Last August, I wrote this post about how I think we should view government as an overhead expense. Yesterday, Edward wrote the following response to that post:
A very interesting post. I agree with your premise that government is overhead. However, if you look at government expenditures relative to GDP, they are lower than the average overhead rates of successful companies. Currently this rate is 19 percent or so (gov/gdp) and for companies this number is in the high twenties. Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?
This is my response to Edward.
The Federal government is not the only overhead in the economy. It’s a piece of it. Comparing Federal government spending to all business overhead is an apples-to-oranges comparison.
For example, all government — Federal, state and local — is part of overhead. According to this graph, all government spending makes up nearly 40% of GDP, which is more than ten percentage points higher than Edward’s ‘high twenties’ benchmark.
And still, all government is only a part of the economic overhead. For example, all the overhead tied to successful companies that Edward mentions, is also economic overhead.
Also, anything we do to comply with the government is overhead. For example, the time and money you and the companies you deal with spend to keep records and prepare your taxes — at all levels — is economic overhead that does not show up in government spending. That’s time or money that we could have spent doing something productive, like cleaning our toilets.
Edward then asked a question that I’m really glad he asked:
Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?
First, as I pointed out above, economic overhead is higher than the ‘faultless private sector’.
Second, and more important, folks of my political persuasion don’t believe the private sector is faultless, as Edward suggests. Far from it. I’d guess the failure rate of government and private sector is about the same. Why wouldn’t it be? Both are run by humans after all. Are the humans in government less fallible than the humans in the private sector, or vice versa? No.
One reason we favor the private sector is the difference in how it and government naturally respond to failure. The private sector is better in this regard, though not perfect.
The private sector — you, Edward and I — reward organizations that provide us with stuff we value by buying that stuff and we punish the others by not buying their stuff.
When it comes to government, that success/fail feedback isn’t quite as strong, and sometimes it’s the opposite of what it should be.
For example, for years the answer to “Public schools are failing!” was “Public schools need more money!”
This sounded reasonable to a lot of folks. I bet those same folks would scoff if “Public schools” was replaced in those two sentences with “Enron”.
We realize that giving more money to the corrupt leaders of Enron so it could try to “fix its problems” and save some jobs would have made no sense. Those corrupt leaders would have blown that money on themselves.
The market clobbered Enron’s stock and put it out of business long before the government even figured out what was going on.
We realized that the best thing was for Enron to go out of business. The market naturally stripped the fraudsters running Enron of their power. Its failure caused some painful collateral damage to people down the totem pole, but it also taught a generation of people valuable lessons in prudence, investment diversification and ‘if it sounds too good to be true…” And, all this happened without taking the whole economy with it. Markets naturally isolated the disturbance.
This wouldn’t be the case a few years later when government actually encouraged fraudulent practices in home lending.
I also believe that the success/feedback loop is weak in overhead functions, whether those functions are in private companies or government.
I’ve been a part of overhead of private organizations most of my career. I’ve witnessed this from the inside. Strong underlying businesses can feed crony, corrupt and political bureaucracies in the overhead departments, precisely because the success/fail feedback loop is weak.
It wasn’t a stretch for me to recognize that government also had this success/fail feedback problem.
Again, that is precisely the reason government tends to grow in good times and bad and is one reason why anti-tax folks would like to minimize government and overhead.
Politicians tell you they can solve your problems if you vote for them and allow them to spend your money (or the rich guy’s money) and too many people believe them.