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Health care expenditures have increased at a rate 2.5 percentage points higher than the rate of inflation over the previous 30 years. Higher education expenditures have increased at a rate twice the rate of inflation over the previous 30 years. Conventional wisdom is that both of these trends are indicative of unprecedented crises in each sector and therefore massive reforms are in order. Of course, you know what kinds of reforms are favored.

So, perhaps today I’ll begin a series of posts to remind folks just how “serious” a problem the growth of some other sectors has been. If you agree that the above two are crises and require dire and urgent actions, then anything that has been worse than health care and higher education might also deserve the same treatment, no?

In 1900, to pick an arbitrary start date, federal government expenditures in 1900 represented 3.06% of US GDP. In fact, just a few years later, they fell to 2.1% of GDP during the Panic of 1907 (notice that during that crisis, governments had to make due with less, in contrast to what has happened today – where the crisis is an opportunity to run-off with more). Today, the 2011 expected federal expenditures of $3.59 trillion (down from $4 trillion in 2010) make up 24.4% of GDP (with no signs of shrinking so long as Medicare and Social Security and public sector pensions are not massively reformed).

In other words, government spending has increased 8 times faster than the economy has grown in just a century. Is that not an increase of crisis proportions?

But that is not all. Remember that real GDP has increased by … 31 times since 1900. Today, real GDP stands at roughly 14.5 trillion, while in 1900 it stood at 475 billion. So government has increased 8 times faster than something that has expanded by a factor of 31. In a very real sense, government has grown by a factor of 248 over the course of a century.

Now, some big government fans say, well, that we are rich, we can afford it, that’s what modern, humane governments do, and all kinds of other arguments like that. OK, if you hold that view, then how can it not be applied to the extra spending we are doing on health care and higher education? It seems to me that you cannot hold one view and not all of them.

And no, I don’t want to hear that, “the feds are doing things that the states used to do.” That may be the case, but in this case the feds are supplementing, not replacing, what the states and localities are doing. More data in a future post.

Tell ya what folks. You want to live in a world where we regulate activities to “harness” them, and to make sure the people are taken care of and served by institutions and not the other way around, then what exempts government qua institution, from the same treatment? I am not a knee-jerk deregulator. I favor certain regulations in financial markets (for example, not allowing any intermediary to take a public corporate ownership structure). But if you think regulations are justified, then how can you not turn your regulatory focus on the government itself? Think of every justification for regulation and ask whether or not it applies to the things government does. In fact, it does, in spades. We’ll see how in future posts.

Update: Here is a timely video.

2 Responses to “Reassuring the Boiling Frog”

  1. Harry says:

    Not included in the 24% is all the additional spending mandated at other levels, and it’s not just Medicaid. It’s Davis Bacon, it’s federal fuel standards, it might be cap-and-trade, it’s paint in toys, it’s everywhere.

    Our township is planning to build a $300M pavillion complete with kitchen to serve some newly built athletic fields. Putting aside whether either the “playfields” or the pavillion are legitimate uses of our money, if the township builds something, the contractor has to pay prevailing wage.
    If we gave the fields to the YMCA, they could decide whether they want a hot dog stand and whether they can afford. There are probably some unemployed Dads who could put it up.

    But our township is awash in money. Millions. The money is burning holes in their pockets. They regard that their money. If they do not spend it, someone might ask for it to be returned to it’s original owners.

  2. Harry says:

    Mike, I had another thought about your post, which you may or may not find helpful.

    I was thinking of the Laffer Curve and its implications about taxation. One of the key points is that government might reach the point of diminishing returns. (The Laffer Curve is a version of the Law of diminishing returns, with political and economic implications.

    I remember watching GMA where Lew Ruykheyser’s brother, who was then editor of Fortune, brilliantly explained the concept simply by drawing an arc from Zero to another point on the horizontal axis. He said, “All the debate is where we are on the curve.”

    Would that ABC News and the rest of the progressive establishment have learned from that lesson. It would become part of my own rhetoric.

    You’ve got me to thinking, though, and I’ve finally grown to question an assumption behind that curve– namely, that the object of government is to maximize tax revenue.

    Surely one is foolish to raise rates too high where people avoid taxes, but is it equally foolish to make tax rates too low, resulting in less money to the government, and more staying in the hands of those who earned it?

    Milton Friedman thought it was always good to put government on a diet, observing realistically that whatever was taken in by the impressor would have been spent and then some, only at a lower, more manageable level. You don’t put a dozen boxes of bon-bons in the same room with someone disposed to overeating bon-bons.

    To finish the point, it would be good if government raised enough money to pay for the public need, and if that fell short of the maximum they could squeeze out of us, it would leave us more money to spend as we wish, which we may do as free people. The goal of government is not to maximize its revenue.

    For now, I’d settle for maximizing growth so we might be able to afford the most efficient tax regime. One way we can get there is step by step producing more and wasting less.

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