Boskin: The Time For Spending Cuts Is Now

See The Time for Spending Cuts Is Now: The White House argues that 'draconian' cuts will derail the economy. In fact, cuts are necessary to preserve tax rates that are compatible with economic growth. From the WSJ, 2-11-11, page A13. Excerpts:

"Yes, the president is calling for a freeze on nondefense discretionary spending (18% of the budget). But this would leave that spending more than 20% higher than already- elevated 2008 levels..."

"But government spending generally does little to boost the economy. Exhibit A is the failed 2009 stimulus bill, the president's American Recovery and Reinvestment Act (ARRA).

The strongest case for stimulus is increased military spending during recessions. But infrastructure spending, as the president proposes, is poorly designed for anti-recession job creation. As Harvard economist Edward Glaeser has shown, the ARRA's transportation spending was not directed to areas with the highest unemployment or the largest housing busts..."

"...Indeed, last September Wendy Greuel, the City of Los Angeles controller, shocked the country when she revealed that the $111 million in ARRA infrastructure money her city received created only 55 jobs—that's a whopping $2 million of federal stimulus per job created.

Why is this so? Modern, large-scale public infrastructure projects use heavy equipment and are less labor-intensive than they were historically (WPA workers digging ditches with shovels in the 1930s)."

"The nation certainly has public investment needs, but federal infrastructure spending should be based on rigorous national cost-benefit tests."

"Moreover, how will we pay for all this new spending? The CBO's 10-year projection sees the possibility of the debt-to-GDP ratio rising to an astounding 100%. Several recent studies (detailed on these pages in my "Why the Spending Stimulus Failed," Dec. 1, 2010) conclude that: 1) such high debt would severely damage growth, so fiscal consolidation is essential; 2) fiscal consolidation is likely to be far more effective on the spending than the tax side of the budget; and 3) substantially higher tax rates and spending cause permanent drops in income that are many times larger than the temporary fall caused by the recession."

"In the 1980s and '90s, federal spending was reduced by more than 5% of GDP to 18.4% in 2000—a level sufficient to balance the budget at full employment and allow for lower tax rates."

"I pointed out in 2007 that 42% of federal civilian workers were due to retire in the coming decade. Replacing half of them (with exceptions for national security and public safety) with technology could improve services and save hundreds of billions of dollars."

"Gradually move from wage to price indexing of initial Social Security benefits. This would eliminate the entire projected Social Security deficit without cutting anyone's benefits or raising anyone's taxes. Also, raise the retirement age over several decades..."