How to Cut the Deficit in Half Without Starting a Partisan Foodfight
Getting it to zero will require some painful choices, but not every federal dollar deserves to be fought over.
The government shutdown is over. But the debate over federal spending is forever. The threat of a debt-ceiling breach and default will return again in just a few months.
Of course, the debt ceiling is something of an artificial issue: If you believe we should constrain federal spending and stop piling up bills, the time bravely to say “No!” is not when the bill shows up several months after you’ve already bought the merchandise and taken it home—it’s at the time of purchase. That means we ought to stop manufacturing crises that threaten the world economy at worst—and make our country look like the world’s crazy uncle, at best—and instead address what drives the debt to begin with: the annual deficit.
The Congressional Budget Office projects the current year’s deficit to be roughly $600 billion, on total outlays slightly below $3 trillion. In other words, we're only paying 80 percent of the bill and putting the rest on the credit card. That’s an improvement over last year, when the $974 billion deficit represented 32 percent of federal spending, leading many on the left to celebrate the end of any need for deficit discussions. Still, this year’s deficit is the fifth largest in history, isn’t likely to shrink any in coming years, and will begin to grow again in a decade.
But can anything realistically be done? The problem isn’t unlike that faced by Gary Sinise in Apollo 13, playing astronaut Ken Mattingly, the crewmember left behind on Earth at the last moment. Sinise/Mattingly must figure out how to restart the dormant command module to allow his stranded colleagues to maneuver for splashdown. The trick: He has to discover just the right sequence of “ons” and “offs” to make the system work without exceeding the maximum power, shorting out the capsule, and dooming the crew. He labors for days, refining his process after each attempt goes over the total permissible energy load, slowly working his way to a series of switch-flips and dial-turns that saves the crew’s lives.
Now check out the Federal Budget Challenge, an online simulation that asks participants to choose between a variety of policy options, clicking buttons and placing checkmarks until—blam!—just like Gary Sinise, you’ve suddenly run out of choices and the budget indicator is still flashing red for failure. I’ve tried several times, always opting for the most draconian policies—cut discretionary programs, means-test entitlements and raise the retirement age, end wars and the home-mortgage deduction, raise every tax allowed—and I still can’t eliminate the deficit.
The Federal Budget Challenge would seem to indicate that any attempt is doomed to a fate unfit for a Ron Howard movie. The simulation isn’t perfect -- for instance, you can means-test entitlements but not eliminate them, and you can change federal-employee pay but not their pension system. But with President Obama and congressional Republicans locked into similarly narrow options, it’s worth giving a try.
The most significant options missing from the simulation—and the current stalemate—are any easy, ideologically neutral ones. I previously wrote about how a major effort to reduce inefficiencies, errors, and improprieties could cut any budget by about 10 percent. For the federal government, that would total about $290 billion—nearly half the deficit. Of course, eliminating all waste is not just ambitious but unrealistic—though cutting fraud levels in federal spending to the average of all industries would reduce them by half, and a 5 percent improvement in efficiency is a realistic aim. (For those who don’t think the latter is possible at the federal level, start with the $25 billion we spend annually maintaining unused or vacant federal properties. The Clinton-era National Performance Review achieved annual savings of about $40 billion on a spending base half of today’s.)
That’s a start—but it doesn’t solve the entire problem. Here’s how we might achieve about the same amount of deficit reduction in the five major federal spending categories, without even getting to tough, and potentially painful, choices that require ideological resolutions:
- Domestic Discretionary: This is everyone’s favorite place for savings, basically because everything else—defense, entitlements, taxes, interest—is off-limits, and because it contains everything Americans hate: welfare, research on snail darters, and, well, government. Unfortunately, it accounts for only 15 percent of federal spending, so even eliminating it completely wouldn’t close the deficit. Congress has already made about 70 percent of the cuts the Simpson-Bowles plan recommended to discretionary spending, so the new Simpson-Bowles framework calls for only about $26 billion in further cuts this year. How could Congress get there? One possibility is the Green Scissors plan, produced by a left-right coalition; this report pinpoints an annual average of about $70 billion in discretionary cuts, $27 billion alone from energy programs—including, in an ecumenical touch, cutting subsidies for fossil fuels, nuclear reactors, renewable energy, efficiency, and carbon sequestration. If both parties could agree to just a measly 10 percent of that, it would save $7 billion. There are plenty more special-interest goodies out there to cut—payments to states for abandoned mines, FCC spectrum giveaways, and underpriced user fees for federal services to private enterprises like flight control, food inspection, and public airwaves—to achieve the level of the remaining Simpson-Bowles cuts here.
- Mandatory/Entitlements: The right has used the global downturn and Barack Obama’s presence in the White House to get older Americans to support among older Americans for the conservative dream, as old as Social Security and Medicare, of repealing Social Security and Medicare—although largely for future seniors, of course. How exactly to manage rising entitlement costs is complicated—and contentious—but both Third Way and the Simpson-Bowles commission identified savings of roughly $56 billion per year in entitlements through (relatively) uncontroversial changes in how benefit levels are calculated, cost controls for health care, and other reforms that do little to change beneficiaries’ quality-of-life – a less-than-3 percent cut in this category.
- Defense: Defense spending accounts for a little more than 20 percent of federal spending. But is every dollar necessary to national security? Many expensive weapons programs are of debatable value—Taxpayers for Common Sense, to name one of many critics, has identified $42 billion a year in potential weapons-program savings. But if you don’t want to cut war-fighting capacity, you can find at least that much in operational savings elsewhere: Ten percent of the Pentagon’s non-war budget—$53 billion—goes for health care, and there’s a chance for savings, just as with civilian healthcare. Republican Senator Tom Coburn has identified $5 billion in savings just from ending subsidies to Pentagon-run grocery stores and using civilians for some back-office functions. In fact, as Gordon Adams recently detailed in Foreign Policy, more than 40 percent of the defense budget goes to back-office overhead; half that amount would still be inefficient—that’s $120 billion in potential cuts from which to choose. We’ll discuss this more in the next post, but, clearly, there are ways to cut “defense” spending, like other government spending, without affecting the nation’s defenses.
- Tax Expenditures: A great deal of the tax code is devoted to an array of tax loopholes that exempt certain favored activities from the taxes the rest of us pay. According to the Center on Budget and Policy Priorities, tax expenditures cost about $1.1 trillion per year, with two-thirds going to the most affluent 20 percent of Americans and nearly one-quarter to the richest 1 percent. Simpson-Bowles called for eliminating all such expenditures, while Harvard economist Martin Feldstein, chair of President Reagan’s Council of Economic Advisers, has said cutting them is the best way to reduce government spending. Third Way has itemized about $43 billion in savings from targeting certain provisions. Of course, that includes going after such sacred cows as the mortgage-interest deduction, at least for million-dollar mansions and second homes. Virtually everyone agrees that provisions like that have to go—so let’s be optimistic and assume we can make a mere 1 percent dent in it. That’s $11 billion in sanity.
- Interest: Here are the bonus savings: For every dollar cut, we save about 15 cents in interest payments on the national debt. The savings above add up to $280 billion per year, so we’ll also get a $42 billion annual interest reduction:
In short, before getting into the really tough decisions or entering ideological battlegrounds, we could probably eliminate half of the remaining annual federal deficit. That’s not to suggest that we don’t have to make difficult decisions about the country’s future and government’s proper role. But we could easily make much more progress in resolving the spending-and-deficit issue now choking national politics—without reaching the more vexatious questions of touching entitlements, national defense, or the fraught subject of actually paying for what we spend.
That starts by recognizing that not everything in government need be a major ideological Rubicon. Sometimes, it’s just finding the right series of switch-flips and dial-settings.