SO BIG IT’S DESTROYING US

Most people seem to believe, as does the always uninformed media, that our governments take as much as 25% or 30% from the wealth produced annually by Americans. And most Americans and the media believe that wealth production is fairly represented by Gross Domestic Product. In his article “How Big Is Government in the United States” Robert Higgs demonstrates how much worse the problem actually is. In that paper he also demonstrates the misuse of the current method of estimating the size of government in the United States. His paper is longer than the following and far better explains the complex issues involved but if in my attempt to cut to the chase I draw conclusions that are in error it is my fault and not his. I encourage you to read the original. A link is provided at the bottom of this page.
Higgs begins by demonstrating the serious flaws in the standard method used by most economists for arriving at the size of government relative to Gross Domestic Product. Among other problems GDP includes capital depreciation and other costs that are not final goods and services.
A more accurate view is produced by comparing all government spending—local, state and federal—which is annually taken from the taxpayer in one form or another—with the amount of after tax wealth retained by the taxpayer for personal consumption. Those are terms we can all relate to as a way of judging the size of government. In that case government spending is almost 51% of the amount left to the taxpayer for personal consumption spending.
In other words government , including state, local and federal, is taking an amount equal to half of all wealth produced by its citizens. Much of that amount is used to buy the support and votes of the warfare, welfare and government employee industries. Yes, some is returned in the form of social security, medicare, etc., but that is included in the personal income on which we pay taxes.
Unfortunately, if we are trying to estimate the size of government, that is only the beginning.
Federal, state and local regulations eat away at every business and every individual far more than most people realize. Best annual estimates by the economist Clyde Wayne Crews Jr. of the Competitive Enterprise Institute indicate that the cost of compliance with federal regulations alone takes another 13% of our remaining earnings. Local and state regulations add still more. In some states, counties and cities regulations may add more than federal regulations.
Now consider that every business must pass on to its customers all of its costs, not only the taxes and fees paid to various governments, but the costs of conforming to government regulations. Every product and service we buy contains infuriatingly stupid regulatory compliance costs we always pay but never see.
Politicians and their cronies use government tax and regulatory structure to constantly prey on the wealth producer. A comparison might be made with mob protection rackets.
So how big is government? It is a parasite almost equal in size to its host. And it grows larger every year. The economy cannot grow in the presence of that parasite.

See Robert Higgs paper https://www.independent.org/pdf/tir/tir_20_02_07_higgs.pdf

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5 Responses to SO BIG IT’S DESTROYING US

  1. Brett says:

    Yup.

    And it’s not going to get better anytime soon. It doesn’t matter if the right or the left control Washington, they are both beholden to interests that will not profit from diminishing the size of government. The bigger the beast, the easier it is to profit without light shining on the back door deals being made. I sometimes wonder if someone like Trump would make an honest effort of dismantling the government money machine, but even if he was elected with that intention truly in his heart, I doubt the many, many bureaucrats profiting from government-as-usual would allow him to dismantle any part of the cumbersome nightmare that is the US government machine.

  2. Warren Gibson says:

    I totally agree that the government is a huge burden on the private economy. And I am no fan of the concept of GDP (http://fee.org/freeman/gdp-who-needs-it/). Still, I have three problems with Higgs’ analysis.

    First, note that the investment component of GDP consists of final goods and services that are used for future production. I see no reason why final goods and services that are used to maintain current production capability (i.e., offsetting depreciation) should be treated differently.

    Second, Higgs mentions in passing the omission of intermediate goods and services, e.g., wheat sold to flour mills. In our macro classes we are all taught to omit intermediate goods/services to avoid double counting. Yet Mark Skousen has made a good case for including them (Google “gross output”). If gross output were used as the denominator rather than GDP, the burden of gov’t would appear far smaller.

    Before getting to my third objection, this digression: government spending can be divided into three categories: harmful, wasteful, and beneficial. I do not include costs in these categories, so harmful activities are those that would make us worse off even if they were costless (example: most wars). Beneficial activities make us at least a little better off even though their costs may be exorbitant (example: highways). Wasteful activities produce neither gross harm nor benefit, and of course it’s a good thing when some spending shifts from harmful to wasteful. By characterizing personal consumption (C) as the part of the economy that “affords immediate satisfaction to consumers” Higgs is implying there is no net satisfaction to be gained from government spending (G). I would agree this is a reasonable assumption, as opposed to Rothbard who if I remember right considers all government spending as harmful and therefore G should enter GDP with a negative sign.

    Continuing with Higgs’s assumption, my third objection, unless I am misinterpreting Higgs, is that he has made an algebra error in proposing G/C as a measure of government’s take. If spending consists of G+C then government’s share is G/(G+C), not G/C. If a pie has four pieces and I get one and you get three, my share is 1/4, not 1/3.

    My final comment is that while such calculations may be interesting they cannot be definitive. A government that took 75% of production would not necessarily be a bad thing if its activities could somehow be shown to be beneficial, inconceivable as that may sound. We have to judge government activities against basic principles of human action, not numerical size. Doing so could only reach the conclusion that the present government is way, way too big.

    • Erne Lewis says:

      Warren, I did read your 2010 article (again) and like all your articles it was excellent! I always learn a great deal from your articles as I do from those of Robert Higgs.
      I will begin by admitting that I suspect my opinions will be easily demolished by you. Nonetheless, I won’t learn if I fail to offer my arguments. I will also not attempt to guess at how Higgs might have answered.

      Your first issue, “I see no reason why final goods and services that are used to maintain current production capability (i.e., offsetting depreciation) should be treated differently.”

      But if the cost of maintaining GDP was for example precisely equal to that cost year after year then no improvement to the economy would occur. GDP would actually be zero, would it not?

      Your second issue, “the omission of intermediate goods and services, e.g., wheat sold to flour mills. In our macro classes we are all taught to omit intermediate goods/services to avoid double counting. Yet Mark Skousen has made a good case for including them (Google “gross output”). If gross output were used as the denominator rather than GDP, the burden of gov’t would appear far smaller.”

      I read and enjoyed Skousen’s WSJ article and agree with much of it. However, if the counting of intermediate goods is permitted then where does it end, or for that matter where does it start? If steel is produced from mined ore, do we count the ore and then steel? If the steel is sold as ingots then is it another product to be counted when it is formed into sheets or bars and another product when it is used in vehicle manufacturing. I see the need for such measures but I also see the unlimited opportunity for the U.S. Bureau of Economic Analysis to fiddle the numbers in years when they need a stronger number. If GDP only measured final privately produced goods I would like it much more and year to year comparisons would be worth following.

      No doubt your third issue is mathematically right but from my standpoint I am less interested in what is the proper denominator to determine what is the proper percentage of what.
      I only wish to see how much is left in the taxpayers pocket after government has completed its constant theft and how large is the total theft when seen next to the amount left with the taxpayer for his own consumption.

      I know you have a low opinion of government. My opinion of our government could not be much lower. It serves few rational purposes for which I would willingly contribute taxes. It is hard for me to believe that anarchy would be worse.

  3. “A government that took 75% of production would not necessarily be a bad thing if its activities could somehow be shown to be beneficial”

    Beneficial to whom? And in whose opinion?

    Taking 100% of the contents of your wallet might be beneficial to me. You’ll probably not find it so. There’s more than subjective perception of benefit to consider in the situation. Like whether or not what’s yours should become mine on demand at gunpoint.

  4. Tom C. says:

    Just to clarify the cost of Federal Regulation, the most recent Small Business Administration (SBA) evaluation of the overall U.S. federal regulatory enterprise estimated annual regulatory compliance costs of $1.752 trillion in 2008 and a report released September 10th, 2014 by the NAM estimated the combined cost of all Federal business regulations at over two trillion dollars in 2012 (in 2014 dollars), an amount equal to twelve percent of GDP.

    The 2014 Edition of Ten Thousand Commandments by Clyde Wayne Crews Jr. reports:
    “U.S. households “pay” $14,974 annually in regulatory hidden tax, thereby “absorbing” 23 percent of the average income of $65,596, and “pay” 29 percent of the expenditure budget of $51,442. The “tax” exceeds every item in the budget except housing. More is “spent” on embedded regulation than on health care, food, transportation, entertainment, apparel and services, and savings.
    The estimated cost of regulation exceeds half the level of the federal budget itself. Regulatory costs of $1.863 trillion amount to 11.1 percent of the U.S. gross domestic product (GDP), which was estimated at $16.797 trillion in 2013 by the Bureau of Economic Analysis.”

    What drives this cost is the continually growing number of regulations as embodied in the Federal Register. Again quoting from Ten Thousand Commandments:

    “Among the five all-time-high Federal Register page counts, four have occurred under President Obama.
    The annual outflow of more than 3,500 final rules—sometimes far above that level—means that 87,282 rules have been issued since 1993.
    There were 51 rules for every law in 2013. The “Unconstitutionality Index,” the ratio of regulations issued by agencies to laws passed by Congress and signed by the president, stood at 51 for 2013. Specifically, 72 laws were passed in calendar year 2013, whereas 3,659 rules were issued. This disparity highlights the excessive delegation of lawmaking power to unelected agency officials.”

    Erne, you are right. It really doesn’t matter who is President. We are fast approaching the state of affairs envisioned by Terry Gilliam in my favorite movie, Brazil. We live under a tyranny of dunces enabled by Mencken’s Boobus Americanus.

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