It is ironic and very tragic that just as the passage of President Donald Trump’s big, beautiful bill was to be timed with Independence Day, a horrendous flash flood devastated Texas. As of 17th July, Governor Greg Abbott has stated that the death toll state wide has risen to 135, the bulk in Kerr County. The estimate of those missing is now about a hundred. The floods have greatly weakened the cause of the small government radicals and libertarians, earlier flying high. The Department of Government Efficiency (D.O.G.E.) under Musk had laid off hundreds of weather forecasters at the National Oceanic and Atmospheric Administration in late February.
Now Trump himself has back tracked from his goal of dismantling the Federal Emergency Management Administration before reconstituting it into smaller State and local level units, as his Administration had planned. As of now, the Administration’s goals and actions to drastically eliminate or cut spending and jobs/ in vital agencies are bound to soften. Even before the calamity hit, the boldly stated intentions to reduce the debt were clearly failing. Despite huge, sweeping cuts in spending by DOGE under Musk, Trump’s hikes in military spending and lowering of taxes have instead both raised the debt hugely. That prompted Musk, who had quit D.O.G.E. in end May to call the Bill a “disgusting abomination.”
To understand why the planned deficit and debt reduction failed, it is instructive to revisit the nineteen eighties and nineties, when similar efforts failed. The decade of the eighties was a watershed one in both America and Britain. Under Ronald Reagan and Margaret Thatcher, advised by Milton Friedman and Friedrich von Hayek, a drastically new economic era had started in 1980, and which then spread across the world. That era was a response to the stagflation – both high inflation and high unemployment – of the seventies.
In 1979 Milton Friedman first published Free to Choose, a collection of essays advocating pro market policies, co-authored with his wife economist Rose Friedman. That book, comprising ten chapters, was made in conjunction with a video series and has been translated into umpteen languages. It contains a one- and-a-half page Appendix B, dated 30th January 1979, which is titled A Proposed Constitutional Amendment to Limit Government Spending. It was prepared by the Federal Amendment Drafting Committee and convened by the National Tax Limitation Committee. Its first proviso was that the percent rise in total outlays in any calendar year should be capped so as to prevent a rise in the spending to GNP ratio.
Elected as President in November 1979 by a huge majority, staunch Republican Ronald Reagan had somewhat tried to implement a fiscal reduction along these lines. That was part of a three-pronged strategy (deregulation of various sectors from airlines to financial services, reduction of inflation that had started earlier under President Carter, and third government spending and fiscal deficit reduction) to get the “government off the backs of the people” in his words. Across the Atlantic, Margaret Thatcher was proceeding along similar lines.
While deregulation and reduction of inflation was achieved, the third goal of spending and fiscal deficit reduction was not. It is not possible to discuss the specifics of the Gramm Rudman Hollings Act and related legislation. In the early 1980s, both tax cuts and the recession due to the Federal Reserve’s disinflation program steeply lowered tax collections.
But by the end of decade, the economy by then had returned to its normal ‘full employment’ level. However in 1989, outlays at 20.6% of GDP were 1 percentage point higher, and the deficit too. Thus, excluding the one point rise in defense spending, outlays were the same as in 1979 when Reagan was elected. The goals of lower spending and deficits were not met.
In the 1990s, under President Bill Clinton from 1992 to 2000, notable deficit reduction took place, with a miraculous surplus of over 1 percent of GDP by decade end. This improvement occurred both through a rise in taxes during a long boom, and a reduction in defense spending due to the end of the Cold War.
Nevertheless, Republican attempts for a much bigger reduction, pushed by Senator Newt Gingrich a former professor from Georgia and Speaker of the House, failed. During mid-November 1995, about eight lakh government employees deemed inessential were furloughed, but only for five days. Another partial shutdown occurred from mid December 1995 to early January but was again rescinded, as per a Congressional Research Service study (Clinton T. Brass, February 2011). Moderate Republicans realized that alienating their voters by laying off Government workers was likely to result in losing their Congressional seats. Libertarians like Musk and Vivek Ramaswamy need to think more about past fiscal episodes.
In my opinion, a politically feasible way to reduce spending on government wages is by work sharing based on six month contracts. (Transfer payments – Social Security, Medicare and Medicaid, and various other welfare payments are a separate matter). What are deemed to be inessential jobs turn out to be essential in a rare crisis – from firefighters to flood rescue workers to para medics and nurses and, most recently, weather forecasters. Completely shutting down small departments is a risk. Keeping them going keeps their skills intact.
Rather than shut down some departments, or downsize their staff, what needs to be seriously considered is to reduce everybody’s work by half and wage income too. It is both humane and politically more feasible to do so than retain half and fire the other half. During crisis, those not working at the time constitute a reserve pool that can be drawn upon as needed.
The economics profession in general, and American macroeconomists in particular, have badly failed to acknowledge, let alone analyse the scope for reducing labor input and wage income by shorter hours and work sharing policies, instead of layoffs. What can be called The Great Inexcusable Macroeconomics Omission (Vivek Moorthy, livemint.com 27 July 2020) that goes back to the Depression needs to be highlighted and, hopefully, rectified.
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