James Pethokoukis

Politics and policy from inside Washington

Why a U.S. government shutdown is worth it

February 25, 2011

The cost-cutting battle lines are drawn in the U.S. Congress. But the fight will affect only maybe a sixth of spending, with big-ticket items like defense and Social Security getting a bipartisan pass for now. Still, tackling even that small slice would save money and reassure markets. A temporary government shutdown would be a small price to pay.

Republicans, who control the House, want to cut $61 billion a year from discretionary programs, excluding defense and other security items, which depending on each politician’s chosen definition total $500 billion or somewhat more of the $3.5 trillion federal budget for 2010. Cost cuts on that scale, though, could lead to an impasse with the Democrat-controlled Senate next month. Meanwhile, President Barack Obama has called for a five-year freeze at current spending levels, saving an average of $40 billion a year over 10 years.

Neither approach would put the nation’s finances on a sound footing. Even hacking at defense spending would only help for a while. What’s needed is a real effort to tackle future spending on Social Security and government healthcare programs. And anyway, even if an aggressive plan like that put forward by House Budget Committee Chairman Paul Ryan came to pass, spending on these so-called entitlements would still most likely rise before it started falling.

But this key: Controlling discretionary spending therefore still has a role to play, and the reductions being proposed by the House GOP could be the start of a sustained effort. Cuts in this area could be faster off the mark, as evidenced by both Republicans and Obama showing willingness to consider them. Moreover, an initial taste of austerity, even if it looks modest, would compound into big future gains.

Suppose non-defense discretionary spending was cut, frozen for 10 years, then increases at the 2.7 percent annual rate normally assumed by the Congressional Budget Office. Compare that to the case where there’s no cut and no freeze and the cost just goes up every year. The present value of those savings over 80 years isn’t too far off the estimated $8 trillion present-value shortfall in Social Security funding, according to calculations from the e21 think tank.

That suggests that cuts in discretionary spending could ultimately be almost as important as Social Security reform. The coming fight, if not quickly resolved, could leave the government forced to close its offices for a while. But if those are the stakes, it could be worth a brief involuntary holiday for bureaucrats.

Comments

The obvious solution to the financial void involves both spending and revenues. When both sides keep their hands above
the bargaining table, the problem may recede

Posted by auger | Report as abusive
 

We had an approaching SS and Medicare problem years ago. Now it’s not a problem it’s a terminal illness. To make up the current deficit gap with something close to 50% spending cuts and 50% tax increases we would have to double the tax generated from income and corporate income taxes and give a 20% across the board cut to spending.

However, doubling the income tax rates would put the top rate at 70% with state and local rates bringing the marginal tax to 80% that won’t fly. Either people will hide the income or they will drop out. – Please go to med school and become a surgeon so the gov can take all of your money and you can earn as much as the liquor store owner who lives much better hours. :) You could increase salaries to get the same effect but note by a vote in congress.

Even if you get an extra $550bil out of taxes – which would be a 50% increase in the taxes paid (probably not doable) you still need at least a 20% across the board cut in spending including SS, Medicare, Defense and everything else except debt payments. Ain’t gonna happen – see $100bil in cuts last month.

Then for around every 2% increase in the Fed interest rates you’ll need another 10% across the board cut.

So, do all of these things and add some fairy dust and it will all turn out ok. Otherwise our kids our toast.

Posted by SteveAdams | Report as abusive
 

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