Tuesday, December 1, 2009

The Culture of Spending

In 1991, James Payne wrote a book entitled The Culture of Spending. In the front jacket of the book he inscribed for me a quote from the French author and psychologist, Gustave Le Bon: "In politics, the name of things are more important than what they are." I found the quote as I flipped through the book searching for a particular passage I remembered from my original reading of the book.

The original passage commented on the oft repeated view of those on the left that a dollar spent by the government is as good as a dollar spent by the private sector. Those of us on the right side of the argument understand intuitively and empirically that a dollar spent by the private sector generates growth (read: more jobs) while the same dollar spent by government creates a black hole of stagnation.

In a discussion with a staff member of the Senate Budget Committee on the question of redistribution of wealth, Payne was told: "It evens out. Everybody pays for everyone else's goods." That kind of thinking pervaded the Congress then and what followed was a mass redistribution of the Democrats in the House. We can only hope that kind of thinking today will result in the same redistribution in 2010. Payne explores that view below.

"Unfortunately, this is culture-of-spending ideology, not sound economics. When the government purchases what people can buy for themselves, two additional costs are introduced (emphasis mine): the cost of taxation, including the distortion of incentives governing production; and the cost of administration, including the distortion of incentives governing consumption. Calculating these costs is quite difficult but preliminary estimates suggest that for each dollar the federal government recycles through the taxation-subsidy system it wastes more than one additional dollar."

He goes on to explore the source and precise amount of this waste citing research studies on the taxation side of the equation (cost is about 60 cents for every dollar collected) and the disbursement side (50 cents for each dollar spent). The "bureaucratic rule of two." Government production of a typical good or service in 1991 cost twice as much as the same items produced in the private sector.

Imagine the cost differential now.

According to RealClearPolitics, through 11/30/09, 58% of Americans say the United States is on the wrong track. 38% believe the country is on the right track. Americans understand intuitively that the culture of spending being proposed in Washington is wreckless. It will only lead to disaster. And they feel this most acutely when it comes to their health care. A recent compilation of the polling data from Laffer Associates shows the trend of opposition to health care reform rose from less than 20% in January to over 50% by the end of November. According to Rasmussen the opposition to the health care bill is at 53% with 41% supporting it. 56% understand, though, that the bill instead of reducing health care costs as suggested, will drive prices higher.

The bureaucratic rule of two. Everyone but Congress seems to get it.

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