Chris Edwards joins us this week to discuss the politics that goes into attempting to minimize the federal deficit. The Federal Government determines the federal budget, however there is not a balanced-budget requirement, which leads to the growth of the federal deficit. The Federal Government does two main “things” according to Edwards; they produce stuff and they transfer income. Obviously, national defense is one of the main things that the Federal Government produces. If they were to cut that production- it would have an immediate effect on defense programs and initiatives. Whereas if you cut from other programs, like those regarding housing, you would cut direct benefits to people.
Over half of the federal budget goes to entitlement programs. Social Security alone has turned into a trillion dollar endeavor. Edwards suggests that if budget cuts were made across the board then it would be perceived as fair to all programs and it would be a step in the right direction.
Why is it difficult for the Federal Government to cut any kind of spending? Why do federal programs always cost more than they are projected to? What is a special interest? Is there ever a point where we should really care about the federal debt? Who is lending the U.S. money? Should we have a balanced-budget requirement, if so, how would we enforce it?
Downsizing the Federal Government website
Opportunity Zones Fuel Corruption, written by Chris Edwards
Tax reform 2.0 can alleviate Americans’ chronic saving problem, written by Ernest Christian and Chris Edwards
Building a Better Government, Free Thoughts Episode
Choose Your Own Government, Free Thoughts Episode
Taking Government Unseriously, Free Thoughts Episode
00:04 Aaron Ross Powell: Welcome to Free Thoughts. I’m Aaron Powell.
00:09 Trevor Burrus: And I’m Trevor Burrus.
00:09 Aaron Ross Powell: Joining us today is our colleague, Chris Edwards, who’s the Director of Tax Policy Studies at the Cato Institute and editor of downsizinggovernment.org. Welcome to Free Thoughts, Chris.
00:18 Chris Edwards: Thanks a lot for having me, guys.
00:20 Aaron Ross Powell: How is that downsizing government thing going?
00:22 Trevor Burrus: Yeah, yeah, yeah, I know. You’ve been working at it for so long, so we’re gonna have to assess your progress.
00:26 Chris Edwards: Well, you know what?
00:29 Chris Edwards: When President Obama came to office right after he won the election, he said something to the effect that, “You know, we’re gonna go through the federal budget line by line and cut out all the wasteful and unnecessary programs.” And we thought here at Cato, “Gee, that’s a good idea. Maybe we’ll help him.” And I talked to Crane at the time and his original conception was to have, “Let’s have a guide book to every federal government department and solutions to cutting the agencies, and of course the… ” A lot of the young folks don’t read books anymore, they read the internet, so we thought of the idea of a website to guide policymakers and inform the public about cuts that we can do to every federal government agency. Unfortunately, Obama didn’t follow through on his suggested cuts, so we’ve still got a long menu of cuts available at Cato for policymakers who are interested.
01:28 Trevor Burrus: But it seems that, Trump maybe will be, but he’s growing other parts of the government. Has the total size of government been shrinking at all from the numbers you have?
01:36 Chris Edwards: No, I don’t think… President Trump, to his credit, he has a very good budget director in Mick Mulvaney, a former conservative member of Congress, who has proposed two very good budgets now with really dozens and dozens of pretty substantial cuts to everything from food stamps to farm subsidies. But Congress hasn’t followed through really at all. It’s basically thrown the Trump budgets in the garbage. It’s true, Trump has expanded defense spending greatly, but he has proposed cuts to many other areas of the government.
02:07 Aaron Ross Powell: What’s the total federal budget right now?
02:09 Chris Edwards: Oh, it’s around $4 trillion a year.
02:12 Trevor Burrus: And how does the budget gets spent generally, not specifically, but the kind of cuts… If you cut a little housing program or something in education or a thing like that, is that really gonna do much to affect the budget of the federal government?
02:27 Chris Edwards: So, the big part of the federal budget over half now is entitlement program. Social Security itself is a trillion-dollar program, believe it or not.
02:34 Aaron Ross Powell: I thought it was foreign aid, was all of it.
02:36 Trevor Burrus: And public broadcasting. Yeah of course.
02:39 Chris Edwards: So of course, Social Security, Medicare and Medicaid are the real elephants in the federal budget, trillions of dollars of spending there. But I think if we’re ever gonna get this government under control, we gotta do cuts across the board to everything. For one thing, that will be perceived more fairly. If you actually had a reform line in Congress and a president who wanted to do cuts, I think cuts across the board to every federal department would be perceived to be more fair and maybe more likely to actually get through.
03:08 Aaron Ross Powell: When you cut a program, the money that’s going into these programs, how much of it is actually being used for the output the program was created for? Such that, so we propose a, across the board, 20% cut, you’re gonna get 20% fewer services. However we define that. Versus we cut it by 20%, that there’s enough slack in these programs, too many administrators or whatever, that you could get that 20% out without really cutting the quality of service or the quantity of service.
03:44 Chris Edwards: So the government does two things; it produces stuff and it transfers income. And these days, the biggest part of what the federal government does is, it transfers income. So, the government produces stuff. National Defense is the main thing it produces, but it also produces the Census Bureau and the Patent Office. Those are actual services the federal government produces. So if you were to cut those programs, it would have an immediate effect on how much services the government provided. But most of the federal budget is simply transfers, Social Security, $700 billion of aid-to-state programs, like housing programs, for example. So if you cut those programs, you’re cutting direct benefits to people, which in my view is a good thing. You asked how much bureaucracy is in these programs. Of the $700 billion the federal government spends on aid-to-state programs for things like housing programs and highway programs and urban transit programs, about 10% of the cost of those programs is just the bureaucracy in Washington. So if we spend, say $50 billion a year on housing subsidies, that’s money that the federal government taxes, the federal government will keep about $10 billion of that and then about $40 billion will be dished out to state governments to spend on housing programs.
05:11 Trevor Burrus: Why do federal programs or pretty much any government-proposed thing, “We’re going to expand the highway, or build this train, or build a VA hospital,” or something like this, why does it always seem to cost substantially more than projections? Maybe it’s just that I’m reading just those headlines as opposed to the ones when they come in under budget, but I don’t feel like I see that very often. In my home state of Colorado, they have this VA hospital, which is the overruns are almost comical at this point. But why is that so often the case?
05:42 Chris Edwards: Right. That’s not just your perception, that is the reality. There’s been a number of academic studies that have looked at dozens and hundreds of big government projects, highway projects and urban transit projects and building projects. Not only in United States but in Europe, there’s been lots of studies and there is no doubt that government projects, especially big complex projects end up costing almost double, or sometimes even more the original projected costs. The reason appears to be, not just that the government has a lot of bureaucracy and the like, because if the government was… And policymakers were fairly estimating the cost of project, say, they would look at the cost overruns and past projects and they would adjust their projections, but that never seems to happen. They always seem to lowball the cost of projects.
06:33 Chris Edwards: So, the reason is they do it on purpose. They lowball the cost of projects to get them through the legislatures, and then when they’re actually in the process of constructing the projects, they’ll go, “Gee, sorry, we made this mistake. We left out these critical requirements we need for the program.” It’s like they’ll vote on a fighter jet that’s supposed to cost $100 million a unit. And it’ll end up costing $200 million a unit because the defense contractors will say, “We want these additional bells and whistles on here,” and policymakers will say, “We want these bells and whistles on,” and so the cost just inflate. And there’s no consequences generally to politicians. The politicians… If you think of military cost overruns, the politicians just blame the defense contractors and defense contractors blame the politicians for not giving them the proper details of the projects upfront. So, there’s a blame game and… But this continues year after year, the cost overruns.
07:35 Aaron Ross Powell: Is that related then to why it seems to be so difficult to actually cut any spending? I mean, if you ask… If you go around to Americans and say, “Hey, do you think the federal government spends too much?” You tell them the size of the budget, you tell them the size of the debt, you ask them to look at how much money comes out of their paychecks and taxes, probably most of them would say, “Yeah, it would be great if it spent less.” And we get candidates like Obama who were like, “Well, we’re gonna go through and we’re gonna cut out, the medical subsidies, the waste fraud and abuse that we’re gonna get rid of,” and so on. But then it doesn’t ever seem to happen. And so what makes this such a hard problem?
08:13 Chris Edwards: I think a couple of things. One is policymakers never admit they made mistakes. If you think about the private sector, if you have a CEO of a company that makes a really bad bet and spends a lot of the company money on something that turns out to be really a bad choice, the company will start losing money. Investors and shareholders will realize it. The financial press will start writing bad things about his choices. And he has… [chuckle]
08:37 Trevor Burrus: Like New Coke.
08:38 Chris Edwards: Right. There you go.
08:38 Trevor Burrus: Or Crystal Pepsi.
08:39 Chris Edwards: That’s right. Business leaders have to eventually admit their mistakes. Politicians never do. Politicians enact these programs. They promise the world to everyone. They promise all these lovely benefits. The programs never end up working as they’re supposed to. They cause all these negative side effects that the politicians didn’t think of. But have you ever heard a member of Congress admit that they made a mistake on a program? They never do. So that’s part of it. And the other part of it is logrolling, which is a central and fundamental problem with the way Congress works and it’s something that I don’t think our founders really got. They got the idea that there would be factions and special interests. I don’t think they got the reality that as the federal government got bigger… Congress would not work like this sort of the simple naive view of a democracy that policymakers would get together and you’d have a majority vote for programs that seem to make sense. That is not how Congress works. How Congress works is like this: You have small groups of legislators over here on one side, who have a really dumb program that doesn’t make any sense for the country, but maybe it benefits some special interests in their districts. They can’t convince other members of Congress to go along with their program.
09:56 Chris Edwards: Different part of Congress, you’ll have other members with a different dumb project that is gonna cost a lot, but it benefits people in their district. So, they both get a light bulb, “Hey, let’s get together. We’ll join these two kind of dumb projects that don’t make sense on a cost-benefit basis standalone.” And they agree to vote for each other’s projects and they eke out a bare majority in the legislature and these projects pass. You see that logrolling problem manifests itself, bill after bill. With farm bills for example, every different crop, corn and soybeans and the rest, they get together and they say, “I’ll vote for your crop if you vote for my crop.” And then they get together with the urban left-of-center legislators and say, “If you vote for our farm programs, we’ll vote for the food stamp program to help urban inner-city folks.” And you go through program after program and this is how dumb programs pass Congress. And of course once they’re passed, as I said, politicians never admit that they made mistakes when these programs cost end up costing a lot more as you said, Trevor, and they don’t work very well.
11:08 Aaron Ross Powell: So you mentioned special interests, but what is a special interest? Isn’t a special interest ultimately just Americans?
11:15 Trevor Burrus: And a group, we’re all unique. We have different things that we care about.
11:16 Aaron Ross Powell: Right. We all have interest. Is there a definition, is it a term of art, what is a special interest?
11:22 Chris Edwards: No, of course it’s a judgment call. One thing that really strikes me about the US Congress is how unbelievably parochial it is. We all know this, but it is astounding when you watch it up close over many years that members of Congress, people in the districts vote for them. They assume they’re gonna go to Washington and do things that are in the general broad national interests that are good for all of us, studying national defense and determining the proper size of the Pentagon budget, that sort of thing. But in fact, they spend the vast majority of their time fighting for business interests that are powerful in their state. If you’re from a farm state, you vote for farm subsidies and other narrow parochial things. Members have this enormous emotional attachment to their states and their districts and they put that above the general broad public interest of Americans time after time. It’s remarkable.
12:26 Trevor Burrus: Is that bad inherently? It seems that that’s part of the point of having localized representation in the House of Representatives that it would… It doesn’t seem to be corruption if you work in… If you represent Seattle and you listen to Boeing when they call, because many people in your district are employed by Boeing and Boeing brings a lot to the community. So it doesn’t seem strange that you would vote things to help your district. That might be their job and that’s what they’re supposed to do.
12:51 Chris Edwards: Right, but the basic problem is this, is that you have to first think about where is the proper and most efficient level of government to deal with certain issues. So properly local things like housing policy, it can best be dealt with by state and local legislators, because there they live within the area that will be affected, they can properly balance the costs and benefits of the taxes and regulations that they’re going to impose on the public. They’ll hear back from the public if the program isn’t working properly. The problem is that these members of Congress who frankly, they wanna fix potholes and housing problems in their districts, they go to Washington where they’re supposed to be dealing with national issues and they wanna deal with all those local issues at the federal or national level. And that’s the basic mistake, it seems to me.
13:41 Aaron Ross Powell: So we’ve talked about the budget, but then there’s the debt, so what is the debt at? And this is important we should really care?
13:53 Chris Edwards: Absolutely. It’s one of the greatest crises facing our country and years down the road, the federal government debt will be a trillion dollars in the new fiscal year 2019 that starts soon. The deficit, right… The federal government debt is around $20 trillion now.
14:09 Trevor Burrus: They’ll have to pull up a website, because it’s just ticking, right?
14:11 Trevor Burrus: It’s moving so fast, that you can’t say it before it’s already changed, yeah.
14:15 Chris Edwards: As a share of the national economy, the federal government debt is by far the largest it’s ever been in our peacetime history. The only time the debt has been larger is at the end of World War II. Then, the debt fell rapidly in the decades after World War II mainly because of economic growth. What is astounding if you go back and look at the fiscal history of United States back to 1789, debt has… Federal government debt has spiked occasionally during wars; the War of 1812, the Civil war, Spanish-American War, the First World War, the Second World War, debt spiked, but then members of Congress ultimately were of both parties, at the time different parties over time of course, were pretty responsible and paid down the debt, as the noble economist, James Buchanan noted prior to, say the 1930s, there was sort of a Victorian fiscal morality where if people thought debt was bad, our founders thought, like Jefferson and Madison thought that debt was equivalent to corruption, it was caused by bad motives, it was irresponsible; that dissipated and disappeared in the later 20th century and that’s one of the basic problems today. The federal government has never had a balanced budget requirement, but somehow before the 1930s, politicians as self-interested as they are managed to balance the budget the vast majority of times.
15:45 Trevor Burrus: Is it possible that maybe one of the reasons that we’re not really doing anything about it right now at least, is that there’s a Chicken Little problem. I remember even during the Reagan administration, where I don’t think it had topped a trillion yet at that point, but there were people saying, “If this topped a trillion, this is gonna be a crisis,” and then we topped $10 trillion and now we’re topping $20 trillion, and nothing seems to have changed in our lives. So you have people saying, “Oh, I guess the debt was never that big of a deal,” ‘cause now it’s so big, that it’s hard to even contemplate that number.
16:19 Chris Edwards: Right. So what has happened in the last few decades is the global economy has happened. If you go back and read budgets from say, President Carter who was worried about deficits and President Reagan who was also worried about deficits. There was a real fear that federal government deficits would cause a short-term, immediate pain to the politicians. They thought, for example, if you ran deficits, interest rates like mortgage rates for homes would spike and it would make Washington politicians look really bad. Well, the fear of that has dissipated as we’ve run large deficits year after year. And because we have global capital markets, now the US federal government can borrow seemingly endless amounts of money without it affecting our interest rates. In fact, interest rates have been remarkably low in recent years, partly because of federal reserve actions. We borrow… About half of our federal government debt now is borrowed from abroad, from Chinese creditors, from Indian creditors, Brit creditors. And that makes it so that they can spend endlessly, run these large deficits with apparently no short-term political pain.
17:24 Aaron Ross Powell: So when we’re borrowing money, these creditors that you mentioned in China and wherever else, is this basically the same thing as like when I buy as an individual, a savings bond? Are they kind of just buying savings bonds from the US government?
17:37 Chris Edwards: Yeah, the government debt is very much akin to an individual borrowing on their credit card or borrowing for personal purposes. Everyone knows with their credit card that you can borrow in the short-term, but once, debt has this exponential feature to it that the more you borrow, the higher your interest rates are gonna be and you get deeper and deeper into trouble.
18:00 Aaron Ross Powell: And so, can these creditors… Are these like banks in other countries that are lending us this…
18:04 Chris Edwards: Well, they’re ultimately individual savers. It’s ultimately individual. So a lot of Asian countries, for example, have very high savings rates and a lot of that excess savings that is not used domestically, is, ultimately flows to United States, which has a very low savings rate, both for individuals and the governments, they save, of course, they borrow a lot.
18:25 Aaron Ross Powell: Okay, so these individual creditors out there who have… They’ve loaned money to the US government, can they just decide tomorrow, could one of them just come to the US government and say, “Okay, I want my debt repaid now,” and then the government would have to repay it?
18:42 Chris Edwards: Yeah, yeah. Yeah, absolutely. Well, they’ll trade. Of course, debt that is out there and outstanding is constantly traded on international capital markets. But yeah, there could be a broad-based feeling or shift in politics or views about the US economy that would result in foreign creditors saying, “Hey, United States is a bigger risk than we thought.” They would demand higher interest rates and interest rates would start spiking on our government debt. Federal government debt now is actually a fairly short term. I think the average maturity on debt’s something like four years now. So in the short term, the government could get away with being irresponsible, but if there’s a sort of a herd mentality that go against to be more suspicious of US government debt, interest rates would start rising pretty quickly. And of course in recent years, we’ve seen debt problems reaching crisis proportions in places like Greece and Portugal, where no one saw the problems coming and then creditors just suddenly felt very scared and interest rates spiked and caused a financial crisis in those countries.
19:52 Aaron Ross Powell: Does the primacy of the US in terms of the global economy protect us somewhat from that because… So, a creditor might say, “I think the government’s, the US government’s looking like more of a risk than it has been. So I’m gonna get my money back now.” But if they do that, if it has that effect of shocking the US economy and so therefore collapsing it or severely hurting it, that’s gonna have huge negative effects to the global economy and so is there… Does that act as a buffer that people are like, “Well, we don’t want… ” Even if we start to get antsy about the future of the US government, we don’t want to go quite that far because the costs from doing that are gonna be far more than what I might lose on my individual debt down the road”?
20:38 Chris Edwards: Well, but that’s not how an individual creditor would think. An individual creditor’s looking at, for his or her own money. It is true that United States, there is a feeling of safety and security with by investing US debt because for one thing, you know that a lot of international institutions and other country central banks and the like hold US-dollar-denominated debt, so there’s that. And there’s also the fact that, I mean United States government’s debt is ultimately backed by the enormous taxing power of the US federal government and which is backed by our strong economy, in general. So on the one hand, you suggested that this is sort of advantage of the United States, but politically and if you believe in small governments, it’s a disadvantage.
21:25 Chris Edwards: The fact, of course, that United States can borrow so easily is a huge negative ultimately for individuals and American taxpayers, because their government has an incentive to be even more irresponsible than governments in other countries. So I grew up in Canada, for example, in the early 1990s, 25 years ago, the Canadian federal government was just borrowing enormous amounts of money, about as much as we’re borrowing now, but international creditors got very scared, interest rates spiked and Canadian politicians of every political persuasions got the message and they became a lot more responsible and Canada started running surpluses, paid down the debt. So that happens with smaller countries; they get into trouble, international capital markets basically force-fixes on them and they fix them, reform themselves. So far, US politicians seem immune from those sort of international pressures.
22:21 Trevor Burrus: When the… You mentioned Greece and Portugal, when their debt crises happened, do you have an idea of what their GDP-to-debt ratio was?
22:30 Chris Edwards: It wasn’t that much higher than where we are now. Our debt is around 100… Federal government debts are around 100% of GDP, depending on how you measure it. And other countries, the experts who’ve looked at these many different country examples and looked historically, have argued that you get to around 100% of GDP with your government debt, you will start getting into trouble.
22:55 Trevor Burrus: Right. But as you said, the United States is sort of unique in the sense of we might need a different theory for how debt works for an economy as big as the United States.
23:03 Chris Edwards: No one knows when we’re gonna hit a wall, when the stuff’s gonna hit the fan, nobody knows that. Many times in Washington, meetings here, I’ll ask finance experts and CBO directors and those sorts of folks, that same sort of question you’re asking. “Well, where is the limit? Where will things start unraveling?” No one really knows. But of course, it makes absolutely no sense. It’s extremely imprudent for politicians to keep pushing ahead and running these trillion-dollar deficits. Because eventually, these are all costs that we’re gonna bear in the future. The New York Times columnist and economist Paul Krugman has written many columns saying, “Well, don’t worry too much about the debt. We owe it to ourselves.” That is complete nonsense. A basic libertarian way to think about the government debt is this: In the short run, when the government, say, borrows another $10 billion to spend on a spending program, everyone’s happy because it’s all, in the short term, it’s all voluntary.
24:02 Chris Edwards: The people who get the new benefits from the spending program, they’re happy ‘cause it’s voluntary, the politicians are happy. And the creditors who lend that extra $10 billion to the government, in the short run, they’re happy because they’re gonna get a return on their investment. The costs come in the future when the government has to raise taxes, an extra $10 billion plus interest; and taxes of course are where government coercion comes in. So government debt is like the government moving coercion to the future, and coercion is the problem here. Coercion causes all the damage and distortion on the economy from government action. So that’s what deficit spending is. No one gets hurt in the short run. In the long run, you’re shifting coercion ahead, and you’re gonna create this great damage when the government tries to extract that extra tax money out of the economy.
24:48 Aaron Ross Powell: What about inflating away the debt?
24:50 Chris Edwards: That’s not gonna happen. So, governments in the past could get away with that, and I mentioned that our debt was the highest it’s ever been in our history. At the end of World War II, it peaked at over 100% of GDP. Debt plunged in the decade after World War II. And historians have gone back and looked at why that was. And you might think it was because, well maybe politicians were responsible back then, they ran surpluses and paid it down. That is not what happened. What happened was after World War II, much of that debt had very long maturities, like 10 years or longer, and the government ran substantial inflation after World War II, which eroded the real value of that debt. So debt plunged after World War II.
25:33 Chris Edwards: Today, the average maturity in federal government debt, as I said, is much shorter. You’re not gonna be able to fool the creditors. If the federal government starts trying to inflate away its debt, creditors are gonna demand higher and higher interest rates very quickly.
25:48 Trevor Burrus: But that seems to be the… The crux of when it becomes a problem is when people start getting scared of how trustworthy the United States is. Is that true? Is that sort of…
26:00 Chris Edwards: Yeah, sure. Yeah.
26:01 Trevor Burrus: And that happens if they start saying, “Well, I really don’t think I’m gonna be able to get my money out of this.” And so they start kinda run to the bank.
26:06 Chris Edwards: And other things might happen, too. For example, I mentioned that a lot of Asian countries have very high savings rates, and so our biggest foreign creditors now are Chinese. Well, in the future, their economy may change and they actually may start being as spendthrift as we are, and their savings rates may go down. So there’s gonna be less savings going into the global pool, and that’ll push up interest rates as well. So there’s lots of things that can happen that could push up interest rates.
26:28 Trevor Burrus: Now you also have recently, I think, been doing work on the state budget situation.
26:33 Chris Edwards: Right.
26:34 Trevor Burrus: And how does that picture look in general? Is it sort of widely variant across the board that some states are pretty responsible and some are out there with daddy’s credit card, just putting everything on it?
26:46 Chris Edwards: Well, the way I look at it is that politicians are the same everywhere. They’re short-term oriented, they follow political, self-interested incentives rather than the general… Doing things for the general public good, in general. But state policymakers are forced to be more responsible mainly because in 49 of the 50 states, there are pretty strong legal requirements that states balance their budgets every year. And there’s some cheating that goes on, there’s big fights between the legislatures and governors often on how to balance state budgets.
27:20 Chris Edwards: Some states like Illinois, I’ve tried to get around the constraints in various ways, and they do cheat a little. At the end of the day though, and just about all the states, they ultimately, they have to pass balanced budgets and they do pass balanced budgets. So if you’re a state politician, a governor who wants a new program, you’ve got to identify a revenue, a funding source for that program, or you gotta cut other programs, or you’ve got to try to increase taxes.
27:47 Chris Edwards: So in many states, for example, they’re debating their highway budgets. Governors and legislators know if they wanna spend more on highways, they’ve gotta raise the gas tax, so there’s political pain to match the political benefits of the spending. You don’t see that in the federal government. Like I said, there’s never been a balanced budget requirement in Washington. And because, as we were talking about politicians in Washington can borrow from global capital markets these days, it’s been this license to just be incredibly irresponsible with deficit spending.
28:16 Aaron Ross Powell: Should there be a balanced budget requirement? If we could pass, say, a constitutional amendment to require a balanced budget, do you think that would be a good idea?
28:23 Chris Edwards: I think in theory, it’s a great idea. I strongly believe that. That’s something that Thomas Jefferson strongly believed. That’s something that unfortunately was left out of the US Constitution, was a balanced budget requirement. There are some technical problems with that. One is that the federal government as it’s structured today, it runs a lot of counter-cyclical programs like unemployment insurance where the costs soar when you hit a recession. So when you hit a recession, federal tax revenues plunge, and spending on a lot of these programs, like unemployment insurance and food stamps and the likes, would soar. I don’t think any economist would think it’s a great idea for the federal government then to have to hike tax rates greatly to try to balance the budget during recessions.
29:11 Chris Edwards: So there is that… There’s an economics problem with it. I think ethically, it makes a lot of sense. What I would say, instead of a federal balanced budget requirement, I would like to see either a statutory or constitutional amendment that limits federal government annual growth. So a simple rule that said, “Federal government total spending cannot increase more than, say, 3% a year, period.” It would be harder for the politicians to cheat during recessions. When revenues fell from the weak economy, that wouldn’t be okay. You could run a deficit for a few years during recessions, but then ultimately you couldn’t have any big spike in spending. Like, for example, when Obama came into office, he spent… He had that $800 billion stimulus bill. That sort of thing would be barred by this strict spending growth requirement.
30:03 Aaron Ross Powell: This is maybe a question for Trevor as our lawyer in the room, but let’s say we had…
30:07 Trevor Burrus: You’re a lawyer. No, I’m kidding. [chuckle] He’s really not a lawyer.
30:12 Aaron Ross Powell: Play one on a podcast. But, what would the enforcement mechanism be for that? Like, you have a… Okay, so we’ve got a requirement that says the government can only grow by 3% but then the government grows by 4% or 5% or 6% or 7%. How do you enforce that?
30:26 Trevor Burrus: Yeah, that’s another issue with any balanced budget amendment that you could go to the court possibly if you could get standing, which is a totally different issue and say that the Congress didn’t obey the Constitution, which you can do now and then the court could rule. They might be a little reticent to do that because they don’t always like to try and tell what the other branches of government have to do. They will but the easiest thing is just write down a law. But to say, “You go back and do budgeting again” even though you already spent it or… And then Congress will say there’s a war. The thing that scares me, not scares me but concerns me, is that all these amendments have, and maybe rightfully so, something like an emergency out clause. The budget has to be balanced except for times of national emergency and exigencies or something like that. And as a lawyer, I read that and I just say, well, there… Everything will be an… I mean everything’s already an emergency. The PATRIOT Act is an emergency, the war on terror is an emergency. Everything is already an emergency where they can hype it up as an emergency and say, “Well, no, we’re complying with the clause of this new amendment.”
31:26 Aaron Ross Powell: And we’ve got tariffs for national security reasons.
31:28 Trevor Burrus: Tariffs would be an emergency, yeah.
31:30 Chris Edwards: I think the answer to that though is you put in a clause, you say the limit is, say, 3% annual growth in total spending but if you have a super majority vote, whatever the threshold is in House and Senate, you can set it aside. So that’s the answer to concerns about war if we needed to spend a lot more for national defense or some other crisis in the short term.
31:56 Trevor Burrus: So in the states we hear that some of these states are in fiscally bad shape but if they have balanced budget amendments, 49 of them as you mentioned.
32:05 Aaron Ross Powell: Which one doesn’t?
32:07 Chris Edwards: I think it’s like Vermont.
32:10 Trevor Burrus: That would make sense.
32:11 Chris Edwards: But they, by tradition, they balance their budget every year. So in like half the states, there’s a constitutional requirement, in about half the states it’s a statutory requirement. But the surprising thing is even in states where it’s just a statutory requirement. They actually, they follow it, they do it, they balance their budgets every year. So states are in trouble because they mainly… So unlike the federal government, a large share of the cost in state and local governments is employee compensation. In fact, about half of all state local spending is employee compensation, which is very different in the federal government. Employee compensation is maybe only about 10% or less of federal spending. So in many states, especially the Northern more unionized states, for many years there’s been these excessively generous pension and post-employment healthcare benefits promised to state and local workers, and now baby boomers who work for state and local governments are retiring in droves. It’s pushing up the costs of these pension plans and healthcare costs on state budgets. So this was a way, it was one way that state government sort of got around these strict annual balanced budget requirements is that they made the promises now, that will be imposed on taxpayers in the future.
33:30 Trevor Burrus: So, that seems to put some states in a pretty big bind in the sense that they may have to make some pretty difficult choices. Of course Chris Christie kind of came to prominence talking about difficult choices in New Jersey but you have… My heart goes to some extent to the retiree unionized who is going to depend upon some sort of guaranteed salary, but if the money’s not there, the money’s not there and there’s limits on how much they can raise taxes, correct?
34:01 Chris Edwards: Right. So, what I would say is actually that a lot of states have been irresponsible with the over-promising of pension and post-employment health benefits. However, there has been a movement now for over 10 years for states to start fixing these problems. New accounting standards came in for government entities, state and local governments, to force more transparency as to how much these future pension costs were going to be, and that has forced politicians to start handling and making reforms to pension plans. And so there has been a lot of forward progress. In Washington, we haven’t made any progress towards doing anything about the giant and growing deficit. State and local governments, generally, there’s been resistance. The unions try to block reforms and they have all unionized states. But there has been a lot of progress, I think, towards starting to solve some of these pension problems. So I think it is an example where state governments, for a number of reasons, they do seem to be able to solve problems and legislate and to fix things that arise. The federal government seems to become increasingly incapable of fixing even the most obvious problems, like our trillion-dollar deficit.
35:09 Trevor Burrus: So which state is the worst though? Is there any state in dire straits right now, or…
35:15 Chris Edwards: Oh, some of them you can guess. Illinois is perhaps in the worse fiscal shape. It has the lowest bond ratings from the bond rating agencies. And that is yet another check by the way on state and local budgets, is that their bonds are rated by the rating agencies. And the worse their bonds are rated the higher, the interest rates they have to pay on their debt. So policymakers, even left-of-center ones, they know that if their bond ratings fall, they’re gonna have to pay more on interest in their budgets, which again have to be balanced. So they know higher interest costs are gonna squeeze out the program spending they like. So there’s an incentive across the board to not let the debt problems get too bad in state governments.
35:57 Chris Edwards: Also a lot of states actually have constitutional limits on how much debt they can issue, at least how much general obligation debt they can issue. And a lot of those requirements actually go back to the 19th century when a lot of states, Illinois and many others in the Midwest, got in a lot of trouble ‘cause they used taxpayer government money to invest in canal and other irresponsible infrastructure projects that turned out to be boondoggles. And there was a lot of disastrous fiscal situations in the mid-19th century that led to reforms and these tighter limits on state government debt.
36:30 Aaron Ross Powell: So if we’re looking at the federal level and we need to start cutting, where is the first place to start?
36:37 Aaron Ross Powell: Let’s assume that across the board, cuts are not [chuckle] on the table. Where is it most critical to cut and where do you think, if we’re gonna do meaningful cuts, it’s most politically feasible?
36:49 Trevor Burrus: Oh, I thought you were gonna ask… I thought you were asking what’s the most useless government program?
36:53 Aaron Ross Powell: Well, that… You can ask that, too.
36:54 Trevor Burrus: ‘Cause that would be the first one, right? Do you have one that is your favorite useless…
36:57 Chris Edwards: I think the most obvious things to cut are the things that are obviously and logically state and local responsibilities, where there is no obvious advantage to federal involvement. Education spending and housing spending, HUD, Housing and Urban Development and the federal Department of Education. There’s absolutely no reason for federal involvement in these activities. We’re taxing people who live in cities, we’re sending their money to Washington, it goes to the Washington bureaucracies, the politicians play games with the money and then some of it trickles back down to local government. Why not just keep the money in a state or local government? This is true for highways, too. I see absolutely no reason for the federal government to fund highways. They need more highways in Texas, Texas can raise its own gas tax and spend the money locally. So, I get the federal government out of the things that are obviously of state and local concern and there’s no real obvious reason for federal involvement.
37:53 Trevor Burrus: But do you have… When I was doing this one Supreme Court case a few years ago about agricultural cartels, essentially, I ran into the Raisin Administrative Committee, which is my favorite federal program I didn’t know about before. Not a character in a Rand novel, but actually this existing thing. Do you have a favorite, like going… All the budgetary, looking through all the books of all these agencies, have you ever found something where you just said, “Oh my gosh, there’s a federal gopher fund” or something like that?
38:25 Chris Edwards: Well, I mean, it has to be farm subsidies. The federal government spends about $25 billion a year in giving cash to farmers, mainly crop farmers, and generally not fruit and vegetable farmers or folks who raise beef cattle and that sort of stuff. It goes to crop farmers. And I have never read, in all the pro-farm subsidy advocacy pieces, any real good reason why we do this. Farming is no more inherently risky than many other industries, like the high-tech industry. There’s no reason why farmers… Farmers know that they’re gonna have poor crop years in the future, maybe the weather won’t cooperate and that sort of stuff. Well, they should save. In the good crop years, farmers should save their extra profits because they know some bad years will come in the future. They can use private insurance, they can use commodity hedging strategies. So, there’s really no inherent reason for these programs other than the fact that these programs were started in the ’30s, the farm lobby groups got their hooks in members of Congress. And for some reason, every member from a farm state goes to Washington and they believe that their highest calling in life is to keep demanding those farm subsidies and trying to keep expanding them every year, it’s really remarkable.
39:42 Aaron Ross Powell: But even if we got rid of that, that’s $25 billion out of what, 14 trillion is what you said?
39:46 Chris Edwards: That’s right. Yup.
39:47 Aaron Ross Powell: So, that’s… I mean, that’s a drop in the bucket.
39:49 Trevor Burrus: It’s a start.
39:52 Aaron Ross Powell: It’s a start. So, that’s the kind of depressing thing about all this, is that it’s… No matter what you’re cutting, unless it’s Medicare and Social Security, it always feels like it’s just a drop in the bucket.
40:01 Chris Edwards: So the easiest cut from my point of view, economically, the easiest cut should be to Social Security. It is the largest federal program. As I said, it dishes out over a trillion dollars of benefits every year. The simple, long-term, reasonable solution that many economists of many different political persuasions have proposed, is simply to slow the growth and benefits. A common strategy right now is that initial benefits rise as nominal wages rise. If you change the law to say, “Initial benefits should rise by just the price level rising,” which is a little bit of a slower inflation rate. Over time, over many decades, that would be enough to balance the Social Security program to slowly trim benefits down the road. And so, young people looking to the future could see that those benefits are gonna be a little less than originally planned, and they can save more and plan for the future. So, that simple Social Security fix of slowing the growth and benefits, I think, would be fair and reasonable. People could see it coming and it would save enormous amounts of money.
41:06 Trevor Burrus: But is there… You keep hearing that there’s a, sort of, day of reckoning coming for Social Security where they’d move the date out and whatever. Do you think it will take… If such a day of reckoning is a real thing, will it take that level of crisis or maybe just people stop getting their checks and something for anyone to do anything? ‘Cause this can seems like it’s been kicked down the road for quite a while.
41:30 Chris Edwards: So oddly… So around the year 2030 or so now, the year… The projected year changes every year with the new estimates. The Social Security so-called “trust fund,” which is this accounting identity, will only have enough money to pay about 75% of promised benefits. So if Congress doesn’t change any law that year after it runs out of money, benefits will have to be cut legally by about 25% or so. So, that’s sort of the crisis. But that’s obviously not gonna happen. If Congress doesn’t fix Social Security between now and whatever that year is, 2030 or so, obviously what’s gonna happen in that last year, Congress will simply pass a law injecting new, fresh taxpayer funds into the Social Security trust fund. Gee, problem solved.
42:18 Chris Edwards: We’ve seen that already with the Social Security disability program, which is about $150 billion program. It has its own trust fund, which has already run out of money, and Congress has already simply done that. They simply injected more general revenue into the Social Security disability trust fund. There won’t be a one-time immediate crisis with Social Security. The problem is the same with Medicare, and Medicaid, and Social Security, all these programs keep growing relentlessly, faster than tax revenues are rising. So those programs are eating out a bigger and bigger share of the overall budget, it’s pushing up deficits. And as we discussed earlier, we don’t know when those giant deficits are gonna cause a crisis, but they will cause a crisis down the road.
43:11 Aaron Ross Powell: Thanks for listening. Free Thoughts is produced by Tess Terrible. If you enjoyed today’s show, please rate and review us on iTunes. And if you’d like to learn more about libertarianism, find us on the web at www.libertarianism.org.