Econ 101: Budget Cuts

What criteria should guild when to cut some program’s budget? We must first get beyond the fact the any cut will result in having less of something. If it is inefficiency or corruption that we give up—good riddance. But usually, it will be something that has some value. That does not necessarily mean that the cut should not be made.

Consider this example from my in-tray today:

“The Trump administration has made drastic cuts to the National Oceanic and Atmospheric Administration (NOAA) that threaten to impact weather forecasting and other key services provided by the agency. 

In the wake of the wave of dismissals this week, lawmakers and former officials raised concerns about potential damage to services ranging from extreme weather responses to efforts to prevent objects from colliding in space.” “The Hill: Energy – Environment – NOAA cuts”

What should be considered when making such a decision is what other services were prevented by directing these resources to NOAA activities rather than alternative uses. Even if the government just increases it overall budget, the added taxes or borrowing will have alternative uses.

You will immediately understand the issue when you consider your own household budget. Your income is limited (unless you give up some leisure to work more hours). You might gain some pleasure spending more on X, but you can only do so by giving up some Y. If you benefit more from the extra X than you lose giving up Y, then you should do it. It passes the cost/benefit test of maximizing the benefit of your given income.  

In short, the fact that cutting the budget of some agency will cut some of its services is an incomplete argument for not cutting because if fails to take account of the rest of the cost/benefit assessment of the resulting reallocation of resources.

Such budget decisions are generally debated in Congress as it approves the government’s budget. It’s an imperfect process, like most of life, but it allows all views and pros and cons to be heard and considered. A body like Musk’s DOGE might be appropriate for evaluating the efficiency with which services are performed (perhaps proposing better information processing systems) and detecting corruption, but not for evaluating the desirability of such services themselves.

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Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon. I live in National Landing Va 22202

One thought on “Econ 101: Budget Cuts”

  1. As usual, you blather on about things beyond your mental capacity. When we have had multiple budget cruises where each part of the government was limited to only the essential staff the government still ran smoothly, albeit with less fat.

    If the US government reduced to the essential again plus a buffer of ten percent for holidays and vacations it would be more efficient and effective than it is now.

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