Government spending reduces a nations wealth.....

Government spending reduces a nation's wealth, decreases its aggregate levels of long-term employment and reduces economic opportunity....



Thanks to Carpe Diem, a daily read of mine.

There are certain things that national governments do well but spending money on pet projects under the guise of economic development is not one of them. Some argue that government spending is important to the smoothing out of economic cycles as one can read in John Kenneth Galbraith's work but I would argue that in addition to the difficultly in identifying what times to actually smooth the exact opposite happens and economic booms are propelled further making the declines stronger and only creating excess volatility and risk.

Additionally, governments, as we know, tend to spend all tax revenues in good times and not only do not decrease that spending during bad times due to weakened tax revenues but tend to further increase it both in nominal terms as-well-as a percent of GDP. This is done in order to 'prime the pump' under these economic management programs to stimulate the consumption or investment. This exercise creates a buildup of debt for this spending or 'investments' that is ultimately less productive then the spending or investment decisions made in the private sector. Government make work programs rarely create many usable goods and services but also this indulgent spending has very few negative consequences for the decision makers in Congress. Whereas business and personal spending decisions do affect those private decision makers that potentially may ultimately end in bankruptcy or being forced to liquidate or recycle economic assets into more productive uses. There is real risk in private spending and investment decisions but no such negative feedback mechanism exists in government programs so there is little incentive for restraint and to do what makes sense except to get reelected.

However, the things that national governments are better suited to do are those where states, localities or individuals will either be incapable of or inefficient at performing. These include:

1. Monetary system: I can just imagine going into a Wal-mart and trying to pay with Glenzo money. I am not too sure who would be willing to take it other than my kids. Additionally, imagine the confusion and problems if there was a New York City or New York State currency (not allowed under the Constitution) and trying to use it in Pennsylvania or in Arizona where the currencies will be different. The framers realized that this is a problem. It makes sense to have a unit of exchange that can be efficiently used around the nation and recognized around the globe. Good idea!!!!
2. National defense: I am capable of defending myself in my home since I have the right to own a firearm under my 2nd Amendment rights. However, it would be very difficult for a nation to defend itself in the event of attack if there is no standing army that is trained in the art of self defense. This is allowed for in the Constitution and is just plainly a good idea.
3. International diplomacy: Imagine if there were a million Americans holidaying in Europe during the summer requesting access to government officials or representatives of the 50 states looking to negotiate with foreign nations to propel their own interests forward on their own. It makes sense to combine these efforts into a singular front to achieve national goals. This task is embedded in the Constitution. Its a good idea.
4. System of law: Although each of the 50 states have a system of law, there is a recognized need to have similarities and those issues that effect all where there is a need for uniformity. Also, there is a recognition that not all law is beneficial and in the best interest of the nation. Therefore, law can be created and destroyed through judicial review. A good idea.
5. Allowance for interstate commerce: One of the problems with these imaginary lines drawn between states and nations is the desire of people in those places to try to benefit themselves over others. Lets say, for example, that egg producers want a higher price for their product and fight to disallow eggs from other states from entering their markets. This allows them to raise prices without the effects of competition on price from outside producers. This costs everyone that consume eggs within that territory for the benefit of a small number of producers. So in order to allow for efficiencies and competition, Congress can regulate interstate commerce with the intent that states do not arbitrarily restrict competition to benefit the few at the cost at the many. This is a good idea.

These allowances are embedded in the Constitution of the United States. All other rights and responsibilities are explicitly the portfolio of the states. A wise approach.

So, back to government spending that is intended to bolster employment or increase general business conditions (these are not specifically addressed except for the phrase 'general welfare' in the constitution but how is the general welfare served if Peter is robbed to pay Paul?); when the government borrows or taxes to stimulate the economy, it takes money out the pockets of people that either have to reduce their own spending or borrow money that would have been lent to other that would have spent it too. So, at the end-of-day, the only way that government creates wealth is if that spending creates more wealth than the spending that would have been experienced that was replaced by the central planned spending. Is the government spending more productive in aggregate than the private spending that it replaces?

So, as uncle Milton says above, it is nearly impossible for governments to spend money more efficiently or effectively than the private sector. I think that we can comprehend that decisions made by the thousands or millions make more sense than a singular decision made by a government bureaucrat that has no way of knowing every bit of relevant information. People make better decisions in aggregate than the government does due to the information gap between the millions and the single decision maker and allocate capital for efficiently for most economic tasks OTHER THAN FOR THOSE FUNCTIONS THAT A FEDERAL NATIONAL GOVERNMENT HAS TO DO.

Furthermore, lets have a look at one issue the nation is debating now that is illustrative of what can be done to improve the lot of Americans that is not being addressed. Instead, the government wants and thinks that it is capable of completely taking over the healthcare business and system and make it cheaper, and more effective. One area that debatably has been open to intervention within the confines of the Constitution is health insurance. States, through regulation of health insurance, restrict insurance companies from offering plans if they do not include a certain or a multitude of procedures that a number of people want in that state. Its not a decision that people can choose a plan that suits them but the plan has to include procedures that I argue benefit the few at the expense of the many. The restriction of health insurance plans offered across state lines and the mandated coverage levels for these products increases costs by lowering consumer choice and innovation. This is something that Congress can actually impact by not allowing States to unfairly restrict access to markets by out-of-state offerers of health insurance but Congress has not addressed this. This, in my opinion, is the kind of problem that the commerce clause in the Constitution addresses and that is to allow for healthy interstate competition. Congress has not addressed this. I wonder why?