In Favor of Across-the-Board Cuts in Government Spending

By Jan 4, 2013, 12:08 PM Author's Blog  

I am not sure which is worse: superstitions based on science or superstitions pure and simple.

Many people would react to across the board cuts in government spending by saying something like: “This is crazy; some things are more important than others. We should cut the less important things first.” And, indeed, economists would seem to agree. After all, the equi-marginal principle was one of the first “discoveries” of the marginal revolution. No sense cutting programs in such a way that some will have very high returns, however measured, at the margin while others will have very low returns. Irrational!

However, what is rational for a household or an individual need not be rational policy for the government. Why is that?

First, there is the problem of measuring returns.  At the most basic level, are we talking about returns from the private or the social point of view? There are usually rents to be gained by specific groups. Are we to consider the returns large corporate farmers get from the agricultural support programs social returns? I think most people would say no. So the enforcer of the equi-marginal principle must adjust for returns that are purely private and not social.

Second, when ordinary people (especially politicians) hear about the possibility that social returns might be greater than private returns (the obverse of the previous case), they tend to get over-stimulated. They hear RESEARCH or EDUCATION.  OMG. We cannot cut those. But marginal thinking, correctly applied, would say no such thing.  Do the specific programs under evaluation, not the generic concepts of research and education, have positive social returns at the margin?

Do “we” need more unqualified young people going to college? Did you know that about half do not graduate in four years? Do we need to feed the construction and non-teaching related administrator boom at universities? Do we need to fund more mathematical economics?  (If you think yes, you have never seen the current work in this area.)

And then even if there were positive marginal returns, they may not be net positive returns. What I am referring to here is the crowding out of more efficient methods of delivering education services by highly subsidized traditional methods. Efficiency in delivery is important.

The basic point, however, is this: The political system responds to rents, not to social costs or benefits. If politicians cut at all, they will do so, as a very rough approximation, such that the rents (private returns to their constituencies) will be equated per dollar spent.

Fine-tuning the budget cuts according to some rational social-welfare principle may sound good. But it has nothing much to do with the reality we face.

But things are worse than that. Opening up a discussion about where to cut – which are the programs more worthy or less worthy of being cut – opens the door to all sorts of special-interest pleading. The interests will always clothe their private benefits in the robes of social welfare – job creation, external benefits, indirect effects of medical discovery, and so forth.  Perhaps the genius economists among us can sort out fact from fantasy, but the public cannot.

As each special interest group makes its case, the probabilities of genuine reform in the federal government’s spending become more and more remote.

There is really no practical alternative to across-the-board budget cuts if the government is to become serious about retrenchment and reform.

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