Tax Cuts or Spending Cuts: Part 3

One of the more popular ideas for spending reform in America today is a so-called Penny Plan: you allow for a slightly slower growth in spending over an extended period of time, and eventually you actually balance the budget.

In 2019 Senator Rand Paul introduced a more explicit version:

Dr. Paul’s budget simply states that for every on-budget dollar the federal government spent in Fiscal Year 2019, it spend two pennies fewer a year (a cut of two percent per year) for the next five years (at which point balance is reached), with spending then growing at two percent for five years afterward.

On the face of it, this looks like a good idea. If this plan had been introduced in 2010, the trajectory of federal spending would have looked quite different over the next decade. Figure 1 reports actual federal government spending (red) and the same spending simulated according to Rand Paul’s two-penny plan (green). Under his plan, by 2019 Congress would have spent almost exactly the same amount of money as they did in 2011:

Figure 1: Penny Plan spending simulation

Source of raw data: Office of Management and Budget

The Penny Plan looks like a good idea, does it not?

Before we answer that question, we might want to take a closer look at what it would do to individual programs under the federal budget. Table 1 reports what these cuts would mean to individual programs. The effects are illustrated under two premises: a proportionate cut in all programs (PPP) and a cut where defense, justice and veterans’ benefits are protected from the 35.6-percent total budget reduction (Mod. PPP). The programs listed are those that would take a hit under the modified scenario, with a reduction of 46 percent from 2010 to 2019:

Table 1: Simulation of Paul’s Penny Plan; $ billions appropriations in 2019

ActualPPPMod. PPP
International affairs            52.7            34.0            28.5
Science and techn.            32.4            20.9            17.5
Energy              5.0              3.2              2.7
Nat’l res., environm.            37.8            24.4            20.4
Agriculture            38.3            24.6            20.6
Transportation            97.1            62.5            52.4
Community dev.            26.9            17.3            14.5
Educ., sco.svcs          136.8            88.1            73.8
Health incl. Medicaid          584.8          376.6          315.6
Medicare          651.0          419.2          351.3
Income security          514.8          331.5          277.8
Social security       1,044.4          672.6          563.6
General gov.            23.4            15.1            12.6
Source of raw data: Office of Management and Budget

The total reduction of the federal budget in 2019 under the Penny Plan would have been $1.4 trillion. Regardless of whether the cuts are made straightforwardly or under the modified scenario, the reductions to individual programs are quite remarkable and raise two pertinent points for Penny Plan proponents to consider.

Before we get to those points, however, let us dispel one of the many myths that float around about the federal government, namely that we can just trim the bureaucracy and keep it affordable. I am the first to agree that government is over-bureaucratized and too large, but the reason is not the staffing itself. In 2019 the total employee-compensation cost for the federal government was $527 billion. This paid for 5.1 million employees, placing the average compensation at almost $103,000. This is, of course, an excessive amount, far above what private-sector employees make.

However, the big problem here is that under Senator Paul’s Penny Plan we would have cut away $1.4 trillion; Congress would have had to fire every single federal employee three times over to cover that cost cut. Furthermore, about 40 percent of all federal employees are in the military; if we wish to protect that function of government – which of course we should – it becomes totally impossible to execute the Penny Plan relying solely, or even predominantly, on staff reductions.

Which brings us to the two points from Table 1 about the Penny Plan. First and foremost: is it morally right to tell every American receiving checks from Social Security that they will have to do with less money so that Social Security in total can keep its spending constant over ten years? Remember that as Figure 1 reported, total federal spending in 2019 was the same in dollars as it was in 2011.

A similar point applies to Medicare and Medicaid. Is it morally right to tell people who enrolled in either of these programs, trusting that government would provide for their health-care needs, to make do with less than two thirds of the health care they were promised?

The answer to these moral questions leads us over to the next point about the Penny Plan: it assumes that government will continue to make all its promises to all the people who are enrolled in tax-paid entitlement programs. This promise problem becomes acute under Medicaid and Medicare, two programs that provide people with tax-paid health insurance. As I have explained elsewhere, health-care costs rise by a certain amount per year simply because of the advancements in medical technology. Generally, if we wish to keep enjoying better health care, we need to let the med-tech advancements make their way to the frontline of our health care system.

We can – and should – use the free market for health insurance to mitigate the cost increases; he who does more with less will always grow his business at the expense of competitors who are not as innovative. Nevertheless, medical technology costs money, as does improvements in skills among medical professionals. Therefore, we have to let the cost increase over time.

Under a government plan, this problem becomes even more serious. There is no real incentive built into a tax-paid program to do more with less, hence the tendency of cost hikes to hit taxpayers unmitigated. But even if we can trim the programs to some degree, costs will still go up.

Under Paul’s Penny Plan, there would have been zero cost hikes from 2011 to 2019.

What medical technology advancements; what gains in health-care skills and treatment methods; should enrollees in Medicaid and Medicare forfeited under his plan?

There is, of course, an answer to this question. It is part of the answer to the broader question: “If the Penny Plan doesn’t work, what do we do instead?” That answer has to do with structural spending reforms, which we will discuss in Part 4.

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