Hidden Government - Manipulated Statistics - Programmed Growth.

by

Ed Dedelow

Government has shifted its spending and responsibilities to the private sector to hide its power and its incredible cost. In accordance with current standards, increasing taxes to cover a government program leads to an increase in the size of government, shifting the cost to the private sector does not. Thus, shifting the cost to the private sector allows government to grow without the appearance of growth. Defining the details of this incrementalism could lead to estimable values that would allow us to determine the pace of growth. For example, growth at x% compounded for y years, begets an outcome. The obvious difficulty is determining x, the rate of growth, and the beginning point, or the base size of government. With these figures, however, we could establish how living standards are being impacted and whether a crisis is pending should the pace continue. If we use government figures, we are led to believe no crisis exists. A redefinition of the base to include the shifted spending would bring about a different conclusion. While there are extreme difficulties in making this calculation, it is important to understand how it would work.

As to the base, the US government calculates taxes to be 35% of GDP compared to some European countries where taxes are nearer 50%. This detail is critical because the influential proponents for tax increases rest their case on the belief that the US government could and should consume another 15% of GDP. Using personal consumption (PCE) as a base, which is more realistic than GDP, taxes consume nearer 50% of every sales dollar. Adding regulation and litigation costs (court costs, insurance, legal costs and settlements [1]), a nominal figure would be another 10 to 15%. This approach shows that government already demands 60 to 65% of the economy. (FYI, I calculate it to be higher.)

The two components of government growth are:
(1) New programs/regulation.
(2) Programmed spending increases.

Funding new programs calls for either increasing taxes or relegating the cost to the private sector and funding only the enforcement. New programs such as proposals for federal health care, energy taxes and banking regulation could result in another 4 to 5% tax increase, added regulation, growth in the base, and an increase in the rate of growth. Aside from congressional moves, many agencies of the federal and state governments plan their own expansion of taxes and regulation through the authority given them by Congress.

This brings us to programmed growth. Social Security payments are an obvious example because of the increasing number of retirees and the annual inflation offsets. Federal, state and local government employees have similar pension increases, however, higher pensions beget greater increases. Many government pension plans are defined benefit plans that use the employees last 2 or 3 years earnings as a base for pensions that net them 70 to 95% of that base. With adjustments for inflation, the continuance in some pension plans of step raises, retirement with as few as 20 years service at ages ranging from 45 to 60 and full health benefits, this burden is substantial and growing.

Backing up to current employees, Government union contracts mandate inflation raises, step raises, annual raises, liberal fully paid health plans and generous sick and vacation time that increase with the term of service. In most governments, budgets are prepared by the employees and include funding for employee pay increases. Given the number and financial stability of government employees, politicians often seek out the endorsement of government unions. (Note: It is not likely that union representatives will give endorsements to politicians planning to cut their demands.) An editorial in Investor's Business Daily reported that wages and benefits for federal civilian employees are 100% higher than in the private sector.[2] This figure would be even higher if it were adjusted to include the risk of unemployment in the private sector. In addition, there are pseudo-government organizations, funded or controlled by government, that take their cues for wages and pensions from government. These include state universities, utilities, airport-toll-housing and other similar authorities.

As to whom bears the cost of these government expenses, consider that, over the past 80 years, businesses have earned on average 5 to 6% net after taxes on a sale. That amount, and more, is typically invested back into business which leaves the general population to bear the cost of tax increases and regulation, either directly or indirectly, through their purchases.

What we can conclude from all this is, that government creates inflation from which they are protected. In order for private sector employees to realize real wage increases or for an individual to increase his/her earnings, they first must cover the added costs of taxes, regulation and litigation. If a business does not cover the added costs, the business will fail or be forced to cut employee compensation. If an individual does not find a way to offset higher government costs, she/he will be forced to change their lifestyles.

This can all be put in perspective with an imagined graph that tracks the percentage of private sector growth needed to achieve breakeven. For example, if government consumes 50% of the economy and real growth is 3%, government's size increases to 51.5%. Private sector productivity growth must be 3.09% plus inflation just to breakeven. If government consumes 60% and has real growth of 3%, the private sector, now constituting only 40% of the economy, must achieve productivity growth of 4.3%. With 3% inflation, private sector growth needs to be 7.3% to breakeven. Obviously, the more government consumes, the more difficult it is for the private sector to overcome the impact.

People have had to make adjustments because this is really happening. Government statistics for 1972 to 1992 show a significant drop in wages for wage earners in nearly all education groups. Recent figures show drops or nominal increases. Available government statistics, however, do not separate the growing public sector from private wages for analysis, so those figures do not reflect reality in the private sector. To overcome the increased government demands, more people have gone to work. Thus, the working population has increased from 40% to over 50% of the population. Moreover, imports of less costly goods have increased to about 2.5 trillion dollars. Even with these offsets and a more efficient economy, income losses have occurred. Given these few facts, it should seem obvious that the continued growth in government control of the economy will have further negative effects on the American public. Just how much and, at what point, a crisis may be reached, I cannot say. I do not have the resources to answer these questions.

The ratio of productive to non-productive workers (government, regulatory and legal) has declined and the number of productive workers who must support retiring Baby Boomers and government workers will be hitting new lows. How much of a decline will result is unknown. I doubt the figures are available and it would take a task force to come up with an estimable number. The problem is that the major focus on the economy has been dollars and not production and it will require a significant change in general economic thinking for this focus on production to occur. Further discussion of labor productivity will be saved for another day.

[1] According to John B. Henry of ELawForum litigation costs for the Fortune 500 amounted to 25% of profits and were about 28 times (210B) executive compensation (7.5B) for the year 2006.

[2] Posted in Investor's Business Daily Thursday, August 27, 2009 4:20 PM PT $119,982 vs. 59,909.