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There is a time to spend and a time to cut and we are now in an age of austerity. Even since Standard & Poor’s downgraded the U.S.’s AAA credit rating earlier this month, some Keynesians still favor more spending. They say the threat that the economy will dip back into recession calls for more public outlay.
They are right that the recovery is weak. Seasonally adjusted unemployment remains at 9.1 percent, and among people older than 20 the rate actually fell from June to July, according to the U.S. Bureau of Labor Statistics. Europe’s debt problems are unsolved and the U.S. stock market is extraordinarily volatile.
But Congress has made clear it won’t respond by spending more money -- and that is probably a good thing. In the past, stimulus funding has been aimed at improving roads, airports and other forms of infrastructure. Yet it’s not at all clear that such spending provides enough value for the dollar.
Consider, for example, spending on highways. President Barack Obama’s 2012 budget called for investing $556 billion on surface transportation over the next six years.
If we spend an extra $100 billion building roads, we boost the economy and reduce unemployment. But if the $100 billion spent generates only $50 billion worth of value to drivers in the form of safety and faster, smoother commutes, then it’s not necessarily worth the price.
Unfortunately, as the Office of Management and Budget noted when it evaluated federal spending on highways, in most cases "funding is not based on need or performance and has been heavily earmarked."
Need for Roads
Fans of infrastructure spending often argue generally that America’s great need for improved roads, bridges, airports and the like calls for federal outlays, but their case has never been made convincingly.
The McKinsey Global Institute, for example, has cited relatively low broadband penetration in the U.S., and the nation’s world ranking in infrastructure, which fell to 23rd in 2010, from seventh 10 in 2000.
It is true that only 68 percent of American households have broadband, compared with more than 95 percent of South Koreans. But South Korea strongly subsidizes broadband. And it’s not clear why the U.S. government should do the same. Why bribe people to download YouTube videos more quickly?
Only 3.1 percent of people who don’t have broadband say it’s because they lack access to it, according to the National Telecommunications and Information Administration. Most people say it’s because the connection is too expensive, or they are just not interested.
Our infrastructure ranking isn’t all that bad in comparison with our standing on budget-balancing: 118th, right ahead of Romania. On wastefulness in government spending, the U.S. ranks 68th, just behind Ghana. These numbers don’t exactly suggest it would be a good idea to borrow more money to spend on tunnels and dams.
Of course, we still need to fix our infrastructure, but we ought to find ways to invest in it more economically. Why not, for example, get users to pay? Many roads and airports, for example, benefit primarily the people of a single state. So it would make more sense to have state governments foot the bill.
Congress has made it clear that it wants to not only avoid new stimulus spending but also find ways to further trim the budget. The way to do this wisely in a slow economy is to overhaul government. And in doing so, we should aim at our great entitlements: Social Security and Medicare.
Raise Retirement Age
If it weren’t for the politics involved, reducing spending on Social Security would be easy: Just increase the retirement age. Cuts to Medicare, on the other hand, would be hard both politically and conceptually. I can’t wait to see the proposal produced by the Congressional supercommittee that is being formed as a result of the recent deal to raise the debt limit.
A good cost-benefit analysis of our various defense programs is in order, too.
After that, we are left with four big budget categories that aren’t related to entitlements or national security: health and human services; education; transportation; and housing and urban development. This spending includes some investment and some humanitarian relief. Money for education serves both functions, given that America’s economic future depends on its human capital. So education isn’t a good target for deep cuts.
On the contrary, saving money by reducing school spending would be penny-wise, pound foolish. Both the “Race to the Top” and “No Child Left Behind” programs help ensure access to decent schooling. Massachusetts lifted its limit on charter schools partly to qualify for “Race to the Top” funds.
Can spending on infrastructure possibly be as important? Certainly, trucks need to be able to move swiftly throughout America, but truckers should be able to pay for their own roads. Good airports are also important, but air passengers can finance their own amenities. We shouldn’t have to subsidize people to drive or take planes.
Rethink Poverty Programs
Compared with most advanced economies, the U.S. spends relatively little on social safety. To cut our spending on food stamps, housing vouchers or temporary assistance for needy families would be to cause real suffering. The right approach is not to keep the same system and spend less, but to rethink our approach to poverty. We could start by consolidating three massive programs, now each run by a separate department: Agriculture handles food stamps, Housing and Urban Development runs the housing program, and Health and Human Services manages Temporary Assistance for Needy Families. A single entity should be charged with delivering the most effective combination of aid our budget can buy.
Needless to say, savings could be found in many other programs, including the National Aeronautics and Space Administration and agricultural subsidies. Tax breaks for things such as ethanol and low-income housing could certainly be reduced.
None of these reductions should happen right now, of course, while the economy remains very weak. But Congress can enact budget cuts that are phased in as the recovery progresses.
We can create a better government, if we are careful to trim spending where costs exceed benefits. Let’s pull out our green eyeshades and start calculating.