Eliminating waste isn’t a panacea. Of course, waste is easy to find. Witness the lavish new $100 million office building for Fairfax County in Virginia. But waste and extravagance don’t explain the steady expansion of government since World War II (chart). We simply want more. In 1960 there was no Medicaid, no federal highway program and less school spending. Fewer students graduated from high school or went to college. The student-teacher ratio was 28 to 1 compared with 17 to 1 in 1988.

Discontent may rise in the 1990s, as all levels of government seem overwhelmed. Health costs (led by Medicare and Medicaid) are swamping the federal budget. In 1990 they were 13 percent of spending, up from 8 percent in 1970. By 1996 they could reach nearly 20 percent, says the Congressional Budget Office. In turn, the federal government is squeezing grants to states and localities, which are increasingly left to their own devices.

“We’re reversing the centralization of the past 50 years,” says government-finance expert Robert Ebel. To cope better, states and localities should:

States should raise tuition and fees at their colleges and universities to private-institution levels - and then provide bigger student scholarships, based on income and academic performance. Low charges for everyone subsidize well-to-do students, who could afford to pay more. In 1991, student charges at the University of California, Berkeley, were about $9,000 annually, compared with Stanford University’s $22,000. Higher education accounts for one eighth of state spending.

Property-tax relief is another example of bad subsidies. The elderly often get preferential treatment, even though many of them have above-average incomes. The result is to shift the tax burden to lower-income groups.

States and localities give lush tax breaks and subsidies to lure big businesses to their areas. Colorado and Denver are now offering United Airlines a package worth at least $250 million to locate a maintenance base there. But these subsidies are self-defeating. Local tax bases erode as big companies play jurisdictions against one another. In 1990 Denver lost a maintenance base for Continental Airlines to Houston. By threatening to move its headquarters from Illinois, Sears, Roebuck won concessions worth more than $200 million. Governors should negotiate a truce to these bidding wars.

The federal government, states and localities share the costs of many programs. This creates excessive bureaucracy and endless bickering. Washington ought to take full responsibility for some programs and abandon others. A good exchange might involve the federal takeover of Medicaid (states pay 43 percent) in return for halting federal grants to local police, mass-transit systems and schools. Federal school aid, for example, totals only 6 percent of all school spending.

A big share of Medicaid costs stems from long-term nursinghome care for the elderly. In theory, people become eligible for Medicaid only after they’re impoverished. In practice, many of the elderly qualify themselves by sheltering their income and assets which can then be passed along to heirs. This shifts a large part of their nursing-home costs to government. Regardless of who runs Medicaid, rules need to be tightened. One idea is to have the government acquire a lien on the assets (including homes) of Medicaid beneficiaries. After the patient’s death, the assets could be sold to defray costs.

Done sensibly, this can cut costs and expand services. Phoenix, Ariz., divided itself into five districts and put garbage-collection services out for bids. The city agency was allowed to compete but initially lost contracts. It won them back after cutting costs 25 percent, reports Governing magazine. California is trying to relieve traffic congestion with four privately financed toll highways worth $2.5 billion.

Glance down this list and you can see the political impasse. All these ideas would strengthen government, but none would generate big, instant savings. And all would arouse stiff opposition from affected groups: college students and their parents, the elderly, big businesses and government workers. There’s a paradox here. Big government means that lots of people and groups have a stake in the status quo. But big government (and high taxes) also means that there’s lots to resent in the status quo.

Politicians everywhere are trapped. If they try to improve government, it stirs the wrath of threatened constituencies. If they don’t improve government, they face higher taxes or broad service cuts. Escaping the trap is a constant agony and challenge.

Government Spending as a Percent of GNP

State and local Federal 1950 7.8% 13.5% 1970 13.2% 18.1% 1990 14% 20.9%

FEDERAL GRANTS TO STATES AND LOCALITIES INCLUDED IN STATE AND LOCAL SPENDING

SOURCE: ADVISORY COMMISSION ON INTERGOVERNMENTAL RELATIONS