What Are The True Costs of Government Spending?

Great Debates
1

It seems to me that if a government spends money in its own nation, then, assuming relatively efficient management of taxes, we don’t loose anything as a people. One might take issue with the government deciding where to spend one’s hard-earned money, or one might take issue with the government paying its own employees/contractors excessive amounts, but from an economic standpoint, we as a people don’t get poorer unless the government sends the money over seas, or sits on it.

The government redirects money/labor/resources, but doesn’t truly “take” it from us as a collective.

Am I right? Am I totally off base?

I had a long, drawn-out hypothetical ready to go, but I figure this is a clearer and more direct way to ask the question.

2

Two things immediately come to mind.

When the government borrows money, it has to pay interest. With the interest we are paying on our debt, we could fund every school in the country.

The government spending money that it doesn’t have can also cause inflation, which is a hidden and regressive tax on everyone. There isn’t a lot of difference between the government taxing ten cents for every dollar you make and the government spending causing the dollar you make to be only worth ninety cents.

3

The other issue I see is that A LOT of gov’t work is farmed out to contractors and various suppliers that in turn farm out the work to off-shore concerns and foreign workers. So the money does leak outside the country. I cannot speculate intelligently what percentage leaks and what percentage stays inside. I suspect the amount is not insignificant.

4

Suppose, for the sake of argument, that there’s a man named Bob who’s very intelligent and talented. If Bob applies his intelligence and talents, he may make inventions, discoveries, and methods that improve the lives of many people. All that Bob asks in return is the ability to sell the things he invents and discovers and profit from it. If taxes are low or non-existent, Bob will make profit easily, and will have a financial motivation to work hard and invent many things, which will benefit everyone. If taxes are high, he has less motivation. He may leave the country, or he may simply decide not to work as hard. The high taxes thereby hurt everyone in the country.

It is, of course, debatable exactly how much this will occur. There may be some people who work hard for reasons other than financial gain. There may be some rich people who would work hard as long as they get some profit from it, regardless of what the tax rate is. Nonetheless it seems clear that tax rates do have an effect on people. In India 40 years ago, corporate taxes were so high that companies barely made any profit at all. As a result, companies showed little interest in investing and the country became synonymous with grinding poverty. In the 1990’s India slashed tax rates and business suddenly bloomed nationwide.

5

OP’s perspective is essentially correct. The government employs Americans who would otherwise be unemployed or working in the private sector. Their salaries will largely be spent in America.

When your right-wing friends complain about how many government workers there are, remind them that the largest category of workers, by far, is teachers. Would it make much difference to the “big picture” if instead of paying taxes, people spent that money paying for private schools with private teachers? Yes, it would make a difference – poor children would not be educated.

Other big categories of government employees are soldiers, civilians working for the military, policemen, firemen, postal workers and health workers. The U.S. Department of Veteran Affairs has about 280,000 employees – more than any federal agency other than the Dept. of Defense. I don’t know how this breaks down by nurses, doctors, trainers, etc.

When the wingnuts tell you about featherbedding government workers, the above are who they’re talking about: teachers, firemen, V.A. employees, etc.

For comparison, among agencies the wingnuts love to hate, the Occupational Safety and Health Review has 68 employees, the Advisory Council on Historic Preservation has 35 employees, etc.

Assuming full employment (a bad assumption today, of course), taxation diverts private employment to employment for teachers, firemen, etc. Good or bad? It depends! In very very round figures, America, taken as a whole, spends about as much for a few professional sports leagues as it spends for NASA. I for one, would be happy to see another gigabuck diverted from the NFL to NASA. You might prefer the opposite. But in the big picture, OP is right either way – government is just another way for America to spend money on the things America wants and needs. The whining wingnuts are just blowing more smoke at you.

6

Is that a department of the Occupational Safety and Health Administration, which has well over 2000 employees?

7

Actual salaries of government workers, excessive as they are, do not account for most government spending. The rest goes to entitlements and to contracts for private companies that do various government work. Sure, pork barrel projects are usually built in the USA and therefore the related wages go into the American economy, but the resources used to build them are wasted all the same. Instead of getting a bridge to nowhere, we could instead build a bridge to somewhere, pay the workers the same wages, and derive the additional benefit of being able to get to somewhere.

8

Or invests it in something less productive than what the private sector would have invested it in. If we had a way of determining when that was so, I think most of us could all get behind that particular government spending.

9

You seem to be pointing out that building useful bridges is a better use of government money than breaking windows. I think OP and other Dopers figured that out, even without post-grad training in economics. What’s your point, unless it’s just the usual wingnut chatter “Natter natter natter … governments are stupid…” ?

Sheeesh.

10

Thanks for the responses. Just to clarify, I am not making the argument that “all government spending is smart spending,” but rather that the government taking money in taxes does not inherently make us poorer, and is not inherently unaffordable.

ITR Champion, your hypothetical might be right about Bob. On the other hand, Bob’s allocation of capital might not be as universally good for society as some other allocation. That’s not my point though. The point is, taking some of Bob’s money and giving it to Dave does not cost an appreciable amount. Whether or not the government is better or worse at deciding how money is spent, or how to accomplish a certain task in a given situation is completely (or mostly) unrelated to the “cost” of taxation in the broader sense.

I wish the discussion about the US economy would focus more on keeping our capital within the country. That, to me, seems like a giant white elephant of an economic issue that gets passed over in favor of the hot-button issue of taxation/wealth distribution.
addendum:

John Mace, I agree that there is a “cost” whenever anyone uses capital in a fashion that is sub-optimal for the production of more capital. I don’t see, though, a way to gauge that in an effective manner. “Widget industries, if it had $100,000 more in post-tax income last year, would have definitely added to the economy X amount more than was accomplished with that $100,000 used elsewhere by the government.”

11

It appears to be a different entity, whose 2013 budget states that they have 65 FTEs. I’ve never heard of it either; no wingnut has ever griped about it to me.

12

I’d say that if heavy taxes on Bob cause Bob to work less, not work at all, or leave for Singapore because the tax rates there are lower, then that does cost an appreciable amount. Such costs may be difficult to pin down and are not counted in any official statistics, but they certainly exist. As I mentioned, in India and many other third-world countries, sky-high tax rates are, or until recently were, the central fact of economic life and they certainly stifled a great deal of economic activity

13

Exactly. There is less incentive to work if your labor (i.e. your money) is being used to help the “collective”. Remember that the group is made up of individuals. Many of those individuals (usually the most productive) will be poorer. The government is taking from the most productive to give to the least. Common sense dictates that the most productive will not be as motivated to be as productive under these circumstances and the “collective” will suffer as a result.

14

Is this really the case though? Speaking from personal experience, I have seen my overall taxes increase as my income has increased over the years, but have never felt the desire to work less as a result.

Are there any studies that have looked at any correlations in this regard?

15

If the government takes our money, $100,000,000,000, purchases iron with it and attempts to fill in the Grand Canyon, we are poorer as a “nation” because we have less iron in productive use.

If the government takes our money, $100,000,000,000, purchases iron with it and attempts to build bridges how do we know those bridges are worth that sum to th people who use them?

On the free market, products are bought and sold for a profit. This is how a provider of services knows that he is making society richer. The value of his output is higher than the value of his input. Government extorts money and puts it to use in ways that can never be evaluated on a profit/loss basis. They can never know whether or not they are making society richer. It is possible that the are, but it cannot be known, and a hunch tells me that in the vast majority of cases, they are not. The value of their input is known, but the value of their output can never be known.

16

When a private individual spends money they have to ask themselves if the money they spend is worth more or less than what they get in return. If the answer is yes they spend the money and if no they do not. When a government spends money, they have to ask if the money they spend is worth more or less than what they get in return and if spending the money helps their reelection chances. The second question is obviously more important than the first. Thus you get things like the bridge to nowhere, the UAW bailout, and headstart.
Even if you assume away the fact that public money is more likely to be misused than private money there are still ways taxation takes money out of the economy. If I am rich enough to pay alot of taxes I may hire an accountant to figure out ways to minimize the tax burden. All of the money I pay for the accountant is lost to the economy. If my accountant tells me to invest in certain instruments for tax reasons the difference between the tax shelters and the most productive investment is lost to the economy. This is known as deadweight loss.
Another effect is that high tax rates discourage work in two ways. First is that they decrease the return of work. So if my boss tells me I can work overtime for $100 and I know that it is actually going to be $60 after taxes, I may not work the overtime. Thus the economy is deprived of the extra value of my work.
Secondly, if we assume that the government spends efficiently then the tax money makes everyone better off. Since taxes allows people to be better off without working more they decrease the incentive to work so that people work less and the economy is deprived of the output of their work.
Prescott in his famous paper Why Americans work so much more than Europeans (pdf) Shows that Europeans use to work as much as Americans and when their taxes started going up responded by working much less.

17

It depends on who holds the government’s debt. It may be the case that most of the interest is funding people’s retirement plans.

18

The big difference between government spending and private spending is that private investors expect a return on their investment. The government has no need of any return-the spending (itself) IS the objective. This is done for many reasons:
-it rewards political contributors (with money and jobs)
-it undertakes projects “in the national interest”
-it funnels money to economically depressed areas
All of these may be good and worthwhile-the problem is that most are not. That is why we build bridges to nowhere, high speed rail links that nobody wants, and subsidize child obesity (via a school lunch program)
Or take the recent bankruptcy of A123 (a battery firm). This cost the Federal taxpayers over $250 million-and the Massachusetts taxpayers over $55 million. A123 had a customer (Fisker) which was building an electric car (the “Karma”), of which only 1200 have been sold. Fisker got a loan guarantee for $200 million (Federal DOE). Was this a good use of taxpayer money? The present adminsitration thinks so.

19

No it’s not. You are employing a person who in turn spends the money he earns and returns it back to the economy.

First, you are arguing that taxes decrease the monetary value of your work. Second, you are arguing that taxes increase the monetary value of your work. I don’t see how it can be both.

20

It is telling that the bridge to nowhere so beloved of conservatives in this thread actually never got built. And remember noted liberals Ted Stevens and Sarah Palin supported it.
It is cute - and stupid - to assume that all government projects are pork barrel. Sorry, the money spent to widen the freeway I drive every day saved me 20 - 30 minutes a day in commute time, and lots of other Silicon Valley workers similar amounts of time. When we can leave work later or arrive earlier that increased productivity goes right into the economy. Making sure the bridges around here don’t fall down in earthquakes might be a reasonably productive investment also.
Are you objecting to the government contracting work out to companies who are expert in the work? That seems reasonable to me, and that money is spent right in the US of A.

Now certainly not all government money is spent optimally. Guess what - not all private money is spent optimally either. Remember the CEO of Tyco who used company money to buy gold crap for his house and to throw big parties? Look at HP, who has wasted billions of dollars on bad acquisitions. The money spent on the freeway near me was a hell of a better investment than that.