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A Better Way To Cut The Deficit

The Congressional Supercommittee has failed to come up with a deficit reduction plan. Personally, I’m thankful for that, since the very existence of the “supercommittee” was a Constitutional violation.

I won’t get into a long explanation here of the debated cuts-which-weren’t-actually-cuts, or the sequestration of funds, or the odd process by which the supercommittee would have presented a bill. It would be too much like explaining a Rube Goldberg invention.

Instead, I’ll discuss the other budget proposal, the one which the supercommittee apparently never considered: Just stop spending!

Let me explain: According to the Congressional Budget Office, a “cut” includes any reduction in planned future spending, even if the total amount spent is greater than current spending. To use Neil Cavuto’s analogy, it’s similar to a diet where a person plans to gain 100 pounds in ten years, but instead only gains 50 pounds and calls it a “reduction”. The “cuts” the supercommittee considered were “cuts” of this type.

The Tea Party proposal, which wasn’t even considered by the supercommittee, would have frozen federal spending for ten years. That’s it. Project the federal budget for 2021 at $3.8 trillion- the current amount.

By CBO’s standard, this would have scored as a $9 trillion cut over ten years- and bring federal spending into virtual balance.

This proposal presents one challenge: Certain areas of federal spending will naturally increase over time- namely, Social Security (as new retirees begin collecting benefits), interest payments on the national debt, and “other federal mandatory spending” (the U.S. government’s contractual obligations).

In order to offset these anticipated increases over the long term, actual cuts would be needed in other areas immediately. To give an idea of the shape of these cuts, here is a pie chart (image right) of federal spending from 2010 (the current proportions are very similar).

Something you’ll notice right away: 80% of the federal budget is made up of just six expenses: Social Security, the Department of Defense, other federal mandatory spending, Medicare, Medicaid/SCHIP, and interest on the national debt. The other 20% is “everything else“.

The Tea Party proposal didn’t include specific cuts. Simply an agreement to freeze the budget would have been a huge victory. I’ll take a little license here and make some “proposals” of my own to keep the budget amount at roughly $3.8 trillion for ten years.

1) Freezing the military budget isn’t a bad thing. Admiral Mike Mullen offered a $100 billion reduction is DoD spending in 2010, which he said could be accomplished without making major changes to our military posture, defunding current operations, or defaulting on contractual obligations. I’ll take Adm. Mullen at his word, and assume that these cuts could also be implemented in the form of reducing expenditures over time by freezing the military budget (and assuming that some of our current operations will end within the next ten years).

2) Offset growth in “other federal mandatory spending” by cutting in other areas. The “other federal mandatory spending” category is made up of the federal government’s contractual obligations- military and civil service pensions, federal unemployment extension funds promised to the states, food stamp and HEAP funds, etc.

It goes without saying that there is substantial work to be done in reducing (and in some cases, eliminating) these expenditures- but this is work that can only be done over the long-term. Among these solutions would be transferring responsibility for food and heating assistance to the states, privatizing long-term unemployment insurance, converting future federal pensions into defined contribution programs, and the like. Naturally, some of the solution to these expenses is fixing our broken economy, which is far too long a subject for this post.

In the short term (i.e. over the next ten years), the amount of these expenses would have to be offset.

3) Paul Ryan is right- privatize Medicare (and block-grant Medicaid). Ryan’s plan, which includes an $18,000 annual premium subsidy and, for low-income seniors, a cash account of up to $9,500 to offset out-of-pocket expenses, will reduce the projected cost increases of Medicare- but it will still increase in cost as more baby boomers enter retirement.

Offset these increases by cutting Medicaid funding by 20% or more, and block-granting the remaining funds to the states. Federal regulations add to the states’ cost of supplying Medicaid, so cutting regulations offsets some of the reductions in funds. Let the states decide how to spend the rest of the money- for example, Mitch Daniels’ highly-effective (and cost-reducing) “Healthy Indiana Plan”.

Also: It strikes me as a total failure of the GOP message machine that the generous amounts proposed by Ryan- $18,000 in insurance premiums and $9,500 in a cash account- weren’t being used to sell the idea. Imagine this conversation by pundits on TV:

Democrat Pundit: “Ryan’s plan will kill Medicare, which is a great program!”
Republican Pundit: “Seniors would get up to $27,000 every year to buy insurance and pay out-of-pocket costs, and seniors get to choose their own insurance and keep their own doctor.”

Argument killed.

4) Offset increases in interest payments by cutting departments. Since the budget won’t balance overnight, the national debt would increase in the short-term. This means interest payments on the national debt would increase as well. In the long term, we’ll need strategies for paying down the debt- sale of federal lands, for example- but in the short-term, we can offset the expected increase in interest payments by cutting federal agencies. This is where the “everything else” which makes up 20% of the total budget comes into play.

There are lots of opportunities here- eliminate the Departments of Education, Commerce, and uhh… (yes, I know, it’s an old joke). Cut earmarks and foreign aid. You, the reader, undoubtedly know these talking points by now, so I won’t waste your time repeating them.

5) The big one: Social Security. This is the area which will grow exponentially over the next ten to fifteen years, as the Baby Boom generation enters retirement. It’s also a political minefield: Freezing social security payment amounts would mean political suicide for the GOP.

Again, there’s a long-term fix for Social Security in the form of privatization. But, as with any long-term solution, there’s a short-term problem to address as well.

What’s needed here is a “bold plan” (please forgive the Herman Cain-ism), and Walter Williams has one: Offer an exchange of Social Security payments for a federal land grant. The federal government currently holds 29% of the landmass of the continental United States- nearly 650 million acres. Offering this land to those who will enter Social Security in 10-20 years, in exchange for their Social Security payments, could accomplish two things:

a) offset projected Social Security expenses;

b) create a demand for development in the states where this land is held- Wyoming, Montana, Utah, Nevada, etc.- for new home construction, road development, electrical, natural gas, and water supply systems, service-oriented businesses such as grocery stores and restaurants, and the like.

I think this is a terrific idea, and merits much more attention than it currently recieves.

In sum: It’s easy to overcome the budget hyperbole from both sides of the aisle and see a solution to our budget problems. All you need is a calculator, a pie chart, and Occam’s razor.

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