This blog is about the major fiscal and economic problems of our country and specifically our stagnant economy (2% real growth for the past six years) and massive federal debt (the public debt, on which we pay interest, is 74% of GDP, the highest since WWII). My major sources of information are the New York Times and Wall Street Journal but I also make use of reports from various think tanks. Today’s source is the recent report, “Why the Federal Government Fails,” by the Cato Institute’s Chris Edwards. According to Mr. Edwards, there are five main reasons for this:
Top-Down Coercion. Federal agencies impose more than 3,000 regulations each year. Total regulations now span 168,000 pages. Benefits are distributed through more than 2,300 programs. Federal policies are often based on guesswork. Failed policies are seldom weeded out because they are funded by taxes and are not contingent on performance.
Lack of Knowledge. Private markets operate efficiently on the basis of price information. Government subsidies and regulations throw a monkey wrench into the price mechanism.
Political Incentives. Congress focuses on the benefits of programs but does not consider the full costs because benefits are delivered to narrow groups while the costs are spread widely. There are too many fiscal illusions to hide costs such as: paying with debt rather than higher taxes, taxing businesses which then just raise prices, conferring benefits by regulation (e.g. requiring employers to provide healthcare) rather than direct subsidy.
Bureaucratic Incentives. There are too many rewards for inertia and not enough for the creation of value such as the absence of profits and losses, rigid compensation, lack of firing, red tape, agency capture, etc.
Hugh Size and Scope. The $4 trillion annual budget is 100 times the average state budget of $40 billion. It is simply too vast for members of Congress, and other top officials, to understand what is going on. The more programs the government has, the more likely they will work at cross-purposes.
Mr. Edwards concludes that “the most important way to improve federal performance would be to greatly cut the government’s size” and to do this by shifting federal activities back to the states. With this recommendation I heartily agree!
The postwar liberal consensus, beginning with President Roosevelt’s New Deal and extending through President Johnson’s Great Society, has broken down. The Reagan Revolution did not undo it and politics in the new 21st century have now become highly contentious with neither the Democrats nor the Republicans able to push their agendas very far. The Manhattan Institute’s James Piereson has written a book, “Shattered Consensus: The Rise and Decline of America’s Postwar Political Order,” describing how we have arrived at our current impasse. Most interestingly, he predicts that “the Democratic blue model is unlikely to succeed at restoring growth and dynamism to the American economy” and that a new system will necessarily look more like the red model than the blue model, i.e. more sympathetic to business and private sector growth than to public employee groups and beneficiaries of public spending.
There will likely be at least three central elements to the new synthesis that must eventually replace the postwar order. They are:
A focus on growth, and the fiscal and regulatory policies required to promote it, as an alternative to the emphasis on redistribution, public spending and regulation.
An emphasis on federalism both to encourage experimentation and innovation in the American system and to remove issues from the national agenda which contribute to division, stalemate and endless controversy.
A campaign to depoliticize the public sector by eliminating or strictly regulating public employee unions.
Mr. Piereson promotes these three new principles of political organization on their intrinsic merits. For me there is the added attraction that each one would also improve our perilous fiscal condition by significantly reducing budget deficits. Growing the economy faster will increase tax revenue. Strengthening federalism means transferring spending programs from the national government (which is highly wasteful) to state governments which are far more efficient because they have to balance their budgets. Public employee unions are especially costly to state governments because of their strong negotiating power.
In short, the cost of government simply must be brought under much tighter control and Mr. Piereson has proposed three organizing principles which would accomplish this.