National Center for Policy Analysis

MONTH IN REVIEW

Federal Spending and Budget

April, 1996

WHO CUT THE BUDGET DEFICIT?

President Clinton has been taking credit for cutting the federal budget deficit, but analysts point out that he only cut defense spending -- and he did that to get the funds to pay for expensive pet social programs and entitlements.

• The deficit has been reduced from $290 billion in 1992 to $164 billion in 1995.
• But because of the Clinton tax hikes in 1993, federal revenues fell $79 billion short of 1994 goals, and $60 billion short in 1995 -- even though the economy was expanding.
• Although the administration has been claiming credit for 1993's deficit drop of $35 billion, that was actually the last year of the Bush budget.
• Had Congress not killed Clinton's $16 billion "stimulus package," the reduction would have been even smaller.

Later events proved that the stimulus package was unnecessary to begin with: joblessness dropped from a forecast 7.2 rate for 1993 to 6.8 percent.

• Economic factors such as lower jobless and interest rates contributed to 1994's $22 billion deficit drop, and 1995's $13 billion reduction -- for a total of $35 billion.
• Certain technical factors -- such as additional revenues from the winding-down of the savings and loan bailout, and slowed Medicare and Medicaid spending -- worked in Clinton's favor in 1994 and 1995, saving $106 billion.
• A surplus in Social Security of $14 billion in 1995 over 1993 helped to mask the true size of the deficit.

Thus, economic, technical and Social Security factors accounted for a total of $155 billion in deficit reduction over the past two years.

Source: Editorial, "Clintonomics: The Real Record," Investor's Business Daily, April 2, 1996.

ROADS VS. MASS TRANSIT

Competition for taxpayers' funds between special interest lobbies promoting road building and social engineers favoring mass transit has resulted in taxpayers funding both -- although roads pay their way through taxes while mass transit has required increasing subsidies.

Today, more than $900 billion is spent annually in the United States on surface road and rail transportation.

• The largest portion is spent privately on automobiles and freight, but government spends more than $70 billion annually on roads.
• By contrast, nationwide operating expenses for mass transit -- train, subway and buses -- is $18 billion.
• Only about one-third of this amount is covered by commuter fares, with nearly two-thirds coming from taxes.
• Federal grants for transit construction and equipment have grown from $3.0 billion in 1990 to $4.6 billion fiscal 1995.

Supporters of road building successfully lobbied last year for passage of the National Highway System bill, which makes nearly 170,000 miles of roads eligible for federal aid.

• Opponents of additional road building, such as the American Public Transit Association, argue that motorists gain $345 billion in benefits while paying $44 billion in taxes -- a net $301 billion in public subsidy.
• However, the Highway Users Federation and the American Automobile Association calculate that motorists are net losers by $38 billion annually, paying motoring-related taxes of $114 billion for only $76 billion in services.

An alternative to continuing conflict over transit versus highway funds is building privately-funded and managed toll roads. State turnpikes with revenues of $5 billion annually are also ripe for privatization.

Source: Peter Samuel, "The Transportation Lobby: The Politics of Highway and Transit," Organization Trends, February 1996, Capital Research Center, 727 15th Street, NW, Suite 800, Washington, DC 20005, (202) 393-2600.

ABOLISH THE DIRECT STUDENT LOAN PROGRAM

Many of those familiar with the president's Direct Student Loan Program want to terminate it. They charge that this Department of Education program -- which substitutes direct government loans for the previous program guaranteeing loans to students from commercial banks -- is a vastly expensive boondoggle.

• Over the next 20 years, the department would be transformed into the nation's third-largest consumer lending institution, managing a $350 billion loan portfolio.
• Under the Clinton program, taxpayers will get stuck with a bill for $1.5 billion in additional losses over the next seven years, since they will be responsible for all defaults -- rather than students, parents, banks or schools.

Few federal activities need reinvention more than the student loan program, experts say, because government is a terrible banker. In 1994, it held $11 billion in unpaid or delinquent student loans, many to former students with well-paying jobs in the private sector. In most cases, miscreants fail to pay with impunity.

Not that the federal government's record is spotless in other loan programs:

• Direct lending programs administered by the Small Business Administration, the Export-Import Bank, the Farmers Home Loan program and others have experienced rivers of red ink.
• The SBA's direct lending programs had default rates approaching 20 percent until the programs were ended.
• The Farmers Home Loan program has amassed losses in the tens of billions of dollars, and in the mid-1980s had programs with delinquency rates eclipsing 50 percent.

Critics also advocate reducing taxpayer losses in the guaranteed loan program by capping the federal guarantee at 95 percent -- rather than the current 98 percent and charging students market interest rates. Finally, they want to permit tax-free savings accounts for education, so that parents and students -- rather than taxpayers -- pay for college.

Source: Stephen Moore (Cato Institute), "Student Loan Boondoggle?" Washington Times, April 10, 1996.

JUVENILE MISCHIEF AND PARENTAL RESPONSIBILITY

States and cities are rushing to enact laws holding parents of juvenile offenders responsible for the crimes or delinquencies of their children.

• About half the states have passed laws in the past few years either to toughen existing sanctions or add new ones, according to the National Conference of State Legislatures.
• In 1995, at least ten states passed so-called parental responsibility laws that allow fines or even imprisonment.
• Parents in Idaho may be forced to pay detention costs for a juvenile; and West Virginia parents can be fined up to $5,000 if their child defaces a public building.
• In Louisiana, parents can be found guilty of "improper supervision of a minor," fined up to $1,000 and jailed for up to six months if their child associates with a convicted felon, drug dealer or members of a street gang.

Towns and cities have also been cracking down.

• Dozens of suburban Chicago towns have passed laws aimed at parents who condone alcohol abuse, or curfew or weapons violations.
• A South Carolina judge last year even ordered a mother tethered to her daughter, who was charged with shoplifting, truancy and burglary.

But legal experts say the laws are applied most commonly to compel counseling or education programs for parents.

Source: Peter Applebome, "Holding Parents Responsible As Children's Misdeeds Rise," New York Times, April 10, 1996.

WHAT NEED FOR THE ENERGY DEPARTMENT?

It is no secret, even in Washington, that the Department of Energy is an expensive, bloated bureaucracy without mission or justification. Critics are eager to abolish it -- but still it lingers.

• Created in 1977 to manage the energy emergency, it still exists in an era when the oil embargo is nothing more than a bad memory.
• It now employs 20,000 federal bureaucrats and an additional 150,000 contract workers.
• At an annual cost to taxpayers of $15.4 billion -- a 235 percent increase since 1977 -- it is known as a bureaucracy without equal and an agency without a focused mission.
• It is estimated that some 85 percent of its budget is devoted to activities that have no direct relation to energy resources.

The bulk of its funds goes to cleaning up radioactive waste from the nation's nuclear weapons facilities and overseeing storage of nuclear waste. This current primary mission has become the agency's greatest failure.

• There are 26 nuclear power plants nationwide that will run out of storage space for spent nuclear fuel by 1998 -- the very year DOE is required to begin accepting waste at an interim storage facility.
• Although DOE has known about that deadline for 14 years, no temporary site has been selected, and a permanent facility is no more than a pipedream.
• Through a surcharge on their monthly bills, electricity customers have contributed $11 billion to a nuclear waste trust fund -- which the DOE has already raided for $5 billion, without making any progress on creating a permanent storage facility.

DOE has spent more than $70 billion on energy research since 1977, but has made little of any progress.

Source: Sen. Rod Grams (R-Minn), "An Agency That's Got to Go," Wall Street Journal, April 9, 1996.

GOOD NEWS AND BAD ON THE BUDGET FRONT

The GOP temporary spending bill under which the government is operating is slowing the growth in discretionary spending and, thus, shrinking the deficit.

• The Congressional Budget Office has estimated that the federal budget deficit for this fiscal year will come in at about $140 billion -- or $30 billion less than previously forecast.
• CBO credits more than two-thirds of the deficit reduction to spending cuts Republicans enacted, largely over the president's objections.
• If CBO forecasts are realized, the deficit will fall to 1.9 percent of GDP -- down from 2.3 percent in fiscal 1995.

While the deficit measured as a share of GDP hasn't been this small since 1979, it is still high by historical standards, and is expected to resume its upward climb next year.

CBO warns that if spending reforms are not enacted to slow the growth in entitlement programs and discretionary spending, the annual deficit will surpass $200 billion in the next four years and hit $287 billion in six years.

Source: Donald Lambro, "Dividends From the GOP's Deficit Attack," Washington Times, April 15, 1996.

DEFENSE SPENDING STILL TOO HIGH?

Federal budgetary analysts say that inflation-adjusted spending at the Defense Department is still as high today as it was in 1980 -- when we faced a truly dangerous world.

• In today's much safer world, the U.S. still accounts for 40 percent of the world's military spending.
• We spend nine times as much as China, roughly four times as much as Russia, and nearly twice as much as Britain, France, Germany and Japan combined.
• Per capita, the U.S. spends almost twice as much on defense as France and Britian, two to three times as much as Germany and Japan, and more than three times as much as South Korea (where we spend as much to defend South Korea as her own people do).

Experts say that we are paying for a defense posture that presumes intervention in a host of potential conflicts that are irrelevant to U.S. security.

• Washington spends roughly $260 billion on defense when $140 billion would suffice to maintain an 850,000-member military, six carrier groups, and 15 air wings.
• By this measure, about 45 percent of our military budget is for the benefit of other, often wealthy, nations.
• That lower level would put us far ahead of Russia, and roughly equal to Britain, France, Germany and Japan combined.
• With such a force, we could protect our own vital interests from any conceivable threat and join with allies against any foe beyond their power to contain.

The question is not the size of the military, but how it is used. Were we to forgo the policy of promiscuous intervention when U.S. national interests were not at stake, critics say, we could make significant cuts in military spending.

Source: Doug Bandow (Cato Institute), "Needed: Real Military Cuts," Investor's Business Daily, April 17, 1996.

GOP TURNING BUDGET DEFEATS INTO VICTORIES

The budgetary impasse between the president and Congress seems to have led to lower levels of government spending. According to the Chairman of the House Appropriations Committee, the GOP has cut $23 billion from nondefense discretionary programs -- $2 billion more than the amount contained in the 1996 budget resolution passed last year.

Moreover, the Congressional Budget Office has trimmed its deficit forecast for this fiscal year by $32 billion -- from $172 billion to $140 billion. The fall in the deficit is notable, given that domestic spending shot up 40 percent from 1990 to 1995. How has it been accomplished?

• President Clinton has signed eight of 13 spending bills and vetoed three -- with two still held up by Senate Democrats.
• To keep some departments running, congress passed a series of stop-gap "continuing resolutions" which set temporary spending levels at the lower of either the department's 1995 budget or the levels set in the bills vetoed by Clinton.
• Thanks to Democrat opposition to the original spending bills and the restrictive continuing resolutions, Republicans say they are saving more money than they set out to save in the first place.
• According to the CBO, if the resolutions stay in effect, spending this year will be $25 billion below what Clinton wanted for the year.

Republicans had originally advanced a catalogue of hundreds of programs it wanted to kill outright. But many still exist. Budget cutters would still prefer to see these agencies terminated -- rather than just subject to reduced funding -- because they can always grow back in the future. It is much more difficult to recreate an agency which has been terminated.

Republicans also claim some victories in the regulatory wars even without new laws. Democrats have blocked most GOP assaults on environmental and workplace rules. But Republicans have achieved some reforms through budget cuts and the threat of legislation to overhaul agencies.

• The Occupational Safety and Health Administration, for example, has been operating since last October on a projected annual budget of $264 million -- $50 million less than in the prior year and almost $100 million less than Clinton wanted for this year.
• The number of pages in the Federal Register -- sometimes used as a gauge of accelerating regulation -- dropped by more than 2,000 from 1994 to 1995.

Another measure is the Unified Agenda of Federal Regulations. From October 1994 to October 1995 the number of new rules imposed on federal agencies dropped from 5,119 to 4,738.

Source: John Merline, "The GOP's Stealth Budget Cuts," Investor's Business Daily, April 19, 1996.

DAVIS-BACON RIP-OFFS

Cases of out-right fraud are surfacing in association with the Davis-Bacon Act. The 65-year old legislation requires contractors to pay workers on federally-subsidized projects what the Labor Department determines is the local union-scale wage.

For years it has been obvious that Davis-Bacon freezes out many lower-skilled workers, primarily blacks and Hispanics, from these projects. Now it has become clear that many "prevailing wages" appear to have been calculated using fictitious projects, ghost workers and companies established to pay artificially high wages.

• Oklahoma officials have reported that many of the wage survey forms submitted to the U.S. Department of Labor to calculate federal wage rates in Oklahoma were wrong or fraudulent.
• Records there show that an underground storage tank was built using 20 plumbers and pipefitters paid $21.05 an hour -- but no such tank was ever built.
• In another case, several asphalt machine operators were reported to have been employed at $15 an hour to build a parking lot -- but the lot was made of concrete, there were no asphalt operators, and the actual Davis-Bacon wage should have been $8 an hour.

In trying to investigate what appeared to be fraud, the Oklahoma Secretary of Labor was thwarted by union officials and contractors, stonewalled by federal labor officials and targeted by anonymous threats. Ultimately, she established that at least two of the inflated Oklahoma reports were filled out by union officials. Likely fraud examples have also surfaced in Ohio, Idaho, Colorado and Missouri.

The Oklahoma official who blew the whistle there calls Davis-Bacon a "welfare program" that is being used to "lie to federal officials and steal from taxpayers." She wants to see the program abolished. President Clinton has promised to veto any repeal effort.

Source: Editorial "Maximized Wages," Wall Street Journal, April 29, 1996.