The Case Against Government Spending

Harvard economist Jeffrey Miron's new paper on government spending offers a sort of Econ 101 lecture on all the ways that government spending can and does go wrong. It transfers money to politically favored constituencies, props up entitlements that go to well-off individuals and businesses, and creates deadweight loss—in which "a dollar of government expenditure costs more than a dollar because of the distortion it creates." The primary argument of the paper, though, is that the current mix of taxes and spending is unsustainable, and that the best way to address the problem is to hack away at wasteful and counterproductive government expenditures:

If tax increases cannot restore fiscal balance, then the U.S. must slow the path of expenditure to avoid fiscal Armageddon…The nation must either suffer higher and higher tax rates, which will slow growth and ultimately reduce rather than increase revenue, or it must cut government functions that are allegedly vital for economic productivity and the quality of life.

This paper argues that current U.S. expenditure is far greater than necessary to support an
efficient economy or an equitable society, so expenditure should be cut regardless of the fiscal outlook. Certain expenditure, to be sure, is vital to a country's success and survival, but much current expenditure actually lowers the economy's productive capacity. Thus expenditure cuts can simultaneously improve fiscal balance while enhancing economic growth.

As Matt Welch mentioned earlier today, Reason's forthcoming issue features a wealth of ideas for reducing the size of the state (so subscribe!).  And if you've looked at a major newspaper today, you may have seen that the good folks at The Cato Institute's Downsizing Government project have taken out full page ads summarizing ways to pare back federal spending. Given the current political environment, it can be tough to imagine that major spending cuts actually have a chance. Obviously, that's compounded by the let's-cut-spending-that-doesn't-benefit-me problem. But if something can't go on forever, it won't. And that's more or less the situation we're in with the current mix of government spending and revenues. Eventually, the country's citizens and policymakers will either have to choose to make changes or have those changes forced upon them.

Comments

[joshua corning]

Reason's forthcoming issue features a wealth of ideas for reducing the size of the state (so subscribe!)

If I subscribe today will i get a the new issue?

[libertymike]

Not if Reason engages in fractional reserve magazine sales.

[Bingo]

"a dollar of government expenditure costs more than a dollar because of the distortion it creates."

Well looks like we finally found the fabled Keynesian Multiplier Effect! Unfortunately it's a fractional multiplier because government can not and does not create value.

[#]

those are two different things... this is deadweight loss

[Alice Bowie]

The nation must either suffer higher and higher tax rates, which will slow growth and ultimately reduce rather than increase revenue, or it must cut government functions that are allegedly vital for economic productivity and the quality of life.

And we all agree on this.

However, some of us feel that spending money on War, legislation against things that are no ones business (gays, abortion, drugs), and the up-keep of Jesus is Vital.

I'm a liberal, so, the things I mentioned above would be the first (and probably the only things) I would need to cut.

[No Name Guy]

All well and good, except you could eliminate the entire DOD and STILL be running a deficit.

Entitlements, Ms. Bowie.

Let's start with the worst of them: Socialist Security and Medicare, both of which are wealth transfer programs from the young, poor, low income earners to the old, wealthy and higher income "earners".

[Tman]

She's a self admitted liberal. Entitlements are non-negotiable. From each according to his ability, to each according to his need, etc.

The "upkeep of Jesus" doesn't make any sense, but she did say she was a liberal.

[sloopyinca]

Ms Bowie misses the point entirely. When it comes to government spending, cuts in defense and cuts to costs associated with fighting gays, abortions and drugs pale in comparison to the amounts that could be cut in wealth distribution schemes like SS and Medi(insert name here).

Also, what about our Dept of Education that operates 0 schools? Our Dept of Labor that creates no jobs? Our Dept of Health and Human Services that operates 0 hospitals? Our Dept of the Interior which serves absolutely no purpose at all?

Those cuts are more important than cuts to military spending and the other laundry list of items she ascribes a huge percentage of the debt to?

(Really, how much $$$ does our government spend to fight the "gay plague," or abortion? Granted, I'll give her the drug war is asinine, but in dollars and cents, it's a pittance compared to these other boondoggles.)

[Draco]

I can't think of a point that Alice Bowie hasn't missed. (Damn that sounds mean.)

[sloopyinca]

It's a little too easy to write how government spending is bad. I want, for once, someone to write how government spending is good in ways that could not be handled by the private sector.

One rule: the phrase "for the children" cannot be used.

Ready.....GO!

[libertymike]

Doesn't exist.

[Night Elf Mohawk]

If I understand this correctly, you believe that national defense could be handled privately and, what, paid for by people who want to chip in?

[sloopyinca]

I should have been clearer. I mean in it's present form. No doubt there is a need for our military. It's just nowhere near what the current mission is.

[libertymike]

No one has a right to socialized defense.

[sloopyinca]

But it is required by the Constitution. Come on, Mike.

Let's not forget "Provide for the common defense," in the preamble. I take "Common" to mean all of us.

Article I Sec 8 pretty well lays out how our defense is to be structured and what responsibilities Congress has in that regard.

Sorry, but the way I read it, Congress is MANDATED to defend our nation, and that means a military. The socialized nature of it is implied in the preamble..."Common" defense being the term used.

The fact that Congress and the various Presidents have convoluted this to do basically whatever the fuck they want to do with the military doesn't change the fact that a socialized defense is pretty plainly written into the Constitution.

That said, I am for dismantling the standing Army and going to a state militia system whereby those militias can be called to active federal service in a declared war, the way the Constitution says it needs to be done.

[adam]

Do we have to establish that people have a right to a socialized defense before deciding to spend tax money on it?

[Paul]

If government spending gets us out of recessions, why did we ever go into a recession in the first place?

[Draco]

Recessions happen. Government spending (which puts financial assets into the private sector - that's how it gets there!) can help get us out of them.

Let me tell you a little secret: the opposite of government spending (tax hikes) doesn't end a recession, it deepens it. Right? Right. Therefore the opposite helps. You can't have it both ways.

[Vermont Gun Owner]

the opposite of poverty striken births (slaughter of rich people) doesn't end a recession, it deepens it. Right? Right. Therefore the opposite helps. You can't have it both ways.

[Draco]

There is a subtle but important difference in the way that raising and lowering taxes are "opposites" as compared with giving birth to poor children and slaughtering rich people.

[#]

this is true when talking about demand side effects. But tax cuts also have supply side effects as well (admittingly, this concept has been exaggerated and basterdized by politicians).

[aix42]

Youse Americans could save a bundle if you would put a stop to the Team America World Police bullshit and stay home.

Get off the worlds lawn!

[libertymike]

That fact somehow manages to elude lots of americans who mistakenly think of themselves as libertarians. There are quite a few who are regular posters here.

[Tman]

Just for shits and giggle, I'm dying to know what "frog in a pot" thinks about 9/11.

Was it da Joooooos?

The Bilderbergs?

The illuminati?

The Chinese?

(puts popcorn in microwave...)

[Tman]

Whoops, wrong thread. Fail.

[Draco]

If tax increases cannot restore fiscal balance, then the U.S. must slow the path of expenditure to avoid fiscal Armageddon...

Wrong. Someone please explain to me exactly how the fiscal Armageddon will occur. If you can do that, I'll recant. This the the same nonsense that the Concord Coalition has been spouting for years.

I agree that more money should be left in the hands of the private sector. But there is no Armageddon looming.

Let's agree for a moment with the idiot Liberals that "tax cuts" are a form of government spending. I proudly represent the position that we should - right now - increase the deficit to increase government spending on tax cuts.

The funds to pay taxes and buy government securities come from government spending. Every dollar in our economy came from government spending. (Of course the real wealth - the physical goods and services, usually came from private production.) You just haven't accepted that we live in a fiat money economy, not a gold-backed currency environment.

[Fatty Bolger]

And when nobody in the world believes that your fiat currency represents real wealth, what happens then?

[TallDave]

Every dollar in our economy came from government spending.

Well, no, they come from the expectation of future tax revenue; it's really more like stock in a business than anything. The government could cut its budget to zero tomorrow and fiat currency would be fine. If they cut taxes to zero, hyperinflation would ensue.

[Draco]

In fact the value of a fiat currency arises solely from its suitability for paying taxes. So, you need taxes to give the currency value. (The British played this trick on certain African tribes, forcing them to pay a hut tax in order to be willing to work for money rather than barter.) For a growing economy, you have to run a deficit in order to create enough money to cover the growth (to avoid deflation). You're right that cutting taxes to zero would cause hyperinflation.

First government spends, by making entries in a spreadsheet (say a Social Security recipient's bank account). Then it taxes to prevent inflation.

So, yes, every dollar came from government spending. (I'm talking about post 1913 dollars of course.)

Notice how the Federal Reserve system and the Income Tax were instituted at the same time? Someone understood back then what they were doing. Most people today, including Congress and the Administration, don't understand it.

[roystgnr]

Someone please explain to me exactly how the fiscal Armageddon will occur.

The government can't pay for everything it spends, so it issues debt. People invest because they expect to be paid back. But our debt is growing faster than our ability to repay it with tax revenue, so we have to repay them by issuing even more debt. That kind of financing increases the debt exponentially.

Without major federal budget changes, that exponential increase will continue outstripping inflation and economic growth, and so it can't go on forever. Eventually people will either start running out of money to lend or (much more likely) they'll run out of faith that the government can pay it back. If we're paying back debt by selling more debt, then just like with tulip bulbs, dot com stocks, etc., the value of a T-note depends on the faith that there will be a bigger sucker coming along to buy more T-notes later. That is the foundation of a bubble, and the loss of that kind of faith can be quite sudden as people realize they are in danger of being the biggest sucker themselves.

Without ready purchasers of hundreds of billions of dollars a year in debt, the government has to make up the shortfall. They will either make sudden massive expenditure cuts (economic Armageddon as public sector beneficiaries are dumped on their asses faster than the private sector can figure out how to put them to work), make sudden massive tax increases (economic Armageddon as businesses start failing due to suddenly reduced private demand), or start printing massive amounts of new currency (economic Armageddon via hyperinflation).

If you can do that, I'll recant.

I've been on the internet too long to hope this is true, but I'd be happy to be proven wrong.

[Draco]

Ok, I fess up. I didn't read carefully enough, and I'm wrong.

Where I was wrong (I think I misread) was that of course, the govt must eventually slow the rate of expenditure or increase the rate of taxation in order to avoid disaster (assuming the two rates are out of whack - a technical term). The disaster would most likely be hyperinflation (as you described), but maybe the other two could happen (doesn't seem popular historically, usually hyperinflation wins).

I thought the claim was that the budget would have to be balanced, which was what I was arguing against. But that wasn't what the excerpt said.

We also don't have to move in that direction until we are well away from the abyss (recession) - and we are still too close to that to talk about either raising taxes or slowing spending. That's something you do once there is no more excess capacity.

Next time I won't post while drinking (although it seems that it doesn's stop a lot of people here).

Thanks roystgnr.

(There, see, it can happen from time to time, even on the Internet!)

[roystgnr]

Hmm... at first glance it would seem that I was wrong about people being unable to admit they were wrong on the internet. But if I don't admit I was wrong about that, then I myself would be an example of someone refusing to admit they were wrong, which would then make me right!

Except that if I wasn't actually wrong then it wouldn't be a good example... which would make me wrong... which would make me right... which... going to go lie down now; my head hurts.

[Max]

Matt Welch has a wealth of ideas for lining his own pockets. Subscribe and donate now! Right-wing hacks have to eat too.

[Hughett]

I should be hearing either a siren or smelling your burning flesh.

[TallDave]

There are good reasons to be skeptical that gov't can manage aggregate demand in a useful way by increasing spending.

If you accept that the private economy grows efficiencies better (which is practically a truism), it seems it ought to follow that over time C+I is increasingly more multiplicative than G -- esp. at the 45% of GDP that gov't spending currently sits at, since each marginal dollar of G is less likely to be efficient than the one before.

That's the best explanation of why the stimulus didn't work -- it took dollars away from more productive uses (C+I) and put them into less productive uses (G).

[Max]

No, the best explanation of why the stimulus didn't work is that it wasn't big enough. The best explanation for why you use letter/number combinations to illustrate simple minded banalities is that you're an idiot.

[heller]

Not big enough? Millions of dollars spent on each unprovable "created or saved job" is not enough? How much is enough Max? hundreds of millions per imaginary job? Billions?

Retard.