” series, “Realizing the 15 Percent Solution,” outlines how such a transformation could work here.

For starters, we must not be afraid to address the “third rail” of American politics – reforming entitlements like Social Security, Medicare, and Medicaid. Social Security’s looming insolvency portends that doing nothing will jeopardize the retirement security of millions of Americans. Common sense reforms that adjust the full retirement age and eliminate the practice of over-adjusting benefits for inflation can make the program solvent and save Social Security for future retirees.

If we adopt broad-based reforms that embrace a more market-based health care system, the health care cost-curve can be sustainably “bent” helping to alleviate the bankrupting effects that Medicare will soon impose on the federal budget.

Beyond entitlement reforms, the Defense Department, a thorny issue in recent federal spending battles, must be forced to spend responsibly, too. Capping the growth in military spending and reprioritizing existing spending to fund critical priorities could reduce the growth in annual military spending while improving overall military preparedness.

All other programs – particularly so-called discretionary spending – needs to be constrained by a hard budget cap. This cap should not be applied equally, however. Some spending programs, like corporate welfare subsidies, are indefensible and should be eliminated. Other programs, like public assistance programs that serve the vital role of helping the most vulnerable, are indispensable. In these cases, reforms are still required that will ensure the programs meet their important goals while also adhering to a tighter budget constraint.

Then there is the problem of future interest costs. The growth of government spending cannot be constrained unless we bring future interest payments under control. To achieve this goal, we should look at selling some of the assets of the federal government. Ideally, we should sell off sufficient surplus land and buildings owned by the federal government to stabilize future interest payments.

Politically, it will be difficult to implement these policy solutions. Many of the ideas suggested in the 15 Percent Solution are sweeping reforms that would have to overcome the power of special interests, an entrenched bureaucracy, and organized constituency groups to become law.

Enacting a budget is a statement of priorities. If it is a priority of Congress to maximize economic growth and protect the prosperity of future generations, then policymakers should look to the 15 Percent Solution for a reasonable and realistic way to reduce spending to optimize economic growth.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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