The Hidden Burden of Government – Part 2

In part 1 the direct effects of government were reviewed, the most visible costs in the form of taxes, and some of the less visible burden. Here in part 2 I present the perhaps not easily quantifiable, but still significant burden of government. (Note: some values in Part 1 have been updated)

The indirect effects of government

•  The absence of investment earnings on social security “contributions” during ones working years of 35 years, between $100,000 and $200,000, amounting to a loss of $2-3 million, which could be a comfortable retirement for most households. (This assumes the “contributions” could have been invested in an S&P500 fund earning an average of 8.3% -- TheStreet dot com )

•  Holding back the economy (the foot on the brakes effect), by the drag of the national debt, which now has exceeded $9 trillion. This hurts what everyone earns.

•  The drag of having 20% of the working people in the country doing government “work” instead of being productive members of the economy.

•  The booms and busts of the economy due to the manipulation of the interest rates and the money supply by the Federal Reserve and the Treasury.

•  “Agreements” by companies to pay fines for victimless crimes.

•  The increase in crime due to the policy of not having police forces prevent crimes and focusing on issues that result in collecting fines and turning citizens into servants and cowards rather than masters of the government.

 

It is not hard to conclude that the true burden of government is more than 68% of the visible parts. Consider just the first item in the preceding list, not having your social security money working in the market. Someone who has “contributed” $215,000 in his or her working years, who could have gained about 8.3% average per year from the 1950s through 2002, will be lucky to get back $300,000 before he passes away. For a discussion of the Social Security issue and some of these facts, see Urban dot org .

If he had invested all of those “contributions” in an S&P500 fund all of those years, he would have built up a nest egg of $1.88 million (get the S&P500 annual changes from 1950 on and derive the annual percent of change, then apply this to your cumulative “contributions”). I marvel at the power of compounding!

If he was married and his spouse worked, he and his wife could have had a fund worth more than $2 million. But as it is, this couple will be paid a mere $456,000 during their retirement, $3,100 a month in 2006, a poverty level amount barely covering rent, food, clothing and medical care.

If instead they had sensibly managed this money, they might have been able to retire comfortably, plus give a significant amount to charity and leave some for their children too.

We are talking about a lifetime loss on this item alone of over $1.5 million dollars for this couple. That is a loss of over $27,950 average per year from age 20 through retirement. Curiously, though this view of what is ours and what is removed by the burden of government makes it look worse, the government's percentage is now lower. The problem is that you never saw the $27,950. It never existed. It was never born because you were not allowed to put your social security "contributions" to work for your own benefit!

Table 5

Description	Amount
Median household income	$48,201
Corporate income tax	3,221
Employer's share of Payroll tax (social security)	3,687
Excise and other taxes	1,561
Inflation shrinking household net worth of $155,100	4,963
The cost of compliance with regulations	5,459
The loss from your social security's lack of earnings	27,950
Total possible income	$95,042

Your annual income would be almost doubled without the burden of government.

Non-financial burden

Governments also make life harder in non-financial ways, which are hard to measure. This includes the time and effort you must expend dealing with:

• Filing income tax returns and other paperwork
• Keeping 2 sets of books if you run a business
• Regulations on drugs, alcohol, etc.
• Other regulations protecting you from yourself
• Preventing you from using experimental medications
• Entrapment
• Profiling
• Restrictions on activities that you have a natural right to do – travel, speech, bearing arms, and lawful activities that are disapproved by society.

What we get back

Now we cannot pretend that we get nothing in value back from the government. We enjoy living in a country largely free from the threat of military attack from abroad. But since we are geographically isolated from most hotbeds of trouble in the world (surrounded by friendly nations and large oceans) and perhaps do not need immense defense facilities as long as we do not actively create enemies.

In any case, the appropriate cost of defense has to be diminutively less than what we now spend on the department of defense. That applies to more than defense.

The cost to us of schools, road, utilities, health care, setting standards and overseeing testing of drugs, foods and other products, screening people crossing the borders, etc., are surely higher than they ought to be.

If the efficiency of government in welfare and education were typical, which I am convinced it is, private provision of all of its services would be better and would cost less than half of what government provision costs.

In his book, Freedomnomics (New York: Regnery, 2007), after describing government expeditions, John R. Lott, Jr. writes on page 93:

“These kinds of inefficiencies plague government efforts in realms ranging from welfare to education. Private charities ensure that 80 to 90 percent of donations get to those in need, while only 30 percent of government welfare spending actually reaches the intended recipients.²⁸ Likewise, non-teacher costs make up over 40 percent of the budgets in public schools compared to less than 20 percent in private ones.²⁹ Over-all the per pupil costs of public schooling are about twice as much as for private schools despite the fact that children typically learn much faster in private institutions.³⁰ These statistics indicate that private charities and schools can provide better service than public ones even if they receive just half the funding.

“The market isn't perfect, of course. But the government is usually much further from perfection. Even when the state intervenes in the with the best intentions, it frequently only succeeds in making things worse.”

Lott's footnotes:

28. Michael Tanner, Congressional Testimony before the Finance Committee, U.S. Senate, March 9, 2024 (http://www.cato.org/testimony/ct-ta3-9.html). Here are some examples of private charity administration and fundraising expenditures as a percent of total expenditures: Habitat for Humanity, Washington D.C.-13.8%; The Salvation Army- 16.8%; YMCA of Metropolitan Washington -19.4%; and American Red Cross of the National Capital Area -11.6%. Source: charitablechoices.com, Charity Descriptions, All Charities A to Z (http://www.charitablechoices.org/categories/all.asp).

29. Kelly Bedard and William Brown, "The Allocation of Public School Expenditures," Claremont Colleges Working Paper, August, 2000, 19 (http:// econ.claremontmckenna.edu/papers/2000-16.pdf) .

30. The relative costs of private schools assumes that religious teachers in parochial schools are paid at the same rate as lay teachers. For further discussion, see John R. Lott, Jr., "Why is Education Publicly Provided?: A Critical Survey," CatoJournal, Fall, 1987: 476-77.

And of course, you would not have to buy all of those products and services at all. You would choose among competitor providers (remember, competition tends to ensure good quality and lower prices).

How it hurts your retirement prospects

Economists are now projecting that social security will require a heavier tax and/or reduction of benefits, or it will be bankrupt within 3 decades. The projected obligation will be 40 trillion dollars. You can no longer count on the estimated benefits you may be getting from the Social Security Administration. Very few politicians will touch it, it is known as the “third rail” (a metaphor from the three rails a subway rides on, one of which carries extremely high amperes of electricity (upwards of 3,000 amps) which would kill one if one stepped on that rail).

Even if Social Security was miraculously made solvent, it is a terribly bad deal. If you were earning a middle class income all your life, you might have “contributed” a quarter million dollars to SSI. Based on American life expectancy you would receive benefits starting with about $20,000 per year (poverty level), increased to match inflation each year, ending up paying you a total $456,000 over about 15+ years.

If your money had instead gone into an indexed mutual fund such as the S&P500, it could grow to 2 million dollars during your working years. The government's plan for your money cuts your retirement by $1,500,000. This is simply wasted, with no one receiving it. It just sat there without working (actually in this Ponzi scheme your “contributions” immediately go out the door to already-retired people).

Furthermore, if you have been building your own retirement fund, investing in stocks, bonds and/or mutual funds, it is endangered by government as well. Inflation takes a bite each year. The weakening dollar, in a world where more and more of our goods come from abroad, will buy less and less in the future from other countries. Lastly, retirement investing is not nearly as profitable as it could be because of the huge diversion of resources from the economy that the government causes (the economy could benefit us and our investments much more if government was not choking it in so many ways).

Why not privatize it all?

Incentives in government work in almost the opposite way that they do in the private sector. Businesses reward managers who improve earnings. Government rewards departments that appear to provide more, which perversely means costing more. In the absence of market, the better performance is to provide more service, which means at a higher cost. There is, after all, no other measure of benefits, no profit.

See my article on political (government) motivations .

In other words, if everything that government now does were instead done privately, those things would cost a lot less.

A system operating outside the economy, where the profit-motive is absent would tend to lose money. It would easily spend twice or three times or more on a product or service relative to what it is worth (remember the Pentagon's $200 hammers?).

Let us estimate that what government now does, that we really want, if it were done privately would cost half of what it now costs us. Furthermore, most of us do not want some of the services we are offered, such as the war on drugs, the IRS, the BATF, the Department of Agriculture, EPA, etc.

But wait, there is more.

It would be tempting to talk here about the federal deficit and the national debt. The debt, in the form of bonds, must be repaid one day. However, it will not be repaid by us, but by our children and grandchildren. The effect of it is already built into the numbers we show, above, in inflation and the government's revenues covering interest payments.

However, the simple presence of the government, diverting up to 20 percent of the GDP, hurts the economy. Government excludes one fourth of the workers of the country from the productive economy, performing bureaucratic activity instead of providing products and services we need. This diminishes the well-being we might enjoy.

Government regulations take more of a toll than in the fees and unnecessary work that companies carry out to comply. Regulations also hamper productivity, makes it harder to produce the goods and services. Low interest rates and increasing credit divert capital to economic activities that are riskier and often prove unprofitable. Moreover, as laws and regulations change, the desired predictability of the future that optimum productivity and risk-taking requires, are reduced.

The engine of the economy has the brakes on much of the time. It cannot serve us as it could as long as the ball and chain of government steals its power.

The Heritage Foundation published an article by Ana Isabel Eiras, in January 2006, “The Fiscal Burden of Government Is Undercutting U.S. Competitiveness” in which she says:

A competitive economy is at the heart of a country's prosperity. Only by producing products or services at or below world prices can countries create wealth. The freedom to access a variety of capital instruments, to hire and fire labor, and to keep the profits of efforts and innovation enhances the economy's potential for growth and wealth creation.

For many decades, the United States has exemplified this truth, and millions of American families have benefited from America 's economic freedom. However, this may change soon. The growing fiscal burden of America 's government could hold back the U.S. economy's future by undercutting U.S. competitiveness.

Also reported, the US place among 161 countries by the Index of Economic Freedom fell from fourth place in 1995 to ninth in 2006. In terms of the fiscal burden alone, we fell from 50th place to 101st .

This belies the belief that we are the freest in the world.

Conclusion

Government either takes or keeps from you almost half of what you earned. It reduces a retirement that could have been decent to poverty level living – and may even fail to do that.

The total damage done to us by the burden of having government is shocking. Most people do not have the facts. If they did, perhaps revolution could start in their minds.