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Step one in getting federal spending under control?

Free-market economists have been warning both Democrats and Republicans for some time now — indeed, for decades — that government cannot simply continue its spending binge without paying a price.

With his Nov. 29 call for a pay freeze for civilian federal employees, is President Barack Obama catching on finally?

The growth in outlays slowed some in the 1990s, as defense spending was reduced. But then federal spending in all areas re-accelerated in the early and mid-2000s. With a long, severe recession starting in December 2007, obviously deepened by the credit/housing mess that hit the fan in late summer 2008, the federal government reacted with so-called stimulus efforts and bailouts. The expansion in outlays and debt has been unprecedented — by the way, and not surprisingly, with nothing positive to show for it in terms of the economy and jobs.

And don’t forget about still bigger government coming due to the phasing in of ObamaCare.

The president’s federal pay-freeze plan would cover two years. According to the White House, it would save $5 billion during 2011 and 2012. And given that future wage hikes would be based on a lower base, the administration claims savings of $28 billion over five years and topping $60 billion over 10 years.

Of course, this all needs to be put in perspective. According to the president’s own budget plan, federal outlays will increase from $3.5 trillion in fiscal year 2010 (which closed out at the end of September) to $4.4 trillion in 2015. That’s a 26 percent jump in five years. Compared to the pre-recession, pre-credit-mess $2.7 trillion spent in 2007, that’s a 63 percent increase.

And from 2011 to 2015, the federal government, according to the Obama budget, will spend more than $20 trillion.

As for the budget deficit, it was $161 billion in 2007. It topped $1.4 trillion in 2009, registered $1.3 trillion last year, and is expected to exceed $1.4 trillion again this year.

This does not sound like a president who is serious about reining in federal spending and debt. Indeed, it’s obviously just the opposite. Also, keep in mind that the president does not have the authority to freeze federal pay. It would require congressional approval.

If truly serious about reducing federal spending and deficits, much more is needed.

First, talk of increasing current taxes or imposing new levies must be put aside. Economic growth is needed to generate jobs and revenue for the government. Higher taxes will only serve as an additional drag on economic growth.

Second, all federal spending programs must be reconsidered. That means the absurd inside-the-Beltway distinction between “discretionary” and “mandatory” spending categories must be eliminated. Congress has the power of the purse-string and, therefore, has discretion over all spending.

A temporary pay freeze is not enough. The size of the federal workforce must be cut, along with compensation. In a July 2010 study, the Heritage Foundation reported: “Salaries and benefits—for identical jobs — are 30 percent to 40 percent higher in the federal government than in the private sector.” According to this analysis, if the federal government merely aligned compensation with the private sector, taxpayers would save $47 billion in 2011 alone.

It’s also critical to pull the plug on ObamaCare before major aspects of the program take hold. The 10-year cost guess-timate of about $1 trillion is bad enough, but actual costs of government programs always wind up running far ahead of original projections.

In addition, everyone has long known that Medicaid, Medicare and Social Security must be reformed in order to rein in future spending growth. Yet, neither Democrats nor Republicans have done anything. When Republicans were running Congress and the White House in 2003, they actually created a new prescription drug entitlement under Medicare, adding to the program’s out-of-control costs.

Market forces must be injected into each of these programs. That means shifting much of Medicare and Medicaid to health care vouchers or health savings accounts to help individuals purchase coverage and services. And Social Security must be shifted at least in part to individual savings accounts, with the eligible age for any government benefits increased.

The focus of federal elected officials must shift away from finding new ways to spend taxpayer dollars to getting focused on how to cut federal expenditures. Are lawmakers capable of such a shift? A new Congress arriving in January will be put to the test.

— Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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