A lot is being said in the news right now about the role of government in the economy.  Some believe the government needs to spend more to rescue the economy.  Others say that increased government spending will ruin the economy.  We are going to look at government spending and use some simple common sense and logical tools and see what conclusions can be drawn.

Government Revenue

Where does the government get its money?  The US government owns no industries nor does it produce profit making services.  The government get its revenue through two primary sources:

  1. Taxes
  2. Borrowing

The government gets most of its revenue by taking it from people and businesses which would spend it in another fashion if given their preference.  Because of this, taxes are confiscatory in nature.  Someone else has to make money in order for the government to take it.  The more productive you are as an employer, an investor, or a provider of rare skills the higher percentage of your money the government takes.  When the government spends more than it gets in revenues it has to borrow money.  And just like the loans you get for homes, college tuition, cars, etc. the money the government borrows has to be paid back with interest.

For the government to balance the budget it would have to raise taxes, reduce spending, or both.  As demonstrated on the Taxation page raising taxes slows the economy and increases unemployment which actually reduces government revenue.  Conversely, lowering taxes has the affect of actually increasing government revenue.  When people spend more of what they earn the government benefits financially.  When the government takes more of what people earn it suffers financially.  In this case, what is good for individuals is also good for the government.

Reducing government spending is exceedingly rare and seldom occurs unless mandated by a state constitution or by very disciplined politicians.

Freedom from Taxes

The website http://www.taxfoundation.org/taxfreedomday/ calculates the date that the average American finishes paying their state and federal income taxes and begin working for their own benefit.  Note that this does not include property taxes, ownership taxes, sales taxes, use fees, etc.  Also not included are the corporate tax burden which is passed on to consumers.  As noted on the Taxation page taxes come in many different layers.   Given these additional taxes the average American probably works more than half the year just to pay for federal, state, and local governments.  Are you getting you money’s worth?

Government Efficiency

Yes, government efficiency is an oxymoron.  Pretty much every level of government is inefficient.

  • Government employees are inefficient
  • Government bureaucracies are inefficient
  • Government programs are inefficient
  • Government spending is inefficient
  • Etc., etc., etc.

How can an entity so large and well funded be so inefficient?  Because they are spending someone else’s money for other people.

If you’re an Average Joe you have purchased a holiday gift for yourself.  When we purchase gifts for ourselves we almost always get exactly what we want.  We very seldom have to return our self-bought gifts or put them in the closet until a charitable donation opportunity comes along.  We seem to be the ideal person to know what we need or want.  Less frequent are the times we get someone else exactly what they want.  Even with well placed hints by the intended gift recipient we still manage to frequently bungle the project.  The less we know the other person the less likely we are to get them exactly what they want.  We seem to be particularly ineffective at knowing what other people want or need.  If someone’s response to your gift is, “That’s exactly what I would have got for myself”, you can feel confident that you did a god job.  On the other hand, if the response is, “That’s exactly what the government would have got me”, you should not take that as a complement.

Now imagine using someone else’s money to buy a gift for someone else.  You have very little invested other than some time.  Since you’re not buying a gift for yourself with that money you probably want to minimize your time as well.  A person may really benefit from a microwave oven with a special popcorn setting but you may see nothing wrong with a toaster oven or a set of whitewall tires for that person.  As we noted in the Rewards page – incentives matter.  If you get no reward for getting the best gift and no penalty for getting an imperfect gift your incentive is pretty low.  That goes a long way toward explaining why government is inefficient.

Final Thoughts

Governments spend other people’s money for the (dubious) benefit of other people.  They have no incentives to do really well and very few penalties for doing poorly.  The party in power makes little difference to the bureaucracies.  Since government workers have no fear of being fired for doing a poor job and no incentives for doing a great job it is hard to expect anything better than a mediocre effort from government employees.  You may expect the microwave oven with the special popcorn setting but don’t be surprised if you get whitewall tires instead.