Budget Cuts in All the Wrong Places: Too Much from Too Little Too Soon

As I write this, many people expect President Obama’s new budget to address our fiscally unsustainable future. He hinted in his State of the Union speech that everything should be on the table, but gave very few specifics, other than a promise to freeze annually appropriated spending for nonsecurity purposes over five years, producing at least $400 billion in savings. Many Republicans have similarly focused on this portion of the budget but called for much more draconian cuts. If action continues to be focused on this small slice of the budget, little progress can be expected and too much of any fiscal discipline will fall on a very limited number of programs without making a real dent in our long-term deficit problems.

It is not only the president’s budget that is animating the debate. The expiration on March 4 of the spending bill that currently funds the government and the need to raise the debt limit later in the spring will both be catalysts for further debate and action. Cuts this year are almost inevitable despite the fact that most economists believe that spending cuts are needed but should be backloaded so as not to weaken the recovery.

The desire for quick action, along with the political unwillingness of many members of Congress to tackle entitlement programs, defense, or taxes leaves only one area of the budget as the primary target for any cuts: so-called domestic discretionary programs. This is budget jargon for the very small slice of the overall budget (19 percent) that is not devoted to defense and is subject to the annual appropriations process. It pays for everything from education and the environment to transportation, housing assistance, veterans’ health care, and the FBI.

It is troubling enough to think about major cuts falling on this small slice of the budget—but what is potentially even more troubling are the implications for four areas that arguably should not be cut, at least not deeply. One is programs that address the competitiveness gap that the president highlighted in his State of the Union speech. This includes investments in education, training, infrastructure, and research. The second area is programs that help the disadvantaged, such as housing vouchers for low-income families and nutrition assistance for low-income women and their babies. The third is programs devoted to protecting the public, including the safety of the food supply, prescription drugs, airlines, nuclear plants, highways, workplaces, and the nation’s borders. The final is programs for veterans, especially their health care. Indeed, if one were to wall off these four areas from cuts, there wouldn’t be a lot left from which to cut.

I estimate that out of the total of $660 billion spent on domestic discretionary programs in 2010 according to the Congressional Budget Office, roughly 44 percent was for competitiveness purposes (mostly education, training, and transportation), another 11 percent was for low-income programs, 7 percent was for public safety, and 8 percent was for veterans. The remainder—a total of about $200 billion—is only 6 percent of total federal spending. I compare it to total federal spending since most of it is what I would call “overhead”—salaries and office space for the people who run the government, administer the laws, promulgate and enforce the regulations, prepare Social Security checks, monitor fraud, respond to congressional and citizen requests, and so forth. Even relatively efficient organizations have overhead rates that are as high or higher than 6 percent.

Some important caveats: any exercise of this sort is no substitute for the kind of careful scrutiny of what actually goes on within each line item in a budget and allocating programs across these five categories is somewhat subjective. Are there efficiencies to be had and activities that could be privatized, consolidated, devolved to lower levels of government, or done away with entirely? Undoubtedly. Still, the kind of freeze the president has imposed will necessitate tough choices as he tries to protect or increase “investments” within an overall freeze. What the Republicans have proposed will be even tougher.

In sum, the president and his Democratic allies are going to have a hard time agreeing to cuts of the magnitude currently under discussion by some Republicans, and many members of Congress should worry about the likely effects of cuts on our competitiveness, on the disadvantaged, on public safety, on veterans, and on the ability of the federal government to responsibly administer a wide variety of laws and programs in a way that does not lead to greater fraud and abuse.

Most of all, this exercise underscores the fact that cutting the budget by aiming one’s knife at just one small slice of the pie is not a good idea. Instead, the debate badly needs to shift to the roughly $700 billion we spend on defense, the over $1 trillion we “spend” (through the backdoor) on tax subsidies, and the $1.5 trillion that funds just three big programs: Social Security, Medicare, and Medicaid.