The high costs of too much government spending

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America is embarking on an unprecedented spending spree. The Committee for a Responsible Federal Budget estimates that the infrastructure proposal and the proposed $ 3.5 trillion reconciliation spending plan will translate into $ 2.9 trillion (approximately $ 8.9 trillion per person) in additional government borrowing. over the next decade. This debt will not solve our problems. America needs more private sector innovation to solve our biggest challenges – raising the poor, healing the sick, and protecting the planet – no more government spending and top-down regulation.

If all of this proposed spending occurs, federal debt will likely reach 109% of GDP by 2031, but could reach 125%. This would exceed the debt-to-GDP ratio in the years immediately following World War II.

Too much public spending harms society and individuals in many ways.

First, it raises the cost of living through subsidies that stimulate inflation. Government subsidies artificially increase demand. This results in higher prices which disproportionately harm the working poor and the middle class. Firms with subsidized offerings get richer, while these higher prices increase the demand for larger subsidies. The cycle repeats itself and costs the head skyward.

Grants are the reason the average cost to attend a four-year college or university increased 497% between 1986 and 2018, more than double the rate of inflation. A substantial body of research shows that universities are responding to increases in state and federal grants by reducing their own aid, increasing tuition fees, or all of the above. This is forcing many middle-class students and families into debt to pay for their education.

Per capita health spending has almost quadrupled over the past 40 years. Thanks in part to legislation such as ACA, Medicare has moved beyond real insurance to cover routine care. As a result, government insurance subsidies protect consumers from the full cost of current health care expenses. This increases the demand for more tests, procedures and consultations, many of which do not improve actual health. Research shows that the subsidies also encourage consumers to switch to more expensive insurance plans, which further increases overall costs.

Instead of subsidizing health insurance, which does nothing to address the underlying cost issues, we should reduce regulations that hamper competition to increase access to health care for low- and middle-income Americans. Scope of practice laws, certificate of need laws, and other regulations restricting technologies such as telehealth reduce the supply of health care and increase costs. Americans deserve personalized health care that actually improves health.

Large public deficits and debt also increase the risk of sustained inflation which acts as a tax on consumers. Unexpected inflation creates uncertainty for investors, which translates into less investment and therefore less economic growth.

Stable and predictable fiscal policy makes it easier for people to develop long-term plans. Growing a business is a long-term endeavor that requires a minimum of certainty about the future. The government can help maintain certainty through a stable fiscal policy that reduces the risk of future inflation or tax increases.

Too much spending reduces innovation by eviction private sector investment. Estimates of fiscal multipliers are usually less than one, which means that one dollar of government spending translates to less than one dollar of economic activity as the private sector reduces activity in response to higher government spending.

Resources used by the government cannot be used simultaneously by the private sector, and researchers have found that private sector investment and consumption are crowded out by public spending.

Private sector investment is the key ingredient in a growing economy. Less investment means fewer new businesses, fewer expanding businesses, fewer job opportunities and less innovation. The products and services we rely on today: smartphones, amazon

AMZN
, safer cars, mRNA vaccines and more efficient household appliances would not exist without private investors willing to take risks.

If done right, some government spending can complement private sector activity, such as highways that facilitate the movement of people and goods. But this complementarity is based on the fact that the government remains in its role and does not do what the private sector can do better.

In addition, the federal government is not the appropriate level of government to provide many of these complementary goods and services. State and local governments own 97% of all infrastructure, including the entire interstate highway system, all sewage systems, all water systems, and 98% of all streets and roads, they should therefore take the lead in infrastructure.

Too much spending reduces economic mobility by weakening the incentive to work via transfers and redistribution. In-kind and cash transfers reduce the incentive to work, and when combined with strict means-tested phase-out rules (called cliffs of benefits) and disincentives, these transfers often trap people in poverty.

Government assistance, preferably cash transfers that empower people rather than micromanage them, is sometimes needed to help people get back on their feet. Such assistance must be timely, targeted and temporary, and state and local governments, not the federal government, must play the lead role. The current social safety net is broken and needs real reform, not more money to fuel a system that prevents people from succeeding.

Bottom-up ideas that leverage private philanthropy and cutting-edge market-tested solutions are the keys to sustainably reducing poverty and expanding opportunities.

Too much spending harms the environment by using resources inefficiently. Building materials release emissions and other pollutants that can damage the environment. As policy analyst Marc Joffe notes: “During the construction process, new greenhouse gases are produced when steel and concrete are poured and vehicles are driven on construction sites. Once… completed, these additional carbon emissions must be taken into account… ”

To mitigate waste and environmental damage, it’s essential to build things that people want and will use. Profit and loss signals can help us determine the value of infrastructure projects, but these signals are often ignored when governments are involved. This results in more waste and unnecessary pollution.

Notable examples include the Detroit People Mover, which never met its ridership forecast, and the Auburn Dam in California which cost taxpayers nearly $ 200 million although it was never completed. California’s high-speed rail line is over budget and on schedule by $ 40 billion, but supporters are hoping taxpayers will get the project back on track with federal grants in the current infrastructure bill.

Each of these projects, and dozens more, have failed to meet the needs of potential users. This means that whatever their environmental impacts, they were preventable. We have to be careful about what we build and not just build for the sake of building.

Finally, too much spending encourages dependence on the government which undermines risk taking and entrepreneurship. Public spending financed by higher taxes reduces the incentive to start a new business or expand an existing one. Government redistribution often fosters a culture of dependency and discourages risk-taking. Eventually, the appreciation of innovation as a driver of economic progress is eroded and people take fewer moon shots.

Countries like France, Switzerland, Norway, and other Western European countries have high taxes and few unicorns, which are private startups with valuations of $ 1 billion or more. It is clear that France and similar countries no longer have the desire, the ability, or both, to harness the ingenuity and creativity of individuals in the private sector to achieve remarkable things.

As Adam Thierer notes, “There are no European versions of Microsoft

MSFT
, Google

GOOG
, or Apple

AAPL
, even though Europeans clearly demand and consume the kind of products and services provided by US-based companies. This is simply not possible given the current EU regulatory regime.

Despite our political challenges, America has the most innovative and dynamic economy in the world. We need to protect it while simultaneously working to improve policies to further encourage innovation.

The dangers of too much government spending are ignored. Countries and empires throughout history have used large construction projects to justify high levels of taxation and spending. But while the right roads and bridges help the economy run, it is the people in the private sector who make it grow. It is imperative that the government spends prudently so that more resources remain in the hands of the entrepreneurs who are the real engines of innovation.


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