September 29, 2013
Can Government Programs be Cut Back?
Can Government Programs be Cut Back? Becker
Government programs, such as social security or price support of agriculture, are extremely difficult to cut back once they have been established. Yet, at times, specific programs have been reduced and even eliminated. It is clear why programs tend to keep going, but it is also possible to understand why they sometimes do get reformed, reduced, and even eliminated.
Millions of potential government programs are conceivable, but they fail to gain political traction because they do not have enough political support. However, once a government program has been running for a while, politically powerful vested interests develop that seek to maintain and even expand its scope. That vested interests may develop to support the continuation of programs is obvious since every government program favors some particular set of individuals or companies. For example, social security and Medicare favor the elderly, while an ethanol program that subsidizes the use of corn in creating fuel for cars clearly helps farmers who grow corn.
The groups favored by a program sometimes form advocacy groups to further promote their interests. Astute politicians may realize they can gain votes and campaign contributions by becoming advocates of programs that help individuals, unions, and companies in their districts. One way or another, powerful political support usually develops for government subsidies and other programs.
One might expect political forces regarding particular programs to be balanced because they not only favor certain groups, but they also harm others. For example, an ethanol subsidy program harms the purchasers of corn and of meat. Social security retirement incomes require taxes on younger workers to help pay for these incomes.
However, political forces are not typically equally aligned because of a basic political asymmetry: the gains from a government program are usually far more concentrated than the costs. For example, an increase in social security retirement incomes by 10% has a sizeable effect on retirees, but a much smaller effect on each worker who is taxed a little more to pay for these added benefits. A program of accelerated depreciation on capital investments might help capital-intensive businesses a lot, but has a relatively small effect on each taxpayer who has to make up the lost revenue due to reduced income from taxes on business profits.
This basic asymmetry in the alignment of political forces has been understood for a long time. The 19th century American astronomer and economist, Simon Newcomb, said in 1885, "One cent per year out of each inhabitant would make an annual income of $500,000. By expending a fraction of {their} profit, the proposers of policy A could make the country respond with appeals in their favor…Thus year after year every man in public life would hear what would seem to be the unanimous voice of public opinion on the side opposed to the public interests"(Principles of Political Economy).
Yet despite this fundamental political asymmetry, some programs have been reduced in scope and even eliminated. In particular, the ethanol subsidy program in the US has been cut back, and various European countries, such as Italy and Greece, have extended the age before government employees become eligible for their generous retirement pensions.
If the political asymmetry approach is our guide to understanding the durability of government programs, then presumably programs that get into trouble have had a shift in political support away from beneficiaries and in favor of those harmed. Obvious examples of this include the aging of the population in developed countries that has raised the burden of social security programs by increasing the number of beneficiaries and reducing the number of workers to tax. Airline regulation got into trouble because the growth in air travel increased the number of travelers harmed by regulations that maintained high ticket prices and kept out entry of new types of airlines offering more basic service, such as Southwest and JetBlue.
Shifts in the alignment of political forces apply to total government spending as well as to individual programs. For example, the financial crisis created serious problems for overall spending in a country like Greece because it raised the burden of the large government (and private) debt contracted during the good times leading up to the crisis. Pressure to rein in entitlement spending on medical care and retirement incomes have grown because these programs require more and more funding from a relatively smaller tax base of working persons.
Clearly, the alignment of political forces are more likely to shift regarding a relatively small program, such as support of rice production, than on the overall level of government spending. This is especially the case in an environment of robust economic growth that makes it easier to fund the overall government budget. But with slow economic growth, a changing age distribution toward older persons, and other structural changes in a society, even the overall level of spending faces stronger political opposition.
Is it realistic to think that federal spending can be cut substantially in either the short or the long run? Posner
The answer, I think, is no, provided the focus is limited to the short run—the next few years. For it's impossible to predict federal spending in the more distant future; there are too many imponderables. Many predictions of federal spending are published, by federal agencies and financial analysts, some for as far out as 2050, but I don't think they have any value, given the volatility of American society, foreign uncertainties, and the rate of technological advance.
Total spending, at all levels of American government, is today about 40 percent of the Gross Domestic Product. The percentage has grown pretty steadily since 1900, when it was less than 10 percent, apart from big spikes in World War I and II. It was 30 percent in 1960, 35 percent in the 1980s, somewhat lower in the late 1990s—down as low as 33 percent in 2000—and since then it has been up. Federal spending has followed a similar pattern, though of course at a lower level because it is only part of total government spending. Federal spending was only about 3 percent of GDP in 1900 and indeed was little changed from that low figure as late as 1928, but it rose rapidly to about 17 percent in 1960, reaching the low 20s in the 1980s, then dipping to about 18 percent in 2000, and now about 20 percent. When one looks at a chart of such growth, over such a long span of time with so little interruption (that is, negative growth), the upward trend looks inexorable.
Much of the growth was powered by the expansion of federal domestic programs that began in the 1930s, and of military expenditures that began shortly before we entered World War II. But a significant factor in the growth of federal spending since the 1960s has been the growth of entitlements spending—spending for which Congress doesn't appropriate money, as distinct from discretionary spending, which requires annual appropriations. The principal entitlement programs are Medicare, Medicaid, and Social Security, and together they were 4 percent of GDP in 1971 and 10 percent last year.
If entitlements spending were not expected to grow faster than GDP, I don't think there would or should be a serious concern with the size of federal spending relative to GDP. Of course there is lots of waste in federal spending, but there is lots of waste in corporate and consumer spending as well, and probably more in state and local government spending. Much that the federal government does, including expenditures on national defense and on national security more broadly, on medical and other scientific research, on law enforcement and adjudication, on essential regulation, on national parks, on tax collection, on foreign aid, on disaster relief, and on education is essential. The caliber of federal employees is generally high, with job security and the honor and interest of public service offsetting, for many able people, the limited financial returns to such employment. In principle most government services could be provided more economically, but given political pressures and the ineradicable characteristics of large organizations the possibilities for reform are limited. Mindless, blunderbuss cuts of the sort administered by the current sequester are inefficient, and unlikely to produce a net increase in social wealth or welfare.
Of course there is a large federal deficit, but it is quite manageable with modest increases in income tax rates coupled with broader coverage obtained by reining in some deductions and exclusions. The experience of the George W. Bush Presidency is that reducing federal income tax rates from the level that prevailed in the 1990s does not promote economic growth, though it does increase economic inequality.
The growth in entitlements is a legitimate concern. Increased longevity increases the government's costs of Social Security and Medicare, and increased inequality of income increases the costs of Medicaid, costs shared between the federal government and state governments. But the focus of conservatives who want to reduce federal spending is not on Social Security and Medicare, which are sacred crows protected by the voting power of the elderly, or even on Medicaid (though conservatives are hostile to it, just as they are to Food Stamps and other measures of what used to be called poor relief), but rather on discretionary spending. Regarding any increase in taxation as anathema, conservatives want to shrink the federal government by drastically reducing federal spending, even if that means underfunding research, national defense, the air-control system, flood control, law enforcement, and other normal government expenditures. That is not a promising approach.