Unlike PCs, economies don’t just reboot after a crash

I had the pleasure of spending time with my uncle recently. He and I do not see eye to eye on most political or economic issues, but that isn’t a problem.

Born in 1923, my uncle has seen a lot, including service to our country during WWII. We got to talking one evening and he asked me why I felt that government was too big. He felt that as the population increases it would be only natural for government to get bigger as well.

There has been considerable public debate on this subject. Some states have amended their constitutions to implement a TEL, otherwise known as a Tax and Expenditure Limitation, or a Taxpayer Bill of Rights, or TABOR, the goal being to limit the growth of government to the increase in population plus inflation. The word coined to describe this phenomenon is “popflation.”

Inspired by the conversation with my uncle, I did some research to determine the rate of growth in federal spending as it relates to “popflation.” I decided to go back to the year 1952 because the population of the United States today is nearly exactly double what it was then. That makes the math a little bit easier.

In today’s economy it would take approximately $883 to buy what cost $100 in 1952. So, for the sake of argument, let’s say that inflation has increased ninefold since then. Since the population has doubled, then one might expect that the federal budget would have increased 18 times what it was in 1952 if it were to keep pace with popflation. It wasn’t even close. The federal budget in 1952 was around $69 billion; today it is $3.8 trillion. That’s an increase of 55 times. That means that over the last 60 years or so, federal spending has increased at triple the rate of growth of inflation times the increase in population. So, even after adjusting for “popflation,” the federal government is three times the size it was in 1952.

If I had gone back to 1948, the numbers would have been far worse. The 1952 budget was nearly double the $36 billion spent by the federal government four years prior. Today’s federal budget is more than 105 times greater than the 1948 federal budget, making today’s federal government six times larger than 1948, on an adjusted basis.

As an aside, it is commonly assumed that it was government spending during WWII that brought us out of the Great Depression. One of the things that bothers me about that is the implication that war is good for the economy. That aside, the economy didn’t pick up until a couple of years after the war ended. From 1947 to 1951, federal spending was actually cut drastically, resulting in budget surpluses in four of those five years that were used to pay down the national debt. During those years, total government spending — federal, state and local combined — ranged from 21 to 26 percent of GDP. According to Warren Buffet, an advisor to the president, economic growth is difficult to sustain when government spending exceeds 26 percent. The bad news is that for 2013, government spending on all levels comes to more than 37 percent of GDP.

The Great Depression lasted for more than 15 years. Throughout, the federal government increased spending and ran deficits, all to no avail. Contrary to popular belief, government spending is a drag on economic growth. We are making the same mistakes today.

In the private sector, as markets expand and costs are amortized over larger numbers, economies of scale result in benefits for the consumer. This doesn’t happen in government. The unit cost of government today is at an all-time high.

When I presented my findings to my uncle he was surprised. It contradicted his assumptions. I asked him how big government should be. He didn’t know.

In order to answer that question, we need to ask ourselves a different question: What is the purpose of government? The so-called progressive movement hasn’t come up with an enduring answer. The answer is blowin’ in the wind; it evolves incrementally. Those that answer incorrectly politically pay a price. They are accused of being unwilling to compromise, and yet, incremental compromise has brought us to our current predicament.

I own a personal computer. There is a function in the utilities that allows for me to restart it after it crashes. I can reboot my computer in “safe mode” and then roll it back to the last point in time where it was able to function properly. Unfortunately, an economy doesn’t work that way. Once it crashes it takes a while to get it to reboot. In the interim, we the people suffer.

— Elliot Simon writes

from Harpers Ferry

 

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