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Now that we have had time to celebrate our first, major victory over the tax hikers, it is time to set focus on the next big challenge: to turn our state away from steadily growing government, and begin the work to permanently reduce its size.
Making government smaller is a much more complex task than to stop tax increases. Yet it is the only way we can prevent a new fight over higher taxes a year from now; if we stop now, or if we go about this the wrong way, we are going to be right back at square one a year from now.
The only difference is that the November election will be over, and we may or may not have a governor and more legislators who like to grow government.
If, on the other hand, we start now, and get this right from day one, we will change the political narrative for years to come. Tax hikes will be off the table for the foreseeable future (except for a small fringe on the far left) and the outcome can be a Wyoming that leads - not trails - the nation in growth in jobs, income and investments.
Yesterday I explained the four principles that must guide all spending reforms:
1. Don't leave the poor behind;
2. Reforms must be permanent;
3. Prioritize; and
4. Don't punt.
Whatever major reforms we pursue, we should follow these principles to get them right where they need to go. However, this type of structural spending reforms is only one component of a bigger strategy for limiting government. We need three other types of reforms to permanently reduce the size and cost of our government - and to be able to secure the essential functions of government.
This last point, falling under the third principle above, is hugely important. If we do not create a fiscally sustainable government, when we go over the fiscal cliff all government functions are going to suffer. Panic-driven spending cuts will hit law enforcement as badly as it will hit schools, health care and infrastructure.
It is only with a fiscally sustainable government that we can secure the essential functions of government.
Now for the three reforms that we need to accompany structural spending cuts.
First, we need a complete transparency and efficiency overhaul of our state and local governments. Many have mentioned the Alvarez-Marsal report and its suggestion of $200 million in cost reductions. Some have suggested that since the report only covers one third of the state government, arithmetic dictates that the real savings would approach $600 million.
I would caution against such conclusions. Not all government functions are as inefficient, and not all are as prone to efficiency reform. Nevertheless, we can safely assume that the real efficiency savings are somewhere in the $200-600 million range, which in itself is a fair amount of money. But the real problem is not to estimate the cost savings, although we should thank Alvarez and Marsal for a valuable report. No, the real problem is to use these savings wisely.
It has been suggested that an efficiency reform is all we need to save our state government and close the budget gap. We would, it has been suggested, not have to shut down a single government program. Unfortunately, this is not true: even though government will be leaner when, e.g., it has a smaller supervisor-to-employee ratio, the variables that actually drive government spending are still in place. Those variables are the entitlements that government provides. Two examples:
--In education, there are quality requirements such as student-to-teacher ratios, education standards for teachers, frequency standards for updates of class literature, computer software and hardware, library content, buildings and other equipment;
--In health care - think Medicaid - health service standards dictate accessibility, technological standards of health care provided; certain access to pharmaceutical products; skills and competence requirements among medical professionals.
These variables do not change when we make operations more efficient. In other words, we should not mistake a one-time reduction in the costs of operating government for a permanent change in the growth trajectory of government spending.
With that said, it is still necessary that we carry out transparency and efficiency reforms. They will help us reach two important goals: the one-time reduction in government costs is a "down payment" on coming spending reforms, giving us more time to execute structural spending cuts; and they will substantially change the narrative about government.
The latter point is at least as important as the former. Today, conventional wisdom is that government will always be able to pay for itself and that there are no incentives to be efficient with taxpayers' money. A transparency and efficiency reform will replace that mentality with one of frugality and unending responsibility with appropriations. (I doubt our school districts will be buying any more Suburbans.)
Secondly, and simultaneously with transparency and efficiency reform, we need a reform to rein in overall state spending. As things are now, our legislators can use whatever money they come up with and continue to spend even in tough economic times.
A spending cap measure can take several different forms, and it is important that we discuss them at length. For now, let us note that the most important feature of a spending cap measure is that it combines two seemingly incompatible functions: to cap spending and to avoid harmful, panic-driven cuts in recessions. This can be done - I will explain in detail in a later article - but it requires some crafting that goes beyond what standard TABOR mechanisms provide.
A spending cap must also secure that permanent spending is funded with permanent revenue, and only permanent revenue. This is to eliminate frivolous use of all sorts of discretionary revenue to plug holes in the budget; this habit is partly responsible for why we, today, find ourselves in such a serious budgetary predicament.
A well-designed spending cap will help us put much needed sideboards on our state budget, especially during the time we design, pass and implement structural spending reforms. Otherwise, we run the risk that government spending increases just to "ratchet up" the budget base. This would leave a larger government in place after the reforms, or raise the cost of reforms to a point where they become politically unpalatable. A spending cap can prevent this from happening.
Again, I will return to this issue specifically in a later article. It requires quite a bit of reasoning. In the meantime, you can check out my crash course in government budget basics.
Third, our state is in bad need of regulatory reform, or as Harriet Hageman calls it, a "regulatory renovation" plan. Some estimates suggest that just federal regulations cost our country north of $2 trillion per year, which is half of the cost of the federal government. That ratio suggests that, at the microeconomic level, businesses and families on average lose 50 cents to regulations for every $1 they pay in taxes.
In other words, deregulation done right can unleash a lot of economic resources. Furthermore, a sound deregulation strategy will be a permanent boost to our economy - once a regulation is gone, it is gone (unless, of course, we are stupid enough to elect a bunch of statists again...) and the economic wiggle room opened by its demise will have a long term positive effect on our economy.
Deregulation will help boost economic growth, and thereby provide a stronger tax base. Thereby it will help us reform both the spending side and the revenue side of our government budgets, state and local. However, just as with transparency and efficiency: deregulation is not the sword that will cut the Gordian knot. It is one of several tools, all equally necessary in our pursuit of a fiscally sustainable government.
To sum up, then: in order to permanently reduce the size and cost of our government, we must
- Implement transparency and efficiency reforms;
- Put in place a spending cap mechanism on the state budget; and
- Complete a regulatory renovation of our state.
We need to start all these reforms in this legislative session. We will not complete any of them in a year, even two, but the sooner we start, the better our position will be to take on the really big elephant: structural spending cuts.