As I write this, it is difficult to know exactly what the federal budget deal entails, but I will hazard a bit of analysis, anyway.
It is clear that the agreement to raise the United States’ debt ceiling demands an immediate 2.5-percent budget cut in each of the next 10 years. This is to be followed by 4.3 percent in additional annual cuts to be determined by a blue ribbon commission over the next months. These cuts will come to military budgets, to entitlements and to the vast cornucopia of discretionary spending. How much each area is cut remains to be seen, but the economic consequences are better known.
First, the shrinking of America’s unseemly budget deficit should ease the worries of many. The most important audience for this confidence booster: employers. We often call these people investors, but really they are small-business owners, midsize plant managers and the like. The decision to hire more workers depends upon their belief not so much in economic recovery as in the future profitability of their particular business. Higher taxes might be fashionable among those who think the rich are undeservedly so, but they are unwelcome among those doing the hiring. We need a long spell of more hiring before we tackle the supposed evils of wealth.
Second, any budget cut will include defense. Some of these cuts can come from the modest peace dividend that will result from fewer forces in Iraq and Afghanistan, but most of the reduction will have to include deferred acquisition of new weapons systems and less frequent replacement and repair of existing equipment. The military will train less and in less realistic (and therefore less costly) conditions. We will close some installations at home and abroad. We will ask service members to contribute more to their health care and will provide them less attractive housing. This is an unpleasant and sobering reality.
Cuts to domestic programs will be more modest and nothing like the long-term reforms that changing demographics ultimately will foist upon us. Reimbursement to health care providers for Medicaid and Medicare will decline. This will clobber doctors, hospitals and other health care providers. Social-service expenditures will shrink. We will cut infrastructure investments in roads, public transit, sewer and water upgrades and the like. All of this will be done slowly. That is critical because, unlike removing a bandage from a scraped knee, government spending cuts do not hurt less when done quickly.
Like many Americans, I am troubled by the scope and scale of a federal government that does too many things too poorly. Remedying this would help remind many of the great and wondrous nature of American government and perhaps prompt more of us to remember that our government is an institution to be loved and nurtured, not vilified and despised. Though it is imperfect, this budget agreement begins in earnest the lengthy effort to focus government, balance the budget and shrink the debt.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at [email protected]