How to Slash the State

14 ways to dismantle a monstrous government, one program at a time

Like sequels to Saw, the government just keeps coming, growing larger, more expensive, and more appalling each year. In times of economic distress, even at the increasing risk of default, the size, scope, and cost of federal, state, and local governments continue to balloon, swallowing everything in their path. For 10 solid years, and especially since September 2008, spending has boomed, the Federal Register has exploded, and Congress altered American life at an accelerating pace. 

Yet loud critics of big government—especially but not only Republican politicians—are often reduced to an awkward stammer when put on the spot by the all-important question, “So what would you cut?” Well, stammer no more. 

Consider the following a Halloween-themed cheat sheet for explaining who, what, where, when, and why whole swaths of government need to be cut or euthanized outright, so that taxpayer money is spent more productively, the remaining government services perform better, and the United States can finally begin its long slow climb toward solvency. 

We’ve asked analysts from the nation’s capital and around the world to offer tips and tricks for fighting off the cold, cold monster that is the state. The suggestions below are intended not as a last word but as a starting point: As in any good slasher movie, the savvy viewer will soon see potential victims everywhere. 

Overhaul Medicaid

Imagine a government-run health care program that limits medical access for millions of patients, is racked by uncontrollably rising costs, and in many instances produces health outcomes demonstrably worse than having no insurance at all. The program exists, and it’s called Medicaid.

Created to provide aid to the country’s poorest and sickest individuals, the joint federal-state program was initially intended as a low-cost bulwark against further government intervention in the health care system. In 1965, its first year in operation, the program cost about $9 billion in inflation-adjusted dollars. But instead of heading off further government intervention, it became the vehicle for much of the government’s expansion into the health care sector. Between 1970 and 2000, the program grew from $29 billion to $250 billion in 2010 dollars.

This year the Department of Health and Human Services expects the total cost of Medicaid to top half a trillion dollars. And according to the National Association of State Budget Officers, it will account for more than 20 percent of total state spending. Medicaid outspends all other welfare programs combined, and, if not for the Medicare prescription drug benefit, it would already be more expensive than any other entitlement.

What do we get for all that money? Not much. Recent studies at the University of Virginia, the University of Pennsylvania, and Columbia University and Cornell indicate that in cases involving colon cancer, vascular disease, and several other maladies, Medicaid’s health outcomes are frequently worse or no better than the outcomes for individuals who lack health insurance entirely.  Yet 46 million Americans are enrolled in the program—a figure that is projected to increase by 16 million over the next decade, thanks to ObamaCare.

Shuttering the program remains politically infeasible, and ObamaCare’s reliance on Medicaid to expand health coverage has dimmed the prospects for reform. But states could opt out of the technically voluntary program, and the rapidly deteriorating fiscal outlook of both Medicaid and the country means an overhaul may become necessary long before politicians build up the courage to tackle it. 

The first step is to stop the matching grant funding process, in which states receive federal money for each Medicaid dollar they spend—creating an incentive for ever greater spending. Instead, the program should be funded by federal block grants indexed to the rising cost of health care. Better yet, scrap the program entirely in favor of a temporary assistance program that doesn’t create long-term dependency. That may sound radical, but the alternative is to perpetuate the ugly and unsustainable status quo, in which we devote ever more resources to a program that fails both taxpayers and patients.—Peter Suderman

Bring the Troops Home

You can’t make a serious dent in government spending without tackling the military budget. And the quickest way to reduce Pentagon spending is to end, as fast as physically possible, our ongoing occupations of Iraq and Afghanistan.

So far those two wars have cost well over $1 trillion—on par with this year’s federal budget deficit—almost all of it spent through off-budget, fiscally reckless “emergency” supplemental bills that smuggled in all sorts of nonemergency weapons pork and social programs. And if the wars had never been fought we could have saved something more precious than taxpayer money—tens of thousands of human lives.

We don’t know how long the wars will last if we don’t withdraw now, so we can’t say for sure how much a swift and total deoccupation would save. President Barack Obama has promised a wind-down in Iraq that would reduce troop levels to 50,000 by 2011 and zero by 2012, but there are already signs the timetable will be pushed back. If Obama lived up to his plans, Brookings Institution analyst Michael O’Hanlon reckons, they probably would save “$50 billion to $70 billion in fiscal 2011 and perhaps $80 billion to $100 billion a year in 2012 and beyond.”

According to the government’s back-of-the-envelope numbers, deploying one warrior for one year costs about $1 million. Congressional Budget Office projections for the 2012–2020 costs of both wars range from $274 billion to $588 billion—and both estimates assume we will be winding down troop numbers significantly, which may or may not happen.

Even if we stop the wars now, the expense won’t stop. As National Bureau of Economic Research economist Ryan Edwards noted in a July study, “Historically, the peaks in total benefits [paid to war veterans] have lagged the end of hostilities by 30 years or more, meaning the maximum effect on annual budgets…might not be felt until 2040.” It’s too late to do anything about that for our thousands of already wounded vets and their families. Given the dubious benefits and indisputable costs of these continuing occupations, we should immediately stop adding to their ranks. —Brian Doherty

Erase Federal Education Spending

In August the Obama administration gave the states a $10 billion bailout to save teachers’ jobs —even though the Bureau of Labor Statistics indicates that teachers aren’t losing them. After 30 months of recession, local education employment has suffered less than a 1 percent decline. In fact, education hires rose in 21 states between 2009 and 2010. By contrast, the private sector saw a 6.8 percent decline in employment.

In addition, the president has proposed a $78 billion education budget for 2011, a whopping $18.6 billion more than in 2010. Federal education spending has increased by close to 80 percent in real terms since 2001, but test scores in reading and math among 17-year-olds have been flat since 1971, according to the National Assessment of Education Progress.

Politicians have talked for a long time about eliminating the Department of Education. While this remains an excellent idea, there is plenty of low-hanging fruit that can be plucked immediately.

The feds’ largest education program, Title I, which costs $16 billion a year, has failed to come anywhere close to its goal of helping disadvantaged kids in high-poverty schools close the achievement gap. Head Start, at $8 billion annually, duplicates many other federal, state, and local early education programs without adding to their effectiveness; a January 2010 gold-standard study by the Department of Health and Human Services found that by first grade not one of more than 114 academic and behavioral tests indicated a reliable, statistically significant effect from participating in Head Start. The $1.2 billion in funding for 21st Century Community Learning Centers that provide after-school care should be eliminated too. There are many duplicative after-school programs, and these are not a high priority to improve educational achievement.

The $2 billion for various “adult education” programs should also be cut. Community colleges can serve adult education needs and are already funded through Pell grants and federal student loans.

These are just a few examples; the federal education budget is full of cuttable programs. If eliminating the entire Department of Education is politically impossible, then the programs with the most tenuous relationships to raising student achievement need to be the first to go.—Lisa Snell

Slash State Budgets

As usual, governments have been slower to adjust to harsh economic realities than the rest of us. The private sector shed nearly 8.5 million jobs during the recession, while governments at all levels actually added more than 100,000 employees, as of December 2009. This growth ensures that state governments will be struggling to balance budgets long after any private-sector recovery is under way. And it means that they will continue to come begging to the federal government—and their own taxpayers—to cover the shortfall.

In a July report, the National Conference of State Legislators determined that the states face a collective budget gap of $84 billion for fiscal year 2011, with 24 states reporting deficits of at least 10 percent of their general fund budgets. In a June report, the National Governors Association and the National Association of State Budget Officers estimated that the cumulative state budget deficits for fiscal years 2009 through 2012 would be $297 billion. Only $169 billion of that sum has been processed to date, leaving at least $128 billion in deficits that must be tackled over the next couple of years. Yet despite a decline in federal stimulus funds and continued lagging revenues, governors’ recommended budgets for fiscal year 2011 forecast a 3.6 percent increase in general fund expenditures.

States blame the recession for their fiscal problems, and the economy certainly did not help matters, either in tax revenues or in demand for services. But the correction merely revealed that lawmakers have been living way beyond their means for far too long. 

One useful metric of good fiscal stewardship is the comparison of spending growth to the increase in population plus the increase in the cost of living, as measured by the Consumer Price Index. During the comparative good times of 2000 to 2008 (the most recent date for which the necessary numbers are available), the national population increased 8 percent and CPI inflation rose 25 percent, for a baseline spending-growth number of 33 percent. Yet actual combined state spending skyrocketed 60 percent. Bringing annual spending increases down to the rate of inflation plus population growth is a minimal first step, although that probably will be impossible without defusing the public pension bomb.—Adam B. Summers

End Defined-Benefit Pensions

The funding shortfall of public employee pensions at the state and local level exceeds $500 billion. Annual pension contribution costs have grown exponentially in the last decade from coast to coast. There is a simple way out of this government-manufactured mess: bankruptcy. As the city of Vallejo, California, discovered in 2009, bankruptcy protection can provide an avenue for governments to renege on their crushing pension commitments.

Unfortunately, the bankruptcy option is available only to cities and counties, not states or the federal government. And public employee unions in California and elsewhere are working time-and-a-half to change bankruptcy laws to stop future Vallejos from declaring insolvency, or at least to rig the settlement terms to labor’s benefit.

So what are the realistic solutions? California gubernatorial candidate Meg Whitman has a good idea: end defined-benefit contributions—in which taxpayers, rather than the employees, fund retirement plans—for all new government hires. Instead, public servants of the future should be put into 401(k) plans like the rest of us, with responsibility to contribute to and manage their own retirement nest eggs.

What about existing employees? The payouts contractually promised to employees at the time of hiring are devilishly hard to roll back. But there is wiggle room at the front end, with the option of requiring public workers to fund more of their own accounts. This doesn’t get governments to parity with the private sector, where defined-benefit plans are all but extinct. But it takes some of the immediate pressure off taxpayers. As the American people grow increasingly angry at gilded public-sector compensation, California Gov. Arnold Schwarzenegger succeeded in getting a handful of unions to accept increases in the percentage that employees contribute to their own plans, and similar proposals are gaining a foothold around the country.

Neither of these solutions will solve the looming shortfall, which ultimately will be filled in with taxpayer bucks. But they are steps toward bringing the era of defined-benefit pensions to an end.—Tim Cavanaugh

Declare Defeat in the Drug War 

As Sting recently observed, channeling John Stuart Mill, the war on drugs by its very nature tramples on “the right to sovereignty over one’s own mind and body.” It also squanders taxpayer money while causing far more harm than it prevents. 

To enforce drug prohibition, state and federal agencies spend more than $40 billion and make 1.7 million arrests every year. This effort wastes resources that could be used to fight predatory crime. But the direct taxpayer costs are only part of the story. While imprisoned (as half a million of them currently are), drug offenders cannot earn money or care for their families, which boosts child welfare costs. After they are released, they earn less than they otherwise could have—roughly $100,000 less over the course of their working lives, according to Harvard sociologist Bruce Western. These losses add billions more to the annual drug war tab.

The Office of National Drug Control Policy estimated that Americans spent $65 billion on illegal drugs in 2000, the equivalent of more than $80 billion today. Comparisons between legal and illegal drugs suggest that as much as 90 percent of that spending is attributable to prohibition’s impact on drug prices, meaning that legalization would make tens of billions of dollars available for other purposes each year. Some of those savings probably would be sucked up by drug taxes, which Harvard economist Jeffrey Miron estimates could generate nearly $50 billion a year in government revenue.

Lower prices also would dramatically reduce the incentive for heavy users to finance their habits through theft. In a 1991 survey, 10 percent of federal prisoners and 17 percent of state prisoners reported committing such crimes. Since stolen goods are sold at a steep discount, the value of the property taken to pay for drugs is several times higher than the artificially inflated cost of drugs. 

Other problems associated with prohibition are harder to quantify in dollars, including official corruption, the erosion of Fourth Amendment rights and other civil liberties, interference with religious rituals and medical practice, terrorism subsidized by drug profits, deaths and injuries from tainted or unexpectedly strong drugs, and the prohibition-related violence that has claimed 28,000 lives in Mexico since 2006. The pervasive demands of the futile crusade against an arbitrarily selected set of intoxicants have made all of us, whatever our taste in psychoactive substances, less free, less wealthy, and less safe.—Jacob Sullum

Cancel the Federal Communications Commission

The Federal Communications Commission (FCC) oversees everything from TV and radio to wireless phones and Internet connections. But none of these tasks is a core government function. From regulating speech to subsidizing broadband, just about everything the FCC does is either onerous, constitutionally dubious, ineffective, or all three.

Take its role as broadcast censor: Under a policy that was recently overturned by a federal appeals court, the agency has spent decades enforcing an arbitrary, inscrutable code governing what speech and images are acceptable on the public airwaves. Are four-letter words forbidden or not? Which ones? And when? What about breasts or bottoms, or lower backs? Does it matter if the context is medical, accidental, or unattractive?

The FCC’s answer to all of those questions is yes, no, maybe, or all three, depending on whether the words and pictures in question meet its definition of “indecency.” But that test is performed using guidelines that are clear as mud: “An average person, applying contemporary community standards, must find that the material as a whole appeals to the prurient interest.” Naturally, judgments about who counts as an average person and what constitutes a “contemporary community standard” are left entirely to the commission’s whim.

Yet the FCC is bent on expanding its reach whenever and wherever possible. The agency’s recent actions include investigating the approval process Apple uses for its iPhone App Store, mulling whether and how phone companies might upgrade their networks, and passing regulatory judgment on various consumer devices of minimal importance. Many of its recent efforts have been focused on finding ways to regulate Internet traffic.

When the FCC was launched in 1934, backers argued that its existence was justified by airwave scarcity. In an age of information overload, with a wide array of media choices available to anyone with a mobile phone or broadband connection, no such argument can credibly be made. Yet rather than shrinking, the agency has ballooned, growing its budget by more than 60 percent between 1999 and 2009 in nominal terms. To what end? And at what cost to the private sector?

In addition to the agency’s $338 million budget, a 2005 study by economist Jerry Ellig estimated FCC regulations hit consumers with up to $105 billion a year in additional costs and missed services. Rather than facilitate communications technology, the agency has made America’s consumer electronics offerings substantially more expensive.

The best alternative is a world in which spectrum is freely tradable private property rather than a government-managed resource, interference is treated as a tort, and no one worries about whether their next on-air word will result in a seven-figure fine—in other words, a world with no FCC at all.—Peter Suderman

Uproot Agriculture Subsidies

Farm subsidies and price supports offer something for people of all political stripes to hate. They distort markets and spark trade wars. They make food staples artificially expensive, while making high-fructose corn syrup—the bogeyman of crunchy parents, foodies, and obesity activists everywhere—artificially cheap. They give farmers incentives to tamper with land that would otherwise be forest or grassland. They encourage inefficient alternative energy programs by artificially lowering the price of corn ethanol compared to solar, wind, and other biomass options. School lunches are jammed full of agricultural surplus goods, interfering with efforts to improve the nutritional value (and simple appeal) of the meals devoured by the nation’s chubby public schoolers.

Enacted in the 1930s as temporary emergency measures in a time of scarcity, subsidies of such staple crops as corn, wheat, and soy have managed to survive into the current era of abundance. Congress hands about $20 billion a year in direct farm support payments to a small group of powerful agricultural companies, while American consumers and firms double that amount in inflated prices at the supermarket, restaurant table, and even at the gas pump.

Challenge agricultural subsidies on Capitol Hill, and you’ll get a song and dance about America’s endangered family farmers. But farm welfare goes overwhelmingly to large corporations. (Those cuddly fruit and vegetable growers at the farmer’s market are virtually all ineligible for federal aid.) Congress reauthorizes the farm bill every five or six years, so in 2013 there will be another chance to set this wrong right. The only people harmed by phasing out farm subsidies would be a few big agribusiness firms and a bunch of congressmen who rely on their campaign donations. The beneficiaries would be farmers in less developed countries—and pretty much everyone else who eats.—Katherine Mangu-Ward

Unplug the Department of Energy

On April 18, 1977, four months into his new administration, President Jimmy Carter delivered a somber speech in which he declared the “moral equivalent of war” on the “energy crisis.” The centerpiece of Carter’s energy policy was
the creation of a new Department of Energy (DOE), which would implement sweeping proposals to transform the way Americans produced and used energy. Just four months later, the new department, centralizing some 50 scattered federal energy agencies, was approved by Congress.

One of the chief functions of the department was to administer price controls on oil and natural gas. The DOE would also dispense billions of dollars in research and development subsidies aimed at jump-starting alternative energy technologies such as coal gasification and solar power. 

So what about the DOE today? In 2010 more than half of the department’s $26 billion budget ($16 billion) was devoted to managing the federal nuclear estate, which consists mostly of facilities that make and dispose of materials used for nuclear weapons. The next biggest chunk of DOE funding, $5 billion, is targeted at that old standby, energy R&D. But payoffs on government-supported research have not been impressive. Three previous programs costing a couple of billion dollars failed to produce automobiles that ran on electricity (1992), hydrogen (2003), or gas at three times the efficiency (1993).
And despite a total of $16 billion in subsidies over the years, solar electricity still costs between three and four times more than fossil fuel electricity. 

Federal energy price controls were mercifully lifted in the 1980s. But the DOE continues to perform tasks better left to other players. Cleaning up after nuclear weapons is costly and will
be necessary for a long time. Why not let the Pentagon handle that problem? Private-sector energy R&D is moribund because energy production and distribution is the most heavily regulated segment of our economy, but federal R&D subsidies have utterly failed as a substitute for competition and the lure of profits. If Congress and the White House must pursue the development of alternative energy via social engineering, a far more effective alternative to allowing DOE bureaucrats to pick technology “winners” would be a tax on conventional energy. The boost in energy prices would at least encourage inventors and entrepreneurs to get to work.

In 1982 President Ronald Reagan called for abolishing the DOE. The Republican congressional “revolutionaries” in 1994 promised to end it as well. As late as 1999, bills were introduced in the House and Senate to eliminate it. And yet the beast lives on. Thirty-three wasteful years after Carter’s speech, we’re still wasting energy (and money) on the Department of Energy. Enough is enough.—Ronald Bailey

Dismantle Davis-Bacon

For nearly 80 years, contractors working on federally funded construction projects have been forced to pay their workers artificially inflated wages that rip off American taxpayers while lining the pockets of organized labor. The culprit is the Davis-Bacon Act of 1931, which requires all workers on federal projects costing more than $2,000 to be paid the “prevailing wage,” which typically means the hourly rate set by local unions.

Davis-Bacon was born as a racist reaction to the presence of Southern black construction workers on a Long Island, New York, veterans hospital project. This “cheap” and “bootleg” labor was denounced by Rep. Robert L. Bacon (R-N.Y), who introduced the legislation. American Federation of Labor President William Green eagerly testified in support of the law before the U.S. Senate, claiming that “colored labor is being brought in to demoralize wage rates.” The result was that black workers, who were largely unskilled and therefore counted on being able to compete by working for lower wages, were essentially excluded from the upcoming New Deal construction spree.

The legislation hasn’t come cheap for taxpayers. According to 2008 research by economists at Suffolk University, Davis-Bacon has raised the construction wages on federal projects 22 percent above the market rate. James Sherk of the conservative Heritage Foundation estimates that repealing Davis-Bacon would save taxpayers $11.4 billion in 2010 alone. Simply suspending Davis-Bacon would allow contractors to hire 160,000 new workers at no additional cost, something that should appeal to a jobs-obsessed Congress and White House.

Yet the Obama administration extended Davis-Bacon via the American Recovery and Reinvestment of Act of 2009, also known as the stimulus. Asked to clarify how the old rules applied to the new money, the Department of Labor declared that Davis-Bacon now applies to all “projects funded directly by or assisted in whole or in part by and through the Federal Government.”

In other words, even projects that are only partially funded by the stimulus must obey these costly requirements. With the economy floundering, the last thing taxpayers need is a rule that makes construction projects cost even more.—Damon Root

Repeal the Stimulus

Government inefficiencies sometimes pop up in surprising places. For instance, in spending money quickly. You’d think Washington bureaucrats, of all people, could figure out how to inject $794 billion in stimulus money into the economy, but as of early September, 18 months after the stimulus was passed, an estimated $301 billion remained unspent.

That money should be banked, not wasted. While more than half of those funds are already promised to specific programs, they could be rescinded because the projects haven’t begun yet.

If you believe the administration’s stimulus tracking website, Recovery.gov, stimulus projects had created 749,142 jobs as of June 30. In related news, unemployment has increased 1.3 percentage points since the stimulus was signed into law, from 7.7 percent then to 9.5 percent in July 2010. If you include underemployed workers, the overall rate of unemployment a year and a half after the stimulus was 16.5 percent, compared to 14 percent before. And a year and a half after approval of a stimulus that was supposed to create or save 3 million jobs, the labor force had contracted by nearly 850,000 people—individuals who aren’t counted in the unemployment numbers because they have given up hope of finding work anytime soon.

The president attributes much of the nation’s GDP growth to the stimulus spending. But there is no objective evidence to back up his claims. The only way you can tweak the numbers to show a significant stimulus contribution would be to assume, not demonstrate, a very high multiplier—the amount of economic activity generated by each government dollar. That’s what the administration does, but more honest economists do not.

Less partisan analysis shows that deficit spending has crowded out private investment. Harvard economist Robert Barro recently estimated that the $794 billion stimulus will shrink private investment in the economy by $900 billion. Whatever local benefits stimulus spending has created have been negated by a contraction of private-sector growth elsewhere.

Not only has the government largely replaced what the private sector could have done, but investors are cutting back on expenditures as they prepare for increased taxes. Given Obama’s declared intention to end the tax cuts of 2001 and 2003, plus various increases woven into health care reform, investors are justified in their
fears.

But all is not lost. A quick, merciful end to the dysfunctional stimulus program could save as much as $300 billion, taking a sizable chunk out of the projected $1.5 trillion deficit.—Anthony Randazzo

Spend Highway Funds on Highways 

Congestion causes gridlock on urban expressways, costing an estimated $76 billion per year in wasted time and fuel. The 50-year-old Interstate highways are starting to wear out and will need reconstruction costing hundreds of billions of dollars. The funding shortfall just to maintain the Interstate Highway System at a decent level is $10 billion to $20 billion per year.

The federal Highway Trust Fund was created in 1956 with a promise that all proceeds from a new federal gasoline tax would be spent on building and maintaining the interstate highways. But Congress reneged on the deal. First it extended federal aid to all sorts of other roadways. Next it allocated 20 percent of those “highway user taxes” to urban transit. Today a quarter of the total is used for such nonhighway purposes, including sidewalks, bikeways, recreational trails, and transportation museums.

So the Highway Trust Fund is effectively broke, spending more than what comes in from gas tax revenues. To some, the remedy is a big increase in those taxes. But why not revive the original deal?

Libertarians typically reject any role for the federal government in highways, urging a complete devolution to the states and the private sector. But even if you agree that a seamless national superhighway network should be federal, lesser highways should all be the states’ problem. And sidewalks, transit, and bikeways, needless to say, are local issues.

Simply reviving the original users pay/users benefit principle of the Highway Trust Fund could save the money spent on central planners’ pet projects while still allowing the authorities to maintain the system’s infrastructure. Indeed, the current federal fuel tax would permit an additional $10 billion a year in interstate highway investment. Combined with the selective use of tolling and other forms of road pricing, this change could slash urban traffic congestion as well, unlocking billions of dollars in economic productivity.—Robert Poole

Privatize Public Lands

The U.S. Forest Service owns more than 156 million acres west of the Mississippi River—an area nearly the size of Texas—making it one of the largest landowners in the West. Letting the states manage this land instead would take up to $5 billion a year off the federal books. It would also devolve decisions about how to use the land to officials who are more accountable to local citizens, be they environmentalists or businessmen.

Deficit-riddled states are certainly in no position to purchase this land outright today, but a payback period of 25 to 30 years (as with a standard home mortgage) could make these deals feasible. Once in state hands, some land could be sold off or put to better uses, though there would still be political pressure to keep large portions of it undeveloped. And states could choose to partner with the private sector.

Private companies currently operate the commercial activities—lodges, shops, restaurants, and the like—in such treasured national parks as the Grand Canyon, Yosemite, and Yellowstone. Similarly, the Forest Service makes extensive use of concessionaires to operate and maintain complete parks and campgrounds more effectively and efficiently than government.

States could use this model to take on new park lands without absorbing them into their budget. One Forest Service contractor in Arizona recently offered to take over six state parks targeted for closure amid budget cuts. The concessionaire would collect the same visitor fees the state charges today while taking the operations and maintenance costs off the state’s books entirely. Further, the company would pay the state an annual “rent” based on a percentage of the fees collected, turning parks into a revenue generator instead of a money eater.

Devolving federal land to states could begin with pilot programs in select states to test the model and refine best practices. Once perfected, the process could be extended throughout the Forest Service and then replicated in the Bureau of Land Management, which owns roughly the same amount of Western land and costs taxpayers another $1.1 billion a year.—Leonard Gilroy

End (or at Least Audit) the Fed

At the height of his 2009 P.R. offensive against the audit-the-Fed bill sponsored by Rep. Ron Paul (R-Texas), Federal Reserve Bank Chairman Ben Bernanke warned that opening the Fed’s books would diminish the central bank’s political independence and “could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.”

The audit-the-Fed and end-the-Fed movements have lost some steam since that time, and the Federal Reserve Transparency Act of 2009, which has 320 House co-sponsors, died a quick, quiet procedural death in the Senate. But the chairman’s words are worth remembering—because if there’s one thing that needs raising, it’s fear about future inflation.

The Fed more than doubled the monetary base in 2009. The depth of the deflationary spiral (primarily in real estate), a continuing “liquidity trap,” and a novel policy in which the central bank has begun paying private banks interest on their reserves have so far kept all that new money from causing significant price inflation. But the massive infusion of cash has also failed in its ostensible purpose of jump-starting economic activity. By keeping its foot on the gas, the Fed is already blazing a path toward a repeat of its disastrous behavior after 2001, when the central bank responded to the deflated tech bubble by creating an even more destructive housing bubble.

The Fed is the biggest bastion of central planning in the American economy, and eliminating it would both move us toward a freer market and remove history’s most powerful enabler of government waste. If that’s politically impossible, auditing the Fed would at least peel away the bank’s veneer of inscrutable wizardry to reveal the feckless dithering at the heart of U.S. monetary policy.—Tim Cavanaugh

Lisa Snell, Adam B. Summers, Anthony Randazzo, Robert Poole, and Leonard Gilroy work for the Reason Foundation, the nonprofit 501(c)3 that publishes this magazine. Versions of some of these pieces were originally published in The Washington Times. This column first appeared at Reason.com.




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