Tea-Leaning Transformation Marks First Step Toward Fiscal Reform

President Obama campaigned to be a “transformational” president. Though he’s achieved that goal, it’s not likely the transformation he sought. During his first two and a half years in the White House, federal spending has soared 28 percent and the government has accrued more than $4 trillion in deficits.

A large portion of that stemmed from the nearly $1 trillion “stimulus” bill the President signed in 2009 to re-energize the economy. Historian Victor Davis Hanson explains:

Apparently in Obama’s worldview there are advantages to deficits that would explain his fondness for unprecedented borrowing. In Keynesian terms, massive government red ink is supposed to foster economic prosperity by creating goods and services that the private sector purportedly cannot.

This time, the effectiveness of government spending to counter effects of the recession is in question.

The combination of our economic collapse, federal spending growth, and the massive, unpopular healthcare overhaul bread a backlash among the U.S. electorate that is best characterized as the Tea Party revolt. While a case can be made that the Tea Party only knows how to say no, the movement has successfully lead to a broader rethinking of the role of the federal government and the damaging and corrosive effects of out of control spending.

Roots of the Tea-leaning transformation appear to be taking hold in D.C. as evidenced by the recent debt-ceiling agreement. Its two-step process to reduce the federal deficit (first, cutting $900 billion from the federal baseline in the 10-year budget pipeline and then assigning a “super committee” to identify an additional $1.5 trillion in cuts by the holidays) represents a badly needed course correction.  And these government cuts must be offset by increased private investment and spending to ensure a healthy economic recovery.

Bottom line: The agreement reached between the White House and Congress is not a destination; it is the start of a process. While lawmakers frequently start government programs and activities, they very rarely end them. So the public today bears the cumulative bureaucratic build up of the past few centuries. In fact, the last truly comprehensive reform of government—according to the President of the US Chamber of Commerce—took place during the Hoover Administration. President Carter initiated a reform effort, but its results were mixed and limited.

That means our leaders’ focus must now shift to the longer term challenge of genuine reform for the 21st century and beyond. Reform in regulation. Reform in the tax code. And reform in the entitlement system.

Since 2000, federal discretionary spending—entitlements excluded—has nearly doubled, growing from $780 billion to $1.3 trillion. In 1960, total federal spending was less than $100 billion (about $650 billion in current U.S. dollars). No matter how you measure it, the federal government has grown dramatically, and few believe we get the government we pay for. Every cabinet department and agency should be subjected to scrutiny to eliminate functions that are not carried out cost-effectively or could be better performed by the private sector. The potential for consolidation of departments and agencies should be explored (ie. combining Commerce, Energy, and EPA might result in better balanced regulations).

Since 1908, the Code of Federal Regulations has grown 55 percent—now topping over 150,000 pages. And according to Heritage Foundation research fellows James Gattuso, Diane Katz, and Stephen Keen, “The regulatory burden increased at an unprecedented rate during FY 2010, as measured by both the number of new major rules as well as their reported costs. Even more are on the way in 2011.” The Environmental Protection Agency, in particular, has been on regulatory steroids thanks to a nearly 40 percent increase in its budget (and it zealotry). The torrent of new EPA regulations is threatening to undermine a fragile recovery and raise the costs of electricity and automobiles among other products.

Two actions could improve this situation. First, there should be a requirement to evaluate the effectiveness of regulations periodically (ie. every 10 years) and re-issue those that can be justified on cost-effectiveness grounds. Second, major regulations—those with a cost of $100 billion or more—must be approved by Congress before they take effect.

Our tax code is largely incomprehensible. It’s effectively an employment act for tax attorneys and accountants. For over two decades, scholars have been proposing a major revision and simplification. There is something seriously wrong with a system that exempts half of wage earners from income taxes and raises over 50 percent of revenue from only 10 percent of wage earners. The time has come for lower rates, fewer exemptions, and more simplicity and fairness.

Evidence that there will be a serious effort to reform the tax code and the regulatory system would encourage new investment which would put people back to work faster and jump start economic growth. In the oil industry alone, thousands of workers could go back to work if permitting in the Gulf of Mexico was accelerated. Likewise, exploration in coastal waters and Alaska would not only create jobs and related economic benefits but would also reduce imports by upwards of 2 million barrels a day by the end of this decade. No doubt other industries would thrive by such regulatory and tax code changes.

Growth in entitlements, primarily Social Security and Medicare, is recognized as being unsustainable. But recognition doesn’t always translate into action. Unless there is serious reform in both programs, tomorrow’s generation will not have a brighter future than we have had and will be left with a much larger debt and fewer retirement benefits.

Raising the eligibility age for Social Security, reducing the annual adjustment for inflation, and raising the wage base subject to the payroll tax would all make the system more solvent. Similarly, means testing Medicare benefits and its insurance premium would increase its solvency. But, both programs need to be rethought to make sure that they can be made financially solvent over the longer term.