This brings up a different point. If government is efficient, shouldn't it be able to grow more slowly than GDP? Economic growth (GDP growth) is a good thing, but why does government need to grow at the same rate as the private sector?
Let me start with the Blackboard (or whiteboard nowadays) mathematics – then move on to the politics.
A rhetorical question first: If inflation runs at 3% but I only give you a 2% raise, have I cut your pay?
If the perpetuity growth rate in the economy is 3%, and the population is growing (and when I was a kid the population was 220 million and now its 305 million) then budget growth below those metrics is a budget cut.
To do some simple math, start off with the general rule that the government, for the most part is not a creator of goods and services. Its “gross profit” margins do not increase with scale. However, it can capture cost efficiencies with scale.
Looking at a simple model of the government, assume inflation runs at 3% and we have 3 expenses: Defense (40%), Social Security and Medicare (40%), and all else (20%) (numbers just for example). Let’s also assume the overall economy grows at 3%. If defense grows at 5%, but SS and All else grows at 2.75%, overall government spending has grown by 3.25% (greater than economic growth).
(.0.4 * .05) +(.04*.0275)+(.02*.0275) =.0325
So defense outpaced inflation. The other two sectors did not. That could either mean more efficiency, or a benefits cut (see my rhetorical question).
SS should grow equal to the growth in the economy, or else it’s a benefits cut because it is just transfer payment with extremely small overhead. To the extent that All Else is “creating” services, then greater efficiency should result from scale, but much of the all else budget is also in the form of transfer payments – whereby an increase at less than inflation is a cut (like the “hated” Dept of Education where most of the budget is direct aid to local schools and higher education). Now if you want to have an honest debate about cutting the National Parks, or the FBI, or the National Institutes of Health, of Highway funding we should have it – and the costs / benefit of how little major cuts here will affect the overall direction of the total budget. But this is what the politicians – and the general public - avoid like vampires avoid holy water.
Defense is a different – and rapacious animal. It creates nothing. Its mission is to destroy things. Much of its budget is in consumables, and war chews up those consumables at an alarming rate. The Defense Department is also the most inefficient branch of the Gov, because its mission is not efficiency – but destruction.
Yet we’ve been at war since 1941 (with a very brief respite in the early 90s). Defense is destroying this nation (along with the bargain basement sale of our industrial capacity by the Corporate and business community Con Artists). Jefferson and Madison particularly warned of the deadly dangers of maintenance of standing armies. But we’ve made war appear costless to the general public. We didn’t raise taxes to pay for Iraq et al, and we have a volunteer army. No sacrifice by the general public means no political pressure to end the wars and no national dialogue and debate as to whether the benefits outweigh the costs. If your next door neighbor’s son is coming home in a bag, and you’re tired of managing your ration coupon book for gas and tires and fresh vegetables, and you are tired of clearly identified and burdensome tax surcharges for war fighting, you want to win quick and “return to normalcy.” Our defense infrastructure has become a perpetual motion machine, and a plaything and shield for the political class.
3 trillion in unfunded liability for the Iraq war alone.
ritholtz.com
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