Wednesday, November 14, 2007

Understanding Government: Spending

Government spends the money that it collects in taxes.

Governments spend massive amounts of money. In America in 2007, all levels of government spent an estimated total of 4,877,100,000,000 dollars.

Government spends money on several different types of programs. The most common of them is redistribution, taking money from some people and giving it to others. This type of program is significant enough to be the topic of a separate essay. Here, it will suffice to say that redistribution discourages productive behavior, encourages unproductive behavior, and dramatically empowers government.

Another type of government program is socialism. Socialism is government production of a good or service funded by taxation. While it is often used as a vehicle for redistribution, it could in principle provide goods or services to the taxpayers in proportion to what they paid in.

Socialism has today been largely discredited. Its early proponents claimed that it would produce goods and services more efficiently than capitalism. However, there are sound economic reasons that this will not happen. Socialism provides no good means of determining how resources should be allocated, implying that there will be perpetual overproduction of some goods and underproduction of others. It provides no incentive for hard work and investment, leading to economics stagnation.

Few today would openly claim that socialism is more efficient than capitalism. But this assumption seems to underlie efforts to create "national health care" and oppose greater school choice. There is a simple answer to the belief that socialism is more efficient than capitalism. If so, then let people engage in it voluntarily, and it will outproduce capitalism and win out in the free market. In fact, all experiments with voluntary socialism have ended in various degrees of disaster.

Another significant recipient of government spending is bureaucracy. Bureaucracy is also significant enough to be the topic of a separate essay. Of course, there are administrative costs in the private sector as well, but private and government employees face very different incentives. In the private sector, administrators must make a profit to survive. Thus they must freely convince people to give them money, and to do so they must make products and services that people want.

In contrast, government bureaucrats are funded by mandatory taxation whether they do a good job or not. They are not punished for failures, nor are they rewarded for successes. Bureaucrats advance not by doing a good job, but by having more subordinates. In fact, bureaucracies may actually gain from failure, since they can demand more resources to fix the problems that they caused. Different bureaucracies are often reluctant to share information, as this will hurt their quest for more funding.

The type of government spending that attracts the most condemnation is waste, fraud, and abuse. This is far more common in the government than the private sector, since government employees are not spending their own money. Ironically, though, waste may actually be less destructive than some of the most popular government spending, which creates incentives that make society worse off than if the money had just been destroyed.

Government spending and taxation are two sides of the same coin. This is because all spending must be paid for. The most direct way is through taxes. Government also spends money that it borrows. But money that is borrowed must still be paid back through taxes. Refusing to pay back lenders would effectively be a tax on them. Inflating the money supply is another possibility, but this is a tax on the value of money. Thus government spending is taxation.

As with taxation, giving money can be done in various ways. It could be secretly slipped into someone's account so that he would never notice. Or, it could be sent as a check complete with fawning news articles and preening politicians praising their own generosity. Just as the least visible methods of taxation tend to win out, so too the most visible methods of spending tend to win out. This creates the perverse situation that government can take someone's money, give some of it back to him, and make him think that he has come out ahead. This is one reason why government spending tends to have significant support.

Many government spending programs continue even though they have little public support. This is due to the difference between concentrated and dispersed interests. Government spending programs often take money from many people and give it to a few people. Thus the recipients of government money have a significant interest in preserving these programs, while those being taxed to pay for them have a much lower interest in stopping any particular program. This dynamic encourages more people to become recipients of government spending and serves to increase the size of government.

Like taxation, government spending gives the government power over the people. Government can encourage behaviors that it desires by subsidizing them. If government tried to mandate these behaviors by law, people would rebel, but spending accomplishes the same goal with little resistance.

Government spends money on a variety of programs, most of which are destructive. Government spending must be paid for with taxes. It misallocates resources and makes people poorer. It creates destructive incentives that make people poorer still. It can be used to control people and empower government. It ultimately rests upon the use of force. Government must spend no more than absolutely necessary.

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