Wednesday, April 14, 2010

Renewed warnings about the US Federal Government's budget deficit hit the front page of the New York Times today.

The Federal Reserve chairman said Wednesday that the government must begin to make “difficult choices” to address its gaping deficits and warned that “postponing them will only make them more difficult.”
Bernanke continued:
"Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policy makers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance."
The United States needs to spend less money. Period. But that is the easy part. The hard part comes when specific cuts must be made.

(I should add that this post is written under the assumption that no further tax increases are politically feasible/possible/desirable in the short- or medium-term)

The American reaction to potentially cutting Social Security benefits is representative of the difficulty of cutting domestic social benefits - Americans react with visceral disdain to any suggestion that their Social Security benefits might be cut and politicians are wary of running on benefit-cutting platforms. Social Security is rightly called the "third rail of American politics."

If social benefits can't feasibly be cut, where to next? Foreign aid is a favorite target of budget-cutters (71% of Americans would cut it), but it accounts for less than 1% of the total federal budget.

One idea, until recently thought to be tantamount to political suicide, is to make cuts in the US Defense Budget, which represents the largest single piece of the discretionary budget. Why is it not political suicide now? Matthew Yglesias has some interesting analysis that examines the political feasibility of defense cuts.


(Graph courtesy of Anne Lowrey of the Washington Independent - In blue, the number of people who say something should be cut with. In red, the percent of the budget that these programs account for)

Yglesias calls defense spending "the least-unpopular cut" of "the major budget items," but correctly identifies that "it’s very politically difficult for a president to do anything that provokes the ire of the defense establishment whether or not it polls well in the abstract."

Stephen Walt, examining the same data, identifies two areas where defense cuts could come from:
One is to hold one’s military obligations (aka “roles and missions”) constant and to devise cheaper ways of meeting these commitments. In this approach, you have to identify genuine waste, fraud and abuse in the Pentagon, and devise a convincing way to defend various interests while spending less money.... The second way to cut defense spending is to reduce one’s military commitments; i.e., to decide that there are some missions or obligations that the United States does not need to perform, either because they are not essential, because they are counterproductive, or because other states can and will do them better than we will.
I think Walt lays out the two choices well, but doesn't frame the choices. In the current climate, it seems much easier to me to go after the "waste, fraud and abuse" than to fundamentally re-think America's "missions and obligations."

Congress thinks so too - the most recent evidence being the House Armed Services Committee's second effort to reduce the costs of DoD's acquisition and procurement. The "Implementing Management for Performance and Related Reforms to Obtain Value in Every Acquisition Act of 2010" is a follow up to last year's Weapon System Acquisition Reform Act. One can hope that both efforts will ultimately prove successful, but even the hoped-for savings will not be monumental. The Congressional Budget Office found "no basis for determining whether such improvements would result in net savings to the government."

Thus, even if increasing efficiency, eliminating fraud and abuse, and streamlining procurement and acquisition efforts work swimmingly, other aspects of the Defense budget will need to be examined - the Obama Administration is planning on $160 billion per year for the next two years to cover the wars in Iraq and Afghanistan. That is a lot of money normally, but especially when money's tight in the federal budget.

(Jeremy has done a lot of research and thinking about this issue and I expect he'll give his 2010-inflated "50 cents" in the comments)

1 comments:

adubs1984 said...

This also does a good job of illustrating how budget-ineffective it is to hold "non-defense discretionary spending" at a flat nominal level....except by severely affecting the efficacy of those programs.

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