Sunday Quiz on Scale, Scope, and Spending

|Peter Boettke|

I read two op-eds this morning that I keep thinking about.  One is by Dalibor Rohac and Matthew Sinclair, and points out the dangers that a new round of regulations will represent for the economy.  The other is Christina Romer's focusing on the fiscal mess that Obama has to get serious about fixing.  Romer warns that if we do not fix our fiscal state, we will become the "Argentina of the 21st century."

What, if any, do you think is the relationship between these two?

As I look at the economic reality we face, I see the consequences of a set of policies which called on the government to grow both in terms of scale and scope over the past 50+ years.  The call for increased regulation when it was in fact not a lack of regulation but of a set of peculiar regulations that caused the problem in the first place is just symptomatic of this problem.

I personally do not think we can fix our current problem until we shift our understanding of the role of government in society.  We have to rethink both scale and scope.  I have my pet government initiatives I'd like to see cut --- especially any set of policies that started with "war on" in front of it.  But again, this suggestion for cutting is a consequence of thinking through questions of scale and scope.

If Obama called you, what programs would you tell him we should cut tomorrow to get our fiscal state in order, and what policies would you suggest are required to get the economy moving forward?  How does your answer relate to your own theory of the scale and scope of government?

Comments

[Jerry O'Driscoll]

Kudos to Pete for this post. It is a problem of both scale and scope.

I was heartened yesterday to hear Mike Huckabee say we should begin by cutting 5-10% from every program across the board. Everything. That addresses scale, but not scope. Still, it's a beginning.

[Rafe Champion]

Surely Cato has an evidence-based list of the top 10 or 100 or 1000 most wasteful budget items.

[Jerry O'Driscoll]

Cato has a website on downsizing government with suggested cuts by cabinet department.

[anon]

Isn't the current account deficit is mainly fuelled by monetary policy? Fiscal policy seems to be secondary in many things.

[Allan Walstad]

"What to cut" misses the point, in my opinion. The question is what to spend on, and how much if anything to spend. The way to focus attention on that question is through the debt ceiling. Wherever you set it sets a limit on how much can be spent. Then the question is how to allocate those limited funds. If the effect of enforcing a debt ceiling is that total expenditures will be, say, 15% lower, you could start by cutting every budget by 15%. Then debate whether perhaps some budgets should be cut by more, to free up funds so that others can be cut less. The essential point is to have a firm limit and force the debate to be about how to allocate funds within that limit.

[David Emanuel Andersson]

I think Hong Kong offers a lot of inspiration about how small government can be and yet deliver better and (in some sectors) more ambitious government programs than the US or Western Europe. Hong Kong's total taxation and spending both amount to between 13 and 14 percent of GDP most years. With this they manage to provide effective law enforcement (a homicide rate of 0.5 per 100,000), extremely ambitious transportation policies (80% of the population commute by public transportation and they have one of the world's largest airports), and 7 public universities, of which 4 rank among the best 200 in the world. In addition, the life expectancy is higher than in most Western countries. So it would seem that - if anything - they err on the side of providing too many rather than too few services.

What they do not have in Hong Kong: mandatory pension programs, defense, welfare programs, corporate or agricultural subsidies. So my suggestion for the US would be to scrap "social security," cut national offense and create national defense instead, cut all welfare, industrial, and agricultural subsidies. Impose an upper limit of, say, 10% of GDP for federal spending and taxation (since the states could take responsibility for most infrastructure and education).

Let the states handle the rest, which in the long run would benefit small-government states such as Texas or New Hampshire.

[Troy Camplin]

The U.S. Constitution seems to only allow for the existence of the military and the post office. And with UPS, etc. there seems to be little question that we could privatize the post office. Make the military purely defensive, and the U.S. government coule survive on donations. Which I think is what they should do. They should have to beg for the money.

[Kurt Couchman]

Political institutions and political culture provide feedback for each other. Absent an emergency (which we may get soon), policy tends to change only incrementally. Some kind of binding fiscal restraint is an incremental policy change that would force policymakers to choose between programs, thus affecting the scope and scale of government over time: the low-priority stuff gets squeezed out. While this would affect policy directly, it would also affect the political culture, probably in the direction of self-governance, freedom, and responsibility.

In the meantime, there's a pile of spending that can be cut, but American political culture has not (until perhaps very recently) permittd those cuts to take place. See www.downsizinggovernment.org.

[Peter Boettke]

See this essay by McArdle on Japan and the Limits of Keynesianism ...

http://www.theatlantic.com/business/archive/2010/12/japan-and-the-limits-of-keynesianism/68619/

And of course look at Buchanan and Wagner, Democracy in Deficit: The Legacy of Lord Keynes.

[Pietro M.]

Anon:

"Isn't the current account deficit is mainly fuelled by monetary policy? Fiscal policy seems to be secondary in many things"

The balance of payment of a country is:

netimports = investment - savings + publicdeficit

Fiscal policy sets public deficits high, so it directly causes a trade deficit, i.e. positive net imports. Monetary policy decreases savings and increases investments, so it too increases net imports.

The very low saving rate is due to monetary policy, although it is not clear how to determine the contribution quantitatively, but the present public deficit is enormous, and can affect the trade deficit, too.

[Silvano Fait]

To rethink the scale and scope of the govermnent, is a quite hard process in a democracy where there are few constraints to tax and to spend.
A private firm may try to implement zero-based budgeting procedures, a burocracy couldn't.
I agree with O'Driscoll: an almost linear cut of a fixed percentage should be the starting point. Mainly for one reason: it is the less time wasting way to reduce public expenditures avoiding dangerous bargainings with committees and sub committees.
Secondly when the number of rent seekers start to decrease and the fiscal budget to improve, it is possibile to discuss about the scope of government.
The first bill is the Scissors' Bill.

[Eric Hosemann]

I'd follow the advice Nick Gillespie gives in that video where he wears an apron over his leather jacket and a chef's hat. Consistent, persistent cuts at the margin and across the board sound like good sense to me.
I'm not sanguine about the idea that government can be large in scale and small in scope at the same time, and so to that effect I would urge President Obama to abolish public employee unions.

[David Andersson]

Hmmm, it seems as if most of the comments here imply that all government spending is equally bad, i.e. cutting 20 percent off law enforcement equals cutting 20 percent off bail-outs or agricultural subsidies. But this is surely not the case. Government spending can be productive or destructive, although the destructive parts tend to predominate when the government's share of the economy is large.

Ultimately, what's most important is that people and capital can relocate with moderate transaction costs, and that taxes and expenditures occur at the same level (no interjurisdictional redistribution). So this would imply political decentralization, which may be better at preventing the growth of government than (other) constitutional safeguards, which may always be reinterpreted.

Efficiency-motivated government policies are not always efficient, but they tend to be more efficient than interest-group-triggered redistributive policies. So while Hong Kong's government may have built too many subways and founded too many universities, they are not a total waste of resources. But it's probably the fact that Hong Kong is a city state with extraordinarily mobile people and firms that have made it the world's freest jurisdiction (example: fears about the Chinese takeover before 1997 transformed the population composition of the Vancouver region; fortunately, the Chinese have wanted Hong Kong to stay as capitalist as possible and have not raised any revenue in HK, not even for defense).

[Troy Camplin]

For my money, it's the federal government that needs the severe cuts the most. Then let each of the states provide what they want and compete with each other. Then we'll figure out what people really want, as they move, state economies grow or shrink, etc. That was the original model for the U.S., after all.

[David Emanuel Andersson]

Troy: Exactly my point.

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Enjoy life every day and stay happy!