Sunday, August 23, 2009

Eight Economic Costs of Government Spending

Everyone, from the right and the left, recognizes that government spending may hurt economic growth. Here are the reasons why (in my own words from this Cato Institute video):

1) Extraction Costs: There are three ways for the government to get money. All have adverse effects on citizens:
  • taxes: any government spending is taken from consumer spending (not even counting the costs of getting it= bureaucracy & accountants)
  • borrowing: there is a finite amount of money to be loaned and any money loans to the government (through bonds) is money not invested in private industries (through stocks)
  • printing money: leads to inflation (essentially a tax) and too much can lead to disaster (Zimbabwe)
2) Displacement Cost: An extension of the first idea in that the money is now taken from the private sector is used in the public sector. Most people/businesses/charities agree that they know how to spend their money better than most politicians. This goes for money spent on capital (every bridge to nowhere is one private nuclear power plant not built) to labor. The hiring of political advisers, government bureaucrats or executive czars takes our most productive members of society out of their respective places. From Timothy Geithner to Obama himself, these are all smart people who spend their time arguing at town hall meetings. Not to discount the importance of their jobs, but the more important government jobs their are, the less skilled private workforce we have.

3) Negative Multiplier Cost: Sometimes government spending is directly harmful. For example many regulatory agencies have small budgets, but impose huge costs on the private sector. I see this in the time I spend meeting government requirements for teachers. Not to say all regulations are bad, but undoubtedly regulation decreases output per dollar.

4) Behavioral Subsidy Cost: Many government programs encourage undesirable decisions. Welfare encourages encourages leisure over work. Home loan subsidies encourages consumer debt. Unemployment insurance encourages, well unemployment. Because wealth is determined by productivity, these policies shrink the economic pie.

5) Behavior Penalty Cost: This is the flip side of the last one. Government not only encourages bad behaviors, but it discourages good ones. Although tariffs are historically low, there are still laws that limit American citizens from buying the products that they want. Even cash for clunkers, which I discussed earlier, encouraged the purchase of new cars (within a certain time limit making saving for the purchase difficult) and will in the long run increase the cost of used cars (mostly purchased by the poor).

6) Market Distortion Cost: Government interference blinds consumers to real prices. For example in health care, also discussed earlier, because of government subsidies and the encouragement of employer provided insurance, consumers rarely pay the full price for care and in turn purchase too much. The same is probably true for education.

7) Inefficiency Cost: The industries that the government directly runs (Post Office, education, etc) could be run by private industries more efficiently. This is probably where the heart of the debate lies. Exactly how inefficient government run businesses are is hard to measure.

8) Stagnation Cost: Lack of "what would have been" in innovation. Without competition and a motive for profit, government run businesses have no incentive to improve. When I can get a banana from Costa Rica for less than it costs to send a letter to my neighbor, you know something is wrong.

However, do not think that I don't want government to do anything. I want it do to less sure, but I still need it to do the one thing that no business can do, enforce and protect property rights. The limited amount of the things I would like my government to do can be traced back to property rights. Here's what I mean:
  • federal, state, and local military protects my life, liberty, and property
  • protection under the law from violent crimes against my life, liberty and property
  • enforcement of contracts on behalf of my life, liberty and property
This is not what the government of the United States of America looks like (and despite the rhetoric not what it looked like in the late 1700's). And as long as I am on the political fringe, there is little chance it will ever be what I want it to.

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