The Size-of-Government Fallacy

By James Kwak

You hear all the time that the government must get smaller. John Boehner said it the day after the elections: “We’re going to continue and renew our efforts for a smaller, less costly and more accountable government.” Barack Obama agreed in part earlier this week: “We have agreed to a series of spending cuts that will make the government leaner, meaner, more effective, more efficient, and give taxpayers a greater bang for their buck.” And a large majority of Americans agree in the abstract (while simultaneously opposing any significant spending cuts).

Conservatives like to point to high levels of federal spending—23.8 percent of GDP last year—as evidence that government is too big. But the idea that there is one thing called “government”—and that you can measure it by looking at total spending—makes no sense. Worse yet, it can lead to fundamentally misguided policy decisions.

That’s the opening of a column I wrote for The Atlantic’s online business section. I’m trying out writing an occasional column for them. Today’s is about the idea that the total volume of government outlays or receipts can tell you anything worth knowing about the size of government — and the damage that is being done by people who fetishize the total spending number.

18 responses to “The Size-of-Government Fallacy

  1. Calculated Risk just put out a blog section on receipts as a percentage of US GDP – we’re currently at the lowest level we’ve been since the 1950s.

  2. Terrific column and clear thinking; thank you!

  3. In his Atlantic piece, Mr. Kwak says: “If there’s a program that the American people, through our democratic system, agree will provide benefits greater than its costs, we should do it, independently of the existing spending level. And if there’s a program that isn’t covering its costs, we should kill it. This is obvious, but instead Washington seems locked in a debate about the total spending level and the total tax bill. And that’s a recipe for bad decisions.”

    What poppycock. We do not have a democratic system and no more than a half-dozen members of Congress, AT MOST, are really working for the interests of the American people.

    With all respect, Mr Kwak: government is so big because of corporate welfare, bank bailouts, proliferating regulatory agencies that don’t regulate, two HUGE foreign military excursions, agribusiness subsidies, and the enormous cost of satisfying every whim of the FIRE sector.

    You are such a bright man and your heart seems to be in the right place. Why do you continue to promulgate these myths, cherished relics of Americana that they are?

    Why do William K. Black and Michael Hudson continue to stand as the only truth-tellers on the U.S. economics scene? Wouldn’t you like to join them?

  4. scottfree43

    There is a country with very small (non-existent?) government and very low effective tax rates waiting for all Tea Party members to try out: Somolia! Enjoy!!

  5. Conservatives like to point to high levels of murders—5.0 per one hundred thousand—as evidence that there is too much crime. But the idea that there is one thing called “crime”—and that you can measure it by looking at the overall crime rate—makes no sense. Worse yet, it can lead to fundamentally misguided policy decisions.

  6. Actually, government probably needs to get bigger to solve our present and future problems. Corporations are solving many of our problems (for example, how to get oil that is under the Sahara desert into my car in the form of refined gasoline), but they’re not solving all of our problems (like how to mitigate the effects of my burning that oil).
    But before anyone gets too much bigger (or smaller), we need to find a source of clean, sustainable energy. If we don’t, it won’t matter how big or small government is. For a clear explanation of this, I refer you to Dr. Joseph Tainter’s talk on the collapse of complex societies on YouTube.

  7. @ Wade

    “Alternative Safe Nuclear Fuels?” Thorium!!! (absolutely no chance of a meltdown!)

    Note: Largest holders of Uranium Fuel are “Royal Dutch Shell and Cameco Inc.” ,… The Rothschild’s hold a majority stake in both company’s!

    http://en.wikipedia.org/wiki/Thorium {(posting for years about alternative) (follow great links below)}
    http://www.world-nuclear/info/imf53.html
    http://www.suite101.com/content/using-thorium-as-a-nuclear-fuel-a188824

    PS. Great read James :-)

    Thankyou James and Simon

  8. jermeredith

    Thanks James. I’d like to see more articles like this one that tackle common fallacies about govt and programs, I think it’d be super beneficial to a much under-educated viewership (as far as in-depth understanding of the premises and strategy of large scale social programs). theAtlantic is many ppl’s daily bread, so i hope to see more contributions.

  9. @Carla: Whatever you think of our political system, it is still the case that individual programs should be evaluated on their own merits, not in reference to some artificial total spending constraint.

  10. Excellent point about spending amount being a poor indicator of impact. I’d add one thing, though: passing a regulation may be cheap, but enforcing it effectively costs money. Regulatory agencies that enforce health and safety laws are among those targeted for budget cuts.
    http://scienceblogs.com/thepumphandle/2011/07/whats_so_big_about_the_us_gove.php

  11. I can agree that we no longer live in a sovereign country that raises citizens capable of evaluating the *merits* of any visionary life-sustaining program – government, “private”, or metaphysical.

    It’s FIAT $$$. Where’s the *value* system in that?

    The economic impact of a decade of entanglement in the ME through *war* that was SOLD as a really really good idea has far exceeded it’s projections.

    More misery for others = more money for ME ME ME

  12. Sadly, my contention is that if our Senate and House are an indication of effective government, we probably would be better off with anarchy. The problem in our every person for themselves world is that our government creates the least even conceivable playing field, and then has the audacity to complain about perceptions and not address realities. The size of government is the perception. When we speak of large amorphous institutions, is it easy to talk in generalities. I would argue, but for financial deregulation, Bill Clinton ran the smartest government in the last half century. We can see the trajetory since he left office, and remember that BHO has only had charge of two of ten years which have run this country deep into the mud. Time for BHO to step to the microphones and challenge the idiot tea partiers and Norquist supporters and remind everyone that their God, Ronald Reagan, raised taxes at least 8 times during his term in office. It’s time for intellect to take over from the mental midgets Boehner, Cantor and McConnell.

  13. Dr. Kwak: I liked your article, but haven’t you left out several important factors in your analysis?

    1. Costs are increasing, and if they increase too much in one area, expansion in other areas becomes difficult. To take your example, if the company was losing billions of dollars in Europe, it might not have enough money/revenue to expand into China. (And even if the “company” could print money, it means your analysis depends on the continued status of the U.S. dollar as the world’s reserve currency.)

    Moreover, companies invest money to return a profit–they wouldn’t “expand” into China if they thought doing so would cause them to lose money. In the cold calculus of economics, older and retired people are money-losers, and younger people are money generators b/c they have more time to pay back the investments made into them.

    Medicare is one area that is a money-loser–and a potentially massive one at that: according to NYT article, “A large share of our health care spending is devoted to ill patients in the last phases of life. This sort of spending is growing fast. Americans spent $91 billion caring for Alzheimer’s patients in 2005. By 2015…the cost of Alzheimer’s will rise to $189 billion and by 2050 it is projected to rise to $1 trillion annually — double what Medicare costs right now.”

    Thus, when you write, “if there’s a program that isn’t covering its costs, we should kill it,” wouldn’t that include Medicare? I certainly am not in favor of “killing” Medicare–but several respected economists–from David Walker to Laurence Kotlikoff–do agree that Medicare costs must be reduced if we are to have any chance at reducing the national debt.

    2. Not all costs are alike–some costs are less palatable than others from an economic and budget planning perspective. For instance, you do not address what I call “tail-end fiscal obligations.” Such expenses would include medical expenses, public pensions, and promises of lifetime medical benefit to public employees–all of which are unpredictable and which pay for past performance, not current performance. Instead of paying a retired person x dollars, couldn’t that same dollar be spent on creating a current job today and/or lowering the private sector unemployment rate? Your analysis doesn’t discuss any kind of efficient spending and therefore assumes that a dollar spent on Medicare has the same value or impact as a dollar spent on a younger person or an unemployed person.

    Furthermore, public pension costs are so unpredictable, we cannot even determine their true scope. Some institutes place the total liability at just 700 billion, while others place it at 3 trillion. The actual number shouldn’t necessarily be the focal point, but the fact is that gov entities have no incentive to get the number right. Unlike an insurance company whose existence depends on a correct actuarial analysis, gov entities have a captive source of revenue–taxes–or the printing press and therefore have few impediments to liberal accounting, such as assuming a perpetual 8% to 10% rate of return on investments.

  14. @ auden5

    #1) paragraphs 4 & 5 ,…Medicare

    Stem cell research has aggressively narrowed the gap for a Dementia Cure, as well as Alzhemer’s .
    Currently in Port Saint Lucie, Florida there is a world renowed ” Research Facility” (biogenetic R&D) on the threshold for voluntary human subject testing.
    I firmly believe in a few short years if these Miracle Drug’s can get fast track approval. They’ll change the way the world views “Stem Cell Medicine” forever! Thusly. Greatly, and for lack of a more firmly optimistic word – “exponentially”, in lowering cost and needless expenditures for caring of all handicapped ,and elderly ambulatory recipients.
    This is going to happen rather quickly, and dramatically reduce health care cost in the near term and certainly far into the future.
    It was Bush #43 that basically stopped medical science in its track, and set us back a decade or more behind Europe, and the entire world! Think of the jobs and revenue from such wonder drugs throughout the world if america had a level playing field in this state-of-the-art medicine breakthrough once refined. (JMHO)

    Thankyou James and Simon

  15. @James Kwak: Thank you for responding to my comment.

    I appreciate the logic and good sense of your response, based on your statement in the Atlantic piece that: “If there’s a program that the American people, through our democratic system, agree will provide benefits greater than its costs, we should do it, independently of the existing spending level.”

    But how can it be demonstrated that the American people agree on anything when the system is not really democratic at all, but is manipulated by interests so powerful that elections are no more than expensive scenery on a movie set?

    When ordinary people from different walks of life are able to discuss the issues of the day, we often agree on many fundamentals. Yet one would never know this from what is termed “political discourse.”

    There is a vast and dangerous gap between elite policy makers and regular folks.

  16. What do the “smaller government” people actually want then?

    A. Less turnover through government because they think it’s inefficient (business could do it better)
    B. Less turnover through government because they think it’s efficient (competes too well with business)
    C. Less impact of government on society for some reason (what would that be?)

    I hear religious arguments about A and C, but suspect it’s mostly B.

    In any sector where government and business compete government wins on sheer efficiency: Education, postal service, health care, insurance, policing, public works. Government captures the low end of the market presumably because it can produce the greatest bulk of goods at the lowest costs. Business captures the high end of the market because “it’s profitable” meaning it can afford the inefficiency of paying dividends.

    If business really was more efficient, it would capture the low end through competition. But the small-government people aren’t calling for open markets. These largely exist in the US. They’re calling for government to reduce its operations, presumably so they can take marget share for their less competitive products.

  17. @earle

    after all the OBVIOUS lying that gets hurled at We the Stupid day after day, 24/7

    you still believe in Santa Clause bringing you the fountain of youth – that’s kinda sad and charming at the same time. You’re gonna die. We all are.

    I’m afraid you are going to push the world into WWIII as a genetic cleanse before you create the Vidian (sp? – from Star Trek Voyager series) race in blood sucking swamp land…

    Best thing for the PLANET would be to empty out Florida and let Mother Nature have it’s “kidney” back (cleanse the Atlantic and Gulf)…

    But don’t you worry, Earle, “scientists” are getting back to not telling lies for no one, no how, no matter what….

  18. Size of government…?

    In my lifetime, the population of the planet has, roughly, doubled.

    The air, water, soil, all of the planet had a different color, smell, *feel*…

    So what kind of *math* is being presented that says there are not enough young people producing the basics of life to support the old people….? Why isn’t it the other way around? Aren’t there WAY more young people wandering around the planet without a plan other than to kill off grandma and live in her house?