Where Republicans Should Start Downsizing Government

With Republicans now controlling both houses of Congress, many Americans are waiting to see if they can accomplish anything significant in terms of reducing government spending. The House fought a pretty successful battle over the past four years to hold the lid on spending and have finally brought it back to its trend line after the Obama stimulus package pushed federal spending way above its normal share of GDP. But now Republicans need to switch from playing defense to offense and show voters they can actually cut both spending and programs. Here are some ideas about where to start.

First, Republicans should go for the low-hanging fruit, the easiest spending to eliminate: unspent balances. There are still $80 billion in unspent stimulus funds and another $20 billion in unspent funds that Congress appropriated at least three years ago for other purposes. While some of these funds will likely never be spent, they are still authorized by Congress so the money could walk out the door at any time. Repealing the authorization would save somewhere between the full $100 billion and nothing, but it also has added symbolism even if the true savings is small. Plus, it is hard to see too much opposition to this cut.

Second, Republicans should begin a process of selling vacant federal office buildings. Right now, we are spending $25 billion per year on maintenance and upkeep for buildings the government is not even using. Selling them would save that $25 billion plus bring in revenue equal to whatever the sale price is. It might take a little while, and some buildings are probably worth keeping, but let's get started. Again, this seems like an easy early victory toward downsizing government, increasing efficiency, and saving money to reduce the deficit. Local governments could even start to collect property taxes on the buildings once the federal government sells them. Everyone wins.

After those easy fiscal boosts, Congress should begin to eliminate all the federal programs that play favorites in our economy instead of working to help all sectors and people. This would include both industry- and place-specific programs. Examples would be programs such as the Rural Business Program Account which subsidizes rural small businesses. We have a Small Business Administration already, we don't need a duplicate agency that does the same thing but only in rural areas (where the SBA also operates).

The infamous earmarks would also fall into this category as they are the ultimate example of federal spending designed to benefit only a targeted beneficiary. Green energy loans and subsidies would be prime examples of programs trying to pick winners that should be eliminated. The more such special interest programs are cut, the more we could save.

Given that the federal government is still running an historically high budget deficit (it only looks good because it was so bad a few years ago), a good next step would be to stop overpaying for services. Two examples here would be the Davis-Bacon Act and the doc fix. The Davis-Bacon Act forces the government to pay union-scale wages on all the projects it funds (like interstate highway construction). Firms bidding for business that do not have unionized workers are required to pay their workers more than normal, meaning the government pays a higher price than necessary. This is a law designed to make unionized employers more competitive on price and should be repealed. If companies want to give the federal government and its taxpayers a better price, we should be willing to take it. We could save $6 billion per year by allowing contractors to give the government lower bids.

Doc fix is the shorthand for paying doctors more than we should. Under a law designed to keep Medicare financially stable, payments to doctors are supposed to be cut if Medicare spending is rising too fast. Instead, over the 17 years since the Balanced Budget Act of 1997 established the payment formulas Congress has repeatedly passed laws suspending the pay cuts that they put into law (these suspensions are called the doc fix). These actions mean doctors get paid more and taxpayers get a bigger bill to keep Medicare going.

Obviously, nobody likes getting a pay cut, but why should average workers pay higher taxes so that doctors can make more money? And why won't Congress follow their own law in order to keep Medicare solvent? Remember Medicare is funded by a payroll tax so all workers are paying for this, not just rich ones. Letting the pay cuts go into effect would save around $15 billion per year.

Finally, Congress should cut military spending. This can be done without hurting military readiness if Congress simply cancels all the spending on weapon systems that the military never wanted. Based on published stories, this could save a minimum of $10 billion per year, but I suspect the number is much higher. Military spending has roughly doubled since 2001 (in other words, since 9/11), which is about 50 percent above the increase needed to keep up with inflation over the same span. Just an 8 percent cut in current military spending would be $50 billion per year. If the military gets to pick the cuts, I am confident we can save that much with no loss in military effectiveness. After all, spending in real dollars would still be almost 40 percent above the 2001 level.

The spending cuts outlined above would not be enough to balance the budget immediately, but at least they would save some money and create momentum in the right direction. If Republicans want to convince voters that they actually do believe in fiscal responsibility and smaller government, they should act like it right from the start on this Congress.

Legislation to improve the jobs climate is important, and there are actions they can take that will help. However, Congress and the President only impact employment and most other macro policy variables indirectly. Government spending is the one thing they have complete control over, and cutting spending is good for all the rest: it will lead to more jobs and faster economic growth. After all, who do you think knows more about where capital should be allocated and what products should be produced: millions of business owners and consumers or a few hundred politicians?

So, Congressional Republicans: let's make some easy spending cuts, set a tone, and get the government out of the way so the economy can continue to pick up steam. Given the choice of lead, follow, or get out of the way when it comes to economic policy, Congress should almost always stand to the side. If Republicans will let the market work, they will be amazed how good their decision will look.