Asymmetrical Information

From the desk of Mindles H. Dreck:

Looking for No-Growth in All The Wrong Places

Calpundit purports to bust the "myth" of "runaway government" in a post showing the level-seeming proportion of GDP made up by the federal government. The exhibits presented (here are alternatives from the CBO)are familiar to those of us who've seen them in other contexts (for instance to show that tax cuts have not eaten into tax revenue the way static analysis suggests).

I don't know about the "runaway" strawman, but if Kevin is attempting to show that government's share of and impact on the economy hasn't expanded he's way off-base. It's worth reviewing, as the numbers in his post fail to reveal the magnitude of change:

1. He chooses a convenient time frame. As an alternative, from 1947 to the present, the federal government has grown from 16% to today's low-20%'s of GDP (same data source that he uses, the BEA/NIPA tables). He does so to "assume away" the growth in entitlements in the late 1940s. I don't know why they should be exempted.

2. He acknowledges that he ignores state and local government, which has nearly tripled from 6 to 16% of GDP in the post war era (also available from BEA/NIPA). In his relative analysis there is no allowance for the fact that states here cover education while that is a national budget item in many of the comparison economies. Furthermore, anyone who's heard the term "unfunded mandate" knows how States have been put in the position of assuming new responsibilities so the Federal government could stay within the range shown.

3. He makes no allowance for the massive off-budget liabilities assumed by our government. Most financial statements estimate the costs of assumed future liabilities. Certainly GAAP, Statutory Accounting (insurance) and Pension regulations require as much. If you are the U.S. government, however, you do not have to account for them. The U.S. takes advantage of its loose accounting requirements to commit liability-hiding that makes Enron look like a three-card monte dealer:
   
   
   
   • If social security were a corporate pension, it would likely be $3.2 Trillion underfunded. That's about 30% of GDP and the underfunding didn't exist (actuarially speaking) in 1983.
     
   • Other national insurance programs are also under-reported. The National Flood Program, which subsidizes its policies between 22% and 75%, most of which would be expenses in a reserve in a commercial company but does not appear in the federal budget. If global warming predictions are correct, this could turn out to be one of government's largest liabilities in the future
     
   • Guarantees and unfunded capital provided to the IMF, World Bank, OPIC, Ex-Im bank, etc. The unfunded capital to the World bank is about $30 billion (around 0.3% of GDP). Propping up many IMF and World Bank borrowers can resemble a Japanese Bank throwing money at insolvent clients in order to not recognize a bad loan. As bankers like to say about contingent liabilities, "a letter of credit is a bad loan waiting to happen".
     
   
   
4. He fails to consider the impact of regulations and risk-shifting that impose a burden on the private sector but have little budget impact. For instance, in the 1980's government actions led to Phase I audits and environmental impact assessments being conducted on all transacted and improved industrial property starting at about $20,000. Desirable or not, this is a cost imposed on the private sector, and it certainly didn't exist before. There are literally thousands of examples on this point, ranging from the added complexity of tax returns to the enormous compliance burden of financial institutions that are essentially deputized by government to track international funds flows to and from terrorists, drug dealers and tax evaders.
   

I have been reading a book by David Moss called "When All Else Fails - Government as the Ultimate Risk Manager", which tends toward defending the growth in government programs to transfer and assume risk (which, as noted above, happens largely outside the current budget). While I am sympathetic with some of Moss' arguments that these programs have largely benefited our economy, it is unambiguous that government is much larger for having done so. And since we are relatively new to this role, it will surely bite us hard at some point. One could argue that the WTC settlement fund's appearance in the budget is a quick preview for the alert to the potential budget effects of government assuming more and more risk.

Finally, it is not at all clear to me, examining Kevin's premise, that it is all fine for government to maintain its share of a growing economy. It seems to me that even an ardent defender of the welfare state might suggest government shrink as standards of living and payroll employment increase.

From direct federal and state spending to retirement funding to welfare to medicaid to worker's compensation to "risk management", government has grown much larger over the post-war period and even in the last two decades. This is reflected both in the combined government outlays measured by Calpundit and in the contingent and unreserved liabilities we have too lightly assumed. Unfortunately, it will be difficult to get a handle on how large until the contingent chickens have come home to roost.

As an aside, I would be interested to see a follow-up to Moss' book that analyzes how the "crowding out" effect of risk assumption differs from that of traditional government programs. That strikes me as a difficult bit of economic analysis.

Also, this post is relevant to John Quiggin's comments here.

UPDATE: I haven't been checking my referrer logs. I did not realize that Calpundit had responded to my original short post in the left column on this. Where is this discrepancy in state spending between Calpundit and Hodges? I fear it shall have to wait. I must to work now.

Obviously, this is a complex subject. Nonetheless, my objections to big government relate to its crowding out more efficient allocation of capital in the private sector and its taking of money earned in the private sector. Current government spending, using flawed government accounting, substantially understates that impact. So I suggest that "runaway government" has not been myth-busted.

UPDATE AGAIN: Here's the state & Local Data straight from NIPA using current expenditures. Looks like it's grown a bit to me. More than Kevin says, less than Michael Hodges graphs. Natch.

Posted by Mindles H. Dreck at December 4, 2002 10:31 PM | Technorati inbound links