It’s not that often we get to praise the Obama administration, so when we get a chance we take it—which is what we’re doing here … sort of.
Anyone who knows Washington knows there is a fundamental flaw in the budget process. If an agency or department doesn’t spend all of its budget, the excess funds go back to the federal government.
Moreover, that agency may see its future budget cut by a similar amount, as the money gets redirected in the next budget cycle to the squeakier wheels. So agencies, reacting to the established economic incentives, routinely find ways to spend their allotments, whether they really need the funds or not.
Back in the 1990s, stories emerged that one of the defense department agencies found it had some $900,000 left at the end of the year and wasted it all on magazine subscriptions. That problem was fixed; the Pentagon can now shift leftover dollars around to other agencies.
The White House is proposing a similar measure for the rest of the federal government. Departments that don’t spend all of their funds would be able to redirect up to half of the excess to other departments. The rest would go back to the budget for deficit reduction.
White House officials think the change might save $25 billion, which it laments isn’t big. Of course, old-timers may recall when Washington considered $25 billion a lot of money—like back in 2008.
But if the government really wants federal employees to cut back on spending, then it needs to create the right economic incentives by letting employees benefit from those reductions—personally.
If money is left over at year’s end, let the employees who had a hand (broadly construed) in controlling costs get a bonus from the leftover funds, with the rest going to deficit reduction.
The bonus can’t be so big that it becomes detrimental or corrupting—i.e., people refusing to spend needed funds just to get a bigger bonus. But it should be big enough so that employees make rational economic tradeoffs.
Of course, the best approach for reducing the budget deficit is greatly reduced spending. This approach simply recognizes economist Gerald Musgrave’s Iron Law of Economics: if you want people to economize, then the economizer must benefit from the economizing.