To Cut Government, US Must Shift Focus

THE United States should shift the focus of economic policy.

Of course, the macroeconomic tools of monetary and fiscal policy are important. Tax changes, shifts in the level of government expenditures, and alterations in the pace of monetary expansion can help achieve an appropriate economic environment. But there is another group of policy instruments that can make macro policies work better. Ultimately, they are more powerful in their effect on economic performance.

This other category consists of ``microeconomic'' mechanisms that focus on the competitive marketplace and the role of individual enterprises, investors, managers, and workers. In responding to public dissatisfaction with government, political leaders should deal with these microeconomic considerations in fashioning budget cuts, tax reforms, and overhauling regulation. It is not just a matter of reducing the level of the budget. This is the time to root out those outlays that make for a less-productive economy.

Eliminating subsidies is a good example of economically desirable budget cuts. I would start with subsidies to business. These include assistance to the maritime industry, defense conversion programs, and a host of credit subsidies. We should then turn to the biggest subsidy, which is to the agriculture sector.

We also shouldn't overlook the Labor Department. An attractive candidate for the budgetary ax is the Davis-Bacon Act, which artificially pushes up the cost of the nation's infrastructure.

The conventional budget strategy of searching for marginal reductions bureau by bureau will not suffice. The serious budget cutter must question the existence of entire programs and agencies, using tools such as benefit/cost analysis.

Consider the food stamp program. Supporters of the program object to including such ``income in kind'' when measuring the number of people in poverty. They argue that the stamps aren't worth their face value in cash. One scholarly proponent suggests that, if such items are included in measuring poverty, they should be discounted by 20 percent or even 40 percent. There we have a neat benefit/cost analysis: $1 of costs generates only 60 or 80 cents of benefits. The food stamp program clearly flunks the test.

The Interstate Commerce Commission is another agency that could not pass the benefit/cost hurdle. It is virtually all cost and no benefit. Its elimination would simultaneously reduce government spending and advance regulatory reform.

TURNING to tax policy, because the US is a low-saving, low-investing economy, any revision of the Internal Revenue Code should also promote saving and investment. The savings-exempt income tax advocated by Sens. Sam Nunn (D) and Pete Domenici (R) fills the bill. Adopting this type of tax reform would generate more saving, more investment, and a faster-growing economy - and, hence, a rising tax base.

Truly reforming government regulation means more than improving the way regulatory agencies carry out their tasks. Policymakers need to focus on the birth stage of the rulemaking process. The crucial action occurs when Congress enacts an 800-page Clean Air Act with an almost endless array of requirements. No amount of executive branch analysis can deal with that problem. Congress must carefully weigh the results of benefit/cost analysis before it regulates.

A word of warning: Criticizing any environmental or workplace regulation sets you up for being attacked as a green-eyeshade type who cares about neither the environment nor people. That threat deters many potential critics who have to live with government regulation every day. But one of the joys of being a professor is you can profess.

Congress should evaluate each major item of spending, taxing, and regulating in terms of its economic effectiveness - and ``act'' on that information. Such action would reform the battered public sector and enhance the performance of the US economy.