Tag Archives: Laws of Economics

Federal budget outraces CPI by four times

Did you know that federal spending has increased  faster than consumer prices?

Four times faster?

From 2000 to 2010, federal spending has increased 106% while prices (according to the Consumer Price Index) have only increased 26%. In other words, while the cost of stuff has risen only 26%, the government is spending roughly four times more than if it had increased spending to match increased costs.

To be sure, a few things have happened in the last ten years that have affected the increase in federal spending faster than consumer prices. There was 9/11 and wars in Iraq and Afghanistan. There was a recession, and there still is a recession.  But even so, shouldn’t federal spending increases match consumer price increases, at least somewhat?

Mandatory Spending or Discretionary Spending?

Right now, a lot of the debate over the size of the federal budget  centers around “discretionary” versus “mandatory” spending. As one economist (Arnold Kling) points out, budget items in the later group aren’t so mandatory as they may seem.

The data indicate that it is not very difficult to increase Federal government spending, in spite of the large portion that is mandatory. Why not? Some hypotheses:

1. We tend to see discretionary increases in “mandatory” spending. As in the prescription drug benefit. Note that at the time the prescription drug benefit was enacted, nobody said, “You know, on the whole, the elderly are doing fine. We want to provide prescription drugs as an in-kind benefit, but maybe we should cut back on other transfers to the elderly in order to maintain generational balance.”

2. The government’s “cost of living” goes up much faster than the CPI. For example, with Medicare and Medicaid, outlays are tied to health care costs, and we all know that health care costs are rising faster than inflation.

Check out the rest of his analysis here. Noting that, with the exception of “net interest,” every major category in the federal budget has seen an increase in spending greater than the consumer price index, Kling argues that if we cut spending back to 2000 levels–without touching defense, Medicare, or Social Securitywe could slash $500 billion from the federal budget.

That’s a healthy chunk of change, and a simple idea. Roll spending back to 2000 levels, and then start looking at entitlement reform for other budget constraints and deficit reduction.

Here’s his data:

Spending, in billions, vs. Consumer Price Index

Spending Category 2000 level 2010 level Percentage increase
Consumer Price Index 174 219 26 %
Total Federal Outlays 1789 3721 108 %
Defense 294 719 144 %
International 17 51 197 %
Health 154 372 141 %
Medicare 197 457 132 %
Income Security 254 686 170 %
Social Security 409 721 76 %
Net Interest 223 188 -16 %
Other 240 526 119 %

Get it? Prices have risen only 26%, and federal spending should have risen about the same, even accounting for defense, Social Security, and Medicare. But it hasn’t. Federal spending has increased far faster.

Kling puts in a last word:

Or maybe the answer to the paradox is that when it comes to the Federal Budget, spending is discretionary when somebody proposes an increase in its rate of growth but mandatory when somebody proposes a decrease in its rate of growth.

Are politicians really just “the slaves of some defunct economist“?

The Federal budget is a curious thing. It alone in the world of finance and spending–from individual home budgets, corporate coffers, Wall Street, and state budgets–is controlled by persons whose primary interest is not responsibility, but reelection, and who spend based on good ideas for benefits, not the realities of economics.

Few things secure reelection like bringing home the bacon or signing a revolutionary new program. Yet the law of unintended consequences is stronger than all the political clout or well-meaning programs in the world.

So it is: well-meaning Congressmen (and Congresswomen), Senators, and Presidents head off to the marbled halls of Washington, D.C. to make plans and pass laws that their constituents will love back home, solve society’s problems, and make world a better place.

Then, the plans hit the real world, and little do  politicians know what results will really happen.

As I’ve quoted before, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The road to hell, or rather, bottomless debt, is paved with good intentions. So, perhaps, is the road to Washington, no matter how little men “really know about what they imagine they can design.”

Recommended reading for more: The Road To Serfdom, by F.A. Hayak.

Cover of "The Road to Serfdom: Fiftieth A...

Cover via Amazon

(h/t Library of Economics and Liberty)

Social Value: The Market Is Smarter Than You, Mr. Congressman

The United States Capitol in Washington, D.C.
Image via Wikipedia

Economics. Whether you try to dodge it, ignore it, or explain it away, you cannot escape the laws of economics. Supply, demand, self-interest, etc, etc, etc. It’s like gravity. And like gravity, you ignore it at your own peril. Says Thomas Sowell (though I’ll not get into the partisan part of his article here)

I first became aware of the law of gravity as a small child when I pedalled by tricycle off the porch and crashed into the yard. Gravity was of course operating all along, whether I was aware of it or not.

Economics is a lot like that. Many people who are completely unaware of economics sometimes discover it the same way I discovered gravity, through some personal or national crash.

It’s true. Ignore it at your own peril. And yet, our government is full of people–Republicans, Democrats, and the occasional odd Independent–that do just that year in and year out. Even as the new year sees Washington, D.C. welcoming a new Congress full of newly elected Representatives and Senators determined to not make the mistakes in the past or, in the alternative, to  undo the mistakes of the past, most, if not all of them, will fall trap to trying to make a difference. They’ll try, as was astutely noted by Kevin Williamson, to “to fix what’s broken in order to serve the public interest and the common good.” All of them will, regardless of party. It’s the Washington way, says Williamson.

And yet, they, just like the rest of us, are subject to the laws of economics. And when they make a mistake, very unlike the rest of us, the mistake becomes law and the law enters the next thing to immortality–the U.S. Code. That’s right. These politicians will pass laws, most about things they know little about, laws that will try to defy the laws of economics and provide for the public interest, laws that will attempt to increase social value in the public interest.

Unfortunately, social value is not very well produced or created by politicians. They just don’t know enough about it, or even what the public interest is, for that matter.  No one person does. Again, Williamson:

But you have no real idea what the public interest is. Nobody really does. How could you? How would you find out? (No, not rhetorical.) You could take a poll and see what the public says it wants, but what the public saysit wants at any particular moment is not identical with the public interest. The public is made up of individuals, most of whom have no better idea what is in the best interest of people they have never met and know nothing about than you do — and practically all of whom will lie when asked what it is they really want: They’ll say they want opera broadcasts and educational programming and organic chard and more foreign news in the newspaper, but in real life their revealed preferences are pretty much classic rock, fantasy-football stats, and those heinous seven-layer burritos from Taco Bell.

Get it? No? Let me (or rather, Williamson) go on:

So Washington’s understanding of the public interest is a little hazy, inevitably. It’s hard to see the big picture, but you can sometimes get a look at a tiny slice of the public interest. Private enterprises, and businesses especially, usually do serve something that might deserve to be called the public interest or the common good, because they createsocial value. How do we know they create social value? Mostly because of this so-obvious-it’s-ingenious, but still kind of counterintuitive, idea that comes from economics: If people in society did not in fact value what these businesses were producing, they would not give them their money. Social valuethe stuff society actually values. The counterintuitive part, at least for you guys who graduated near the top of your classes at very prestigious law schools and made a lot of money in litigation or bond-counsel work or whatever but have not spent a lot of time selling hotdogs or landscaping or painting houses, is this: Profits are evidence of the creation of social value, not deductions from the sum of the common good. Washington totally flubbed that one during the health-care debate. Enormous profits come from the creation of enormous social value. Exxon, for instance. Americans may not have cozy feelings toward Big Oil, but given a choice between free gas for a year from the local Exxon station or lunch with a bigfoot politician, most Americans would just pick up a Slim Jim on their way to fill up on gratis high-test and motor on down the road and take a rain check on the coq au vin with Senator Snout.

Not that there’s anything wrong with Senator Snout, but frankly, as my wife demonstrates season after insanely brain numbing season, American Idol and Dancing with the Stars is more interesting that talking about public policy at a Meet the Candidate night or a Townhall Meeting. Profit is a sign of social value, or, as Williamson put it, social value is the stuff that society wants.

And that, Mr. Congressman, is why the market is smarter than you. It knows what we want far better than you, or I, know what we want (and heaven help us if American Idol really is all we want…). When you decide you need to pass a law that regulates the economy, the economy gods laugh. They turn the thumbs on their invisible hands down, and stick it to you, as well as three hundred million Americans affected by your ill-considered attempt at controlling what you do not understand–the economy. And then that law is on the books. Maybe forever.

On the other hand, when the market is free to make the decision, the market is always right. It demonstrates what we want, and it lasts. It, Mr. Congressman, knows what social value is, and it is always right. (Not that the market is painless, but that’s a subject for another day…)

The article is “Welcome to the Machine” by Kevin Williamson.  It’s an insightful, as well as a witty read, and I recommend you read it.  You are subject to the laws of economics it describes, like it or not.

APROPOS: For a great read of what happens when people, including whole countries, try to defy “common sense” and evade the laws of economics, pick up a copy of “Aftershock” at the library or a local bookstore. Also, check out a short post on the book here.