The Magazine

The Sharp Pencil Test

Time for a real growth agenda

Jun 13, 2011, Vol. 16, No. 37 • By LAWRENCE B. LINDSEY
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Ideally Congress would have started over and designed a workable program, but it did not. Secretary of Health and Human Services Kathleen Sebelius has been trying to stitch the unworkable result together by granting waivers—1,400 of them already—to such Mom and Pop businesses as McDonald’s to stop them from dropping their health benefits. A joint study by the departments of Labor, Treasury, and Health and Human Services found that a majority of private sector health plans would not comply with the rules HHS was drafting. When firms face a choice between complying with these regulations and putting their workers on the public plan at a fraction of the cost, the whole budgetary house of cards will collapse.

But there is no room for partisan smugness. A number of Bush administration ideas also fail the Sharp Pencil Test. Ethanol subsidies cost far more than any rational computation would justify. There is no evidence that No Child Left Behind has significantly improved test scores, though it has prompted the dumbing-down of tests. And the bipartisan establishment’s immigration reform developed under Bush—making 11 million people citizens—is so obviously beyond the capacity of the already clogged Immigration and Naturalization Service as to fail the laugh test. (See my “Can Immigration Reform Work?” in the May 22, 2006, issue.)

But probably the hardest thing for Republicans to admit is that the nation-building part of the liberation of Iraq and Afghanistan has not been cost effective. One can easily make a case that deposing Saddam and the Taliban was a cost effective use of the nation’s resources. One cannot make the case that being there eight years later is. While nation-building is a nice idea, the trillion-dollar price tag for Iraq and Afghanistan is too high. President Obama’s decision to do regime change on the cheap in Libya is unlikely to prove any more successful than Secretary Rumsfeld’s effort to topple Saddam on a budget of $54 billion in 2003.

Each of the major components of federal spending requires a structural repair, and so does our tax policy. Currently the focus is on discretionary spending—which is scheduled to total about $16 trillion over the decade, about evenly divided between defense and non-defense. Obviously government wastes a lot of money in this category. We need to be candid about the fact that there are some things we simply cannot afford to do. These uneconomic programs range from dozens of low cost initiatives to some fairly grand ones. No, we do not need to subsidize National Public Radio, with its upscale audience and clear political bias. We may also have to take cost into consideration in deciding issues of grand strategy, such as our position in the Western Pacific and in the Arabian Gulf. But these discretionary items are only part of the problem, and they are growing slowly, roughly in line with the economy.

The real long-term budgetary problem is in the area of entitlements, especially programs that are scheduled to grow much faster than the economy—a mathematical impossibility in the long term. Each requires sharp pencil reforms that are structural in nature.

Start with Medicaid, our health care program for the poor. It will consume roughly $4.2 trillion over the decade but will more than double in cost over that time, setting us up for real problems in the 2020s. Here the structural problem is the “matching grant” approach, in which the federal government sets minimum, but highly complex, standards and then pays half the cost. States must meet the federal standards, but may exceed them. The result of that latter provision is that state politicians may raise spending but have to raise state taxes by only 50 cents on the dollar to pay for them. 

New York, which epitomizes what is wrong with Medicaid, has clever state politicians who go one better. They pass half of their share on to the counties, which must raise money from property taxes to cover it. This allows the politicians in Albany to claim credit for spending dollars of which they have to raise only 25 cents, while the Feds pick up 50 cents and the counties the other 25 cents. Guess what happened in New York? With just 6.2 percent of the nation’s population, and incomes somewhat above the national average, the state has 8.5 percent of Medicaid beneficiaries and consumes over 13 percent of all Medicaid spending. At one point a decade ago the governor’s mother was on Medicaid, along with one-fifth of New Yorkers. Is it safe to say that any program for the poor with the governor’s mother on its rolls has serious design flaws?

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