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Thursday, December 14, 2023

¡AFUERA! Milei Leads the Way on Slashing Bureaucracy

Why slashing bureaucracies is a necessary first step.

Image Credit: Todo Noticias via Wikimedia | CC BY 3.0

Promises made; promises kept. On president Javier Milei’s first day in office, he made the best move he could’ve made.

Milei signed an executive order cutting the number of Argentinian government ministries from 18 (or 21 depending on how you count) down to nine.

The immediate proposal consolidates these ministries into a single ministry. The long-term number of bureaucratic jobs eliminated is unknown at this point, but the move signals the beginning of a large change. Recent updates also have given some specifics about what jobs will be cut.

Among the cut ministries are:

  • Science and Technology
  • Education
  • Culture
  • Environment
  • Social Development

Milei’s massive cuts to the national bureaucracy are the first in recent history and arrive at a time when calls for similar moves are gaining traction in the US.

Cuts aimed at permanent government employees have made their way onto the Republican debate stage: candidate Vivek Ramaswamy has proposed cutting the number of federal employees by 75% by using a random system of firing by Social Security number.

Former Trump advisor Steve Bannon has proposed a similar vision in his call to deconstruct the administrative state. Outlets have reported that Trump’s second term would involve reclassifying a large portion of federal employees as at-will to make them easier to fire. He claims to want to use this executive order to punish “rogue bureaucrats.”

While the rhetoric of firing government employees and cutting the bureaucracy is jarring compared to recent history, it isn’t completely unique. Over the last few decades, many Republicans, famously including Ronald Reagan, ran on abolishing the Department of Education. Of course, in Reagan’s case, the promise was never carried out, despite his ability to do so.

Despite lip service by those on the right, the federal bureaucracies in the US have grown ceaselessly over the past few decades. Unsurprisingly, no real progress has been made in shrinking the government’s spending.

In my view, if politicians in the US want to make an actual dent in the size of government, they need to follow Milei’s lead.

Given Milei’s goal of radically cutting the size of government, this was precisely the right move. While some might think cutting taxes or changing currency rules should be the first directive of any “libertarian leader,” Milei’s first priority makes sense for several reasons we can see using economic logic. Let’s consider a few of these reasons.

Rule 1: Spending Cuts Must Happen for Sustained Tax Cuts

Milei’s strategy of cutting government spending before tax cuts is important because tax cuts past some point cannot survive without attendant spending cuts.

To understand why, consider a simple equation. The money used for government spending must come from three sources: tax revenues, currency printing/debasement, and borrowing.

While tax cuts can inspire more productivity and therefore increase tax revenue, at some point tax cuts will ultimately lead to lower revenue. If this happens but spending remains the same, the government only has two options: print more money (which indirectly taxes currency holders) or borrow money.

If the government borrows money, though, it must be paid back in the future—with interest! How does the government get revenue to pay back debt? Future taxes.

So, while the government can cut taxes without cutting spending in the short term, it will have to pay back loans with higher future taxes in the long term. This is perhaps why Reagan’s tax cuts were followed by tax increases—Reagan did not follow through with cutting spending.

Rule 2: Bureaucracies Generate Their Own Demand

But why is cutting bureaucracies and bureaucratic employees necessary to cut spending? Well, one answer is pretty straightforward accounting. According to Brookings, 45% of government spending in the US goes to paying government employees.

This is a massive portion, but it does mean that 55% of spending is left and available for non-employee cuts. However, I’d argue even this spending is largely generated by bureaus and their employees.

Why? Consider the incentives of the bureaus. While private companies have an incentive to maximize their profit, bureaucracies don’t have any metric analogous to profit.

However, members of bureaucracies must still pursue some objective. Economist William Niskanen proposed that one fruitful way to think about bureaucracies is to consider their propensity to maximize their budget.

The idea is simple. Bureaus that effectively solve the problems they set out to solve no longer have a justification for their own existence. In order to continue to exist, bureaus must convince legislators of their worthiness to receive more money and more prestige. This tendency means that surviving bureaus will tend to seek out more reasons to acquire and spend money.

This need not be an intentional scam or conspiracy. Which bureaucrats are most likely to be promoted? Well, any persuasive bureaucrat who truly believes that he needs a lot of money to solve a very difficult problem will rise to the top.

In this case, “putting in the right people” really doesn’t make a difference. The organizational incentives of bureaucracies lead them to grow, regardless of who comes in.

The bureaucracies also seem resistant to change. As I wrote back in 2021, research has found that bureaus rarely change political composition even when Americans vote in different political parties.

The underlying incentives of bureaucracy and their consistent composition make them necessarily “conservative.” Note that by conservative here I don’t mean “right-wing.” I mean these bureaus exist, in part, to preserve the status quo.

This is precisely why Milei’s first move is the best. Bureaus have no incentive to stop unsustainable spending habits like we have seen in Argentina. If anything, their existence requires them to prevent reforms that take from their agendas and budgets. There is still work to be done. As noted in the beginning of the piece, this is really just the first step of eliminating the bureaucratic bloat. But it is a necessary first step.

Any attempt to “work with” the experts of government bureaus is doomed out of the gate.

One can only hope that politicians in the US follow Milei’s lead before the ever-mounting US spending and debt displace our prosperity.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.