Tuesday, April 22, 2008

Should Gov't Expenditures Stay a Constant Percentage Of GDP?

Liberals frequently like to point out that, no matter the meanderings of the government on tax and spending policy, government expenditures as a percentage of Gross Domestic Product (GDP) have remained fairly constant across the years. This, they argue, means that all-in-all government is not growing too large. Here is an example of the graph they like to point to.

It's a seductive argument accepted by many in academia. It is also one with which I strongly disagree. The details of this disagreement can be very useful in dissuading liberals of their wrongheaded beliefs.

GDP growth is composed of several factors. The three biggies are inflation, population growth and "other." The first two are just products of the expansion of the money supply and the society, respectively. As such, it makes perfect sense that government spending should grow as these do. The basic idea is that the government should spend roughly the same inflation-adjusted number of dollars per citizen each year.

It is the third, "other," category which lies at the core of the argument over the proper role of government. The reason I called this category "other" is because it is somewhat mysterious. One might wonder how the economy manages to produce growth above and beyond inflation and population expansion. Are we working more hours per year? Or maybe the "other" category is generally so small as to be irrelevant.

In fact, this third category is responsible for the entire improvement in human conditions since the stone age. It represents progress in all sorts of areas: transportation, technology and financial engineering, to name a few. Economists often term this category "efficiency," in the sense that each year we're able to accomplish more work per person-hour of work.

This makes intuitive sense when you think about an assembly line. In the early 1900s, each function in the factory had to be performed by an individual person. Gradually, automation took over, and today many assembly-line processes are done by robots. Today, we move raw materials more quickly with less wasted effort than ever before. This may come as a surprise to many liberals -- environmentalists in particular -- but the fact is that capitalism puts a huge premium on efficiency and conservation in every area. Less waste means higher GDP growth.

So, then, one might reasonably ask why government expenditures need to grow at the rate of GDP. To some extent, this might make sense. The advent of automobiles required that the government furnish paved roads, which cost considerably more than the dirt trails which dominated the 1800s. Similar arguments might be made about the Internet or biotechnology, both of which require significant infrastructure investments to keep things growing.

But in reality keeping up with these sorts of expenditures does not push government spending significantly ahead of population growth plus inflation. The real drivers of government spending increases are flawed budgeting processes and government's own internal inefficiency.

In large measure, the government provides us with the same services it did 25 years ago. In private enterprise, one would expect that to mean the number of employees dedicated to the task had declined, owing to the gains in efficiency during that period. Instead, the government employs far more people -- directly and indirectly -- than it did.

Even entitlement programs such as social security and medicare should properly grow only at inflation plus the rate of population growth. For the former, maintaining seniors' standard of living should require payments which grow at the rate of inflation. For health care, costs should actually decline as technology permits government to pay less money to maintain the same standard of care as in prior years.

Of course, this is not what actually happens. For better or worse, government views the efficiency-driven portion of GDP growth as a cookie jar permitting them to inject government into our lives in new and exciting ways. This is a why government becomes more intrusive each year, even as spending as a percentage of GDP remains constant.

It is also, I believe, a crucial reason why people want to be government officials. It must be great fun waking up each morning with a fresh new set of GDP growth to waste. Even if efficiency gains produce only a 1 percent annual excess GDP growth rate, that's a $35B annual party fund for government.

When viewing political debates, particularly in this presidential year, it's important to keep this analysis in mind. Candidates generally like to set up false dichotomies and choices for voters. While "universal health care" and "war in Iraq" are interesting issues in the short term, mostly what's going on is a sleight of hand to prevent voters from noticing government's ever-widening reach.

This growth is government's true nature, and it is this growth which makes government fundamentally problematic. As conservatives, the best we can do is to recognize it, expose it and oppose it wherever possible.

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