Posted by
"Happy" Jake Greene on Tuesday, August 23, 2011 1:30:44 PM
For over 100 years, now, we’ve seen evidence of the damage that runaway government spending can do to the economy. Whether in the extreme of the Soviet Union’s planned economy, or the more subtle entitlement programs under FDR’s New Deal, LBJ’s Great Society, or Barack Obama’s Stimulus and Healthcare programs, they have all been shown to crush economic growth, disrupting the natural cycle of boom and recession that any human system must have.
The question, at least in my opinion, is not whether, but how government spending ruins the economy. And I do have a couple of hypotheses to offer as possible answers.
1. How Revenues are Raised
The most basic problem of government spending concerns government revenue. Businesses acquire revenue through the productive sale of goods and services. A business transaction is not a one-sided deal, it is a trade. When two people engage in a trade, each provides something of value to the other. The value of the exchange is determined by how much each party demands what the other party is offering in trade. In modern economies, the exchange usually involves money on one side, since money is an easily transportable asset with a (relatively) fixed value, and, thus, can be used to precisely assign a value to a good or service. Companies make profits by selling products that are worth more than the sum of the component parts and consumable supplies used to create the product, the labor used to assemble the product or provide the service, and the overhead costs of administering the company. In this way, people are supplied with the goods and services they demand (meeting their needs and wants) and companies are supplied with the money they need to operate and grow, and pay their employees who can then buy more products, etc.
Governments operate differently, usually. Governments, by nature, are inefficient and unproductive. In this country, only a very few government agencies – the Postal Service or the Patent Office, for example – provide a direct, fee-based service demanded by consumers, and, thus, operate like productive businesses, potentially making a profit if they operate efficiently. Those agencies are usually only just self-sustaining, and, more often, are at least partly funded by the general treasury fund. I once heard, and I don’t know if it’s true, that the US Air Force’s Air Mobility Command (AMC) – which is responsible for transporting military and government personnel and equipment all over the globe – is the only truly profitable (that is making more money in its own right than it must pay in expenses) government agency in the United States, though, even AMC is paid almost exclusively by other government agencies. The vast majority of government agencies, however, are funded directly through taxation, the forcible taking of money from the populace by the government to fund the government’s activities. Taxes are essential for governments to operate, and to an extent government is essential to “…establish Justice, insure [sic] domestic Tranquility, provide for the common defence [sic], promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity…” as none of that is possible in anarchy. The problem creeps in when taxes become burdensome, and the more government spends, the more burdensome on the economy as a whole taxes become. Taxes remove money from the hands of consumers and producers and place it into the hands of a generally unproductive entity. Taxes are taken by force of law (with the threat of imprisonment for nonpayment), and spent as the government wills. Individuals do not pay for the military to defend them, or the fire department to save their house, or public schools to educate their children. We all pay for all of those services regardless of whether or not we need or want them. I have no children, therefore I do not demand education services, yet I must pay for them. Further, government has no incentive to operate efficiently. If they aren’t bringing in enough revenues, they can increase taxes to bring in more, in theory.
Further, when sales don’t provide enough ready cash for a business to expand – say, a new factory needs to be built – businesses can do several things: they can get a loan from a private bank, which has the power to require the repayment of the loan; or they can seek investors by selling stock. Interest-bearing loans allow banks to operate – the interest is the fee for their service – and the money loaned to businesses is usually used to make the business ultimately more profitable, providing more and better products and services, allowing them to hire more workers, or both. Stocks give investors a share in the ownership of the company, and some degree of power in the direction the company takes (though that is limited). They also get a share of the profits (the dividend), and the value of the stock is related to the value of the company. If the company is profitable, the stock increases in value.
When taxes aren’t enough to cover government expenses, the government also has a couple of options: take out a loan in the form of a government bond, or print more money. Loans to the government are essentially deferred taxes. What is not paid for by taxation today, must be re-paid to the creditor by taxes later. Government bonds are little more than IOUs which, nowadays, don’t even pay as good interest as they did merely 20 years ago. Purchasing a government bond doesn’t give you any additional say in how the government spends its money, even in theory. And with inflation, the “matured” value of the bond may not even be worth the price you paid for it. Printing more money causes inflation: the devaluation of the currency, and the corresponding increase in prices of goods and services. And with all the money that the government can collect, very little is put to productive use.
2. Incentives
Earning money is an incentive to excel. Money is necessary to provide you with needs (food, clothing, shelter, transportation, water, energy) and wants (entertainment, recreation, particular food, clothing, shelter, transportation, etc.). In a productive economy, where money is earned in exchange for goods and services provided, providing goods and services that people will pay for is essential. Human beings are lazy, as evidenced by the fact that much of innovation is geared toward labor-saving devices. Most of us wouldn’t survive if we were suddenly stranded in Roman times, because most of us would be unable to function in the Roman economy. Even they who we acknowledge as hard workers – construction workers, farmers, miners, fishermen – benefit greatly from automation and would be lost having to do even more of their jobs by hand. The point (and I do have one) is that given the choice between earning a dollar working and earning that same dollar sitting, the vast majority of us would take “sitting.” What keeps the productive actively productive is the incentive of (a) earning more than one can by sitting, (b) earning more tomorrow than they do today, and (c) the simple pride gained by productive work. When (a) and (b) aren’t true, then (c) is an awfully hard case to make. In other words, if you make as much sitting as you do working, and you don’t stand to earn more later by working hard now, pride in hard work doesn’t pay the bills.
Government entitlement programs, now nearly half the US Government’s budget, provide a strong disincentive to work productively. A person can be given enough money to live in relative comfort without having to work under most welfare programs. Such money is not earned as a reward for productive behavior, but is gifted from the funds forcibly taken from productive labor. Further, most welfare entitlements are low enough to be exempt from progressive federal taxes. Add that to the fact that earning money productively usually results in the end of some or all of the gifts, and that the people who receive those gifts have no reason to attempt to learn the skills required to earn more than their gifts, there becomes little reason to be anything more than wards of the state. This has a double effect of taking money from the productive and giving it to the unproductive, and allowing a person who is able to be productive to not be, taking both money and productivity out of the economy.
Government employees, often, have the same disincentives. Union agreements and civil service work rules make it extraordinarily difficult to terminate the employment of an unproductive employee solely for lack of productivity. Certainly it is possible, but it requires so much extra effort on the part of supervisors that most don’t bother. We’ve all heard horror stories about government employees being promoted into positions where they can no longer do damage; sometimes making 6-figure salaries to run some small, relatively useless division that has little to do with the actual mission of the organization in question. I’ve seen it first hand. I’ve also seen – not merely heard about – people who are proud to be 20-plus-year GS-5 employees, never having applied themselves enough to warrant additional responsibilities that come with promotion, and usually – particularly at that level – doing little more than pushing paper or answering the boss’s phone. Often, when people at any GS level reach the highest “step” (automatic, time-in-service-based pay raises) they become “Retired In Place”, a derisive term meaning someone who shows up to work enough to collect their paycheck, gets full government benefits, and does literally nothing day after day for years at a time. Not only is there nothing that can be done to fire them, but they are usually, by that time, eligible for retirement on government pension. These people often take actual pride in their unproductiveness, again costing the economy both the money they “earn” and the potential productive labor. Certainly, there are exceptions to those rules, I’ve known them personally as well. There are plenty of people who are either on welfare and work to get away from it, are eligible for government benefits and refuse them, or work for the government as productively as government work can allow. But they are exceptions, and by far not the rule.
Finally, back to taxes. Taxes, particularly progressive taxes – i.e. taxes that increase by percentage of income earned as income increases – in and of themselves are a disincentive to productivity. In this country the incentive to be wealthy can be overwhelmed by the Leftist rhetoric and actual government policy designed to harm the “rich.” Our current President believes that “at some point you’ve made enough money,” and that as a consequence, the government will take some “back” to “redistribute” to the “less fortunate.” If there is a point at which an individual has made enough money, why, then, continue to be productive in the economy? The Marxist tenet “From each according to his gifts, to each according to his need” cannot work in society because gifts and needs are not evenly distributed.
3. Corruption
Government money generally is used to pay for one of three things: entitlements, regulations, and public safety. If we look through history, and we review modern “corrupt” dictatorships, we discover that more than anything else, entitlements and regulations breed corruption. And such corruption costs the government, thus the entire economy, a great deal of money.
There is an old saying, and I don’t remember its origin off-hand, that goes “if you subsidize a thing, you will get more of that thing.” If you create a law intended to aid single mothers who are having trouble making ends meet, you will not reduce the incidence of single-motherhood. In fact, not only will it increase, but it will increase in the worst way possible – with women conceiving children with anyone who will give them the time of day so they can collect the government checks. That was one of the arguments for “welfare reform” in the 1990s, and still rings true. Whenever you have free money being handed out, there will be a great many people who will either artificially create the conditions required to get the money (women having babies out of wedlock with any man who’ll spend a few minutes with them), or will flatly falsify their qualifications to receive the money (people on the NYC welfare system who also got checks from the New Jersey system by falsifying their state of residence). And if the money being handed out is in the form of a voucher – such as food stamps or transit vouchers – people sell the vouchers for slightly less than face value in cash.
In Washington, DC, only a few years ago, the Federal Government had to change how it operated its employee transit subsidy program. Originally, the money had been handed out as fare cards for the DC Metro system, and it was a free benefit (unlike private companies that, at best, take the money out of your paycheck pretax, and match it, up to certain legal limits). Since the money was given out in a physical, untraceable form, and in several cards, rather than just one, government employees would lie about the amount they spent on their commute, get more free fare cards than they needed, and sell the excess for slightly less than face value, often as much as $200 a month.
Another case in point: Years ago, I worked for a company that had a contract to provide training services for the District of Columbia Department of Employment Services (DOES). The training was to be provided not to DOES employees, but individuals who took advantage of the DOES entitlement. Such individuals not only got free $200-per-day (in 2000 dollars) training classes in computer applications, but they were also paid a stipend to attend the 8-hour classes. That company taught dozens of classes per month that were filled with DOES “students,” often the same people having taken the same class over and over. While I was working in a productive endeavor, providing a demanded service (computer training), the people in my classes were using other people’s money to sit in classes where they made little effort to learn, and took seats away from other students who might gain some real – as opposed to monetary – benefit from the classes.
Regulations breed corruption because while people frequently lie to receive entitlements, they just as often lie to avoid regulation. This sort of corruption is often played out in the movies (bribing a corrupt customs official, companies paying off the EPA so they can pollute, etc.). Often such corruption is all too real, mainly because government employees are no less flawed, greedy human beings than the rest of us – and some more so. The more you regulate, the harder the targets of that regulation will work to avoid being regulated, usually finding the easiest, not necessarily the most moral, way to do so. Honest businesses are faced with revenue crushing rules that they follow diligently, and dishonest ones not only pay a good chunk of their revenue, but when caught, they subject the honest businesses to more stringent – read revenue crushing – regulation.
And lest you think that I, as a conservative, am going to leave businesses and Defense contracting out of the corruption discussion, I don’t. The best example of that is the Boeing KC-767 scandal that occurred when I worked in the Pentagon – fortunately not for that particular part of the Air Force. In short, the Air Force was looking for a new tanker to replace its 1957-vintage fleet of KC-135s (a Boeing 707 with a big gas tank). Boeing stepped up and offered to produce some converted 767 airliners into tankers. Negotiations resulted in a lease program in which the Air Force would essentially rent the airplanes from Boeing – cheaper in the short term, but horrendously expensive down the road. After the deal, which was advantageous to Boeing, not the American Taxpayers, was complete, the Air Force civilian acquisitions manager who approved the deal left her civil service job and got an executive slot at Boeing.
All of this – taxes, the disincentive to be productive, and the corruption inherent in government entitlements and regulations – combines to produce an entity that stifles economic development, punishes productivity, and intrudes into the most minute details of our lives (if they are paying for it, they can decide how you live it.) It’s time to start cutting. Really cutting, not just slowing the increase. Entitlement agencies ought to be stripped to the bone. Regulatory agencies ought to have their regulations either made into statutory law in and of themselves (voted on by Congress and approved by the President) or nullified. The Federal civilian workforce can be cut by at least half, possibly 2/3 and no one aside from those cut will notice, presuming that actual, recent performance, and not seniority or race or political affiliation, are the criteria for the cuts. Defense should be cut on the rear echelon. The men and women who do the real work of the military – the ones who deploy, who fight, who die for their country, and those that train the fighters – need to be cared for as best we can, it’s only right. But the ones who spend their entire career on the home front often doing jobs that can be done by private contractors ought to go. A government cannot be a charitable organization. Such ideas are unsustainable in the real world, as we are all finding out.