Friday, January 11, 2013

Our Broken Frame of Reference on Government Spending

When I first traveled to Door County in Wisconsin I visited the various lighthouses and was given a tour by local historians. One of the points that stuck with me most of all was that these lighthouses essentially were one of the few elements of the Federal government that were locally present in the region.

Today our government is ubiquitous at the Federal, State and local level, especially here in Chicago where Cook County is one of the largest counties in the country, with massive hospitals and criminal court facilities.

I wrote about government influence and how it is all around us in posts aptly titled "We're Barely Capitalists" here and here based on some (semi-humorous) local insights. It would be difficult to find substantial portions of the economy anywhere in a place like Chicago that wasn't heavily influenced by government spending and allocations.

This article in Business Insider reviews recent job growth and notes that 40% of it was subsidized by government.
Consider our economy right now: about 17% of it is health care; about 6% in terms of GDP is education; and with some overlap, 15-20% is what we call government consumption–government activity, not just transfers. At all levels of government, including state and local. Add those all up, take out the overlap, and it’s a pretty big chunk of the economy, like 20-30%. Those are all sectors where there are massive subsidies, massive distortions of incentives, a lot of bad policy; and it’s hard to measure value.
State and Local governments are poised to grow in 2013, according to this Bloomberg article.
After slashing their workforces by about half a million in the past five years, state and local authorities will add employees in 2013... Their payrolls in the fourth quarter will be 220,000 larger than in the same period for 2012.
Bloomberg then goes on to explain how this state and local government job growth is funded; by Federal US deficits at the trillion dollar+ level that then are passed down to the State and Local levels.
States get about one-third of their revenues from Washington. The agreement Congress hammered out to avoid more than $600 billion in automatic spending reductions and tax increases --the so-called fiscal cliff -- spared states from cutbacks, at least for now. (states received) approximately $519 aid last year.
Don't forget that, in addition to the US Federal debt and borrowings, the state and local governments are also deeply indebted. Not only are we borrowing to fund current needs, we are also accumulating pension and medical obligations that are truly enormous and growing, especially here in Illinois where recent pension reforms failed to get off the ground.

Our frame of reference on all this government spending and debt, however, is skewed by our comparison group. We continually compare US spending levels to the "Industrialized Powers" which include Western Europe and Japan. Comparing the US to these countries, many of which are economic "basket cases", is not relevant for a forward looking appraisal of countries where our actual economic competition is coming from - we need to look at China, India, and other rising powers that represent the future.

One of the oldest shibboleths is the fact that the US doesn't have a "single payer" health system, like the (broken) comparison group listed above. However, if you get sick in China, Brazil, India or other rising countries, there is a (small) safety net but you essentially have to pay substantially extra or have connections in order to get what we'd consider to be modern and effective medical care.

Another point of comparison is greenhouse gases and various environmental practices, such as use of "green" power. Our broken "peer group" countries like Spain invested heavily in massively subsidized wind generation, as I document here, which recently collapsed the moment that these subsidies evaporated (which correlated with the country essentially going broke and being re-floated by the EU central bank. China and India continue to invest enormous amounts in coal power, since it is so effective and plentiful and is needed to power their growing economies.

Correlating Government With Outcomes

Not only are we comparing ourselves to the wrong groups if we want to see the countries where we will actually compete for future goods and services (unless we are in the tourism business), it can be seen that high levels of governmental spending are not correlated with good outcomes. Just as the lighthouse represented the extent of Federal government which is now ubiquitous, these countries like Spain, France, Italy and Greece where governmental jobs are the norm see little in terms of competitive advantages over other countries where governmental investment is lower.

Is there a business anywhere that fears a Spanish business, backed by legions of bureaucrats, is going to win an account or order from them? There are MANY quality businesses in all of these countries and highly motivated and competent individuals; but their successes are often in spite of the governmental system and in smaller or privately run entities that are competitive in niches and export markets.

There are obvious uses for government and areas where intervention has led to growth, such as the US highway system and a judiciary based on the rule of law. Much less apparent is the value in all the other overlapping health, welfare, transfer payments, and multiple levels of law enforcement and governmental agencies as far as the eye can see.

In the end, as you can see in Greece today, the governmental safety net will collapse in a sea of debt and failure. We cannot help but avoid that end at some point in the future, where we can no longer borrow trillions from others (or ourselves, through a Federal shell game) and need to build a government that is rational and based on an "economic surplus" that we can afford.

Probably 90%+ of the world's population today is essentially self-governed, in which if you don't work, don't have money, aren't part of a group or clan that has resources, can't fend for yourself or protect yourself, you are at serious risk of starving, dying of a preventable disease, or being at the whims of local thugs. Government "isn't the answer" in these areas; it is connections, cash, or your own ability to defend yourself that defines your outcomes.

Our Western "peer group" exploded out of the gate after WW2 with reconstruction and pent up economic growth but then "captured" most of this growth by the state and has been on a path of secular decline for years. In this brief interval the West, as well as the US, built an assumption that you can work a reasonable job, retire early, and have a safe and comfortable lifestyle and retirement. If something happened to you along the way, a safety net would protect you.

These assumptions are evaporating today in the west, as you can see in the scourge of youth unemployment, and never existed for the rest of the world.

Cross posted at Chicago Boyz

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