DOWNSIZING THE U.S. GOVERNMENT

Author: Chris Edwards (Director of tax policy studies at Cato and editor of www.DownsizingGovernment.org. He is a top expert on federal and state tax and budget issues.)

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"U.S. Federal government spending is rising ($3.8 trillion in 2015), deficits are chronic $ 616 billion estimated in 2016) and accumulated debt is reaching dangerous levels ($ 20 trillion +). Growing spending and debt are undermining economic growth and may push the nation into a financial crisis in coming years. The solution to these problems is to downsize every federal department by cutting the most harmful programs. 

Federal spending cuts would spur economic growth by shifting resources from lower-valued government activities to higher-valued private ones. Cuts would expand freedom by giving people more control over their lives and reducing the regulations that come with spending programs.

The federal government has expanded into many areas that should be left to state and local governments, businesses, charities, and individuals. That expansion is sucking the life out of the private economy and creating a top-down bureaucratic society that is alien to American traditions. So cutting federal spending would enhance civil liberties by dispersing power from Washington.

The Congressional Budget Office (CBO) projects that federal spending will rise from 21.1 percent of gross domestic product (GDP) this year to 23.1 percent by 2026 under current law. Over the same period, tax revenues are expected to remain flat at about 18.2 percent of GDP. As a consequence, rising spending will produce increasingly large deficits.

Policymakers should change course. They should cut spending and eliminate deficits. Some economists claim that cutting government spending would hurt the economy, but that notion is based on faulty Keynesian theories. In fact, spending cuts would shift resources from often mismanaged and damaging government programs to more productive private activities, thus increasing overall GDP. Markets have mechanisms to allocate resources to high-value activities, but the government has no such capabilities.

It is true that private businesses make many mistakes, but entrepreneurs and competition are constantly fixing them. By contrast, federal agencies follow failed and obsolete approaches decade after decade. So moving resources out of the government would be a net gain for the economy. Policymakers should not think of spending cuts as a necessary evil to reduce deficits. Rather, the U.S. government's fiscal mess is an opportunity to make reforms that would spur growth and expand individual freedom.

The federal government funds more than 2,300 subsidy programs, more than twice as many as in the 1980s. The scope of federal activities has expanded in recent decades along with the size of the federal budget. The federal government subsidizes farming, health care, school lunches, rural utilities, the energy industry, rental housing, aviation, passenger rail, public broadcasting, job training, foreign aid, urban transit, and many other activities.

Each subsidy causes damage to the economy through the required taxation. And each subsidy generates a bureaucracy, spawns lobby groups, and encourages even more people to demand government hand-outs. Individuals, businesses, and nonprofit groups that become hooked on federal subsidies essentially become tools of the state. They lose their independence, have less incentive to innovate, and shy away from criticizing the government and its failures.

Without major reforms, official projections show that federal spending will soar to more than 30 percent of GDP by the 2030s. State and local government spending of 11 percent or more of GDP would come on top of that. It seems inconceivable that American voters would let the government grow that large. It is also unlikely that the government would be able to raise taxes much above current levels to support higher spending because of the increasingly globalized economy.

Policymakers will have to make large spending cuts sooner or later, and the sooner the better to avoid accumulating more debt. They should begin reforming the government. Leaders of other nations have pursued vigorous cost cutting when their debt started getting out of control, and there is no reason why U.S. political leaders cannot do the same."