You are here

Costs of Economic Distortions Caused by 'Ordinary' Federal Spending, Subsidies, and Stimulus

While routine ground-level federal spending is less glamorous than interventionist national agendas, socialization of properties and resources, or economic “stimulus” and “big sciencecrusades, the distortions and displacement caused by ordinary government spending are nonetheless highly significant.

The core reason is that much federal spending exists because of administrative state programs and conceits rather than constitutional functions.

Government, as opposed to private, funding of ordinary items does not merely run us up against debt ceilings and government shutdowns these days—it distorts the development and impedes improvement of services that (public goods arguments notwithstanding) could alternatively be produced in the private sector. These include infrastructure, food safety, loans, preparation of statistics and financial data, air traffic control, education, security on airplanes, and so on down the list of everything government does apart from protecting rights.  

Government does not have to (and cannot by its nature) do all these things, and when it displaces private production of them, it removes them from ordinary market pressures for betterment. This is restrictive and distortionary, a major hidden cost of government intervention.

Taxation often may not be intentionally regulatory, but it alters behavior regardless. Sometimes, though, taxation is deployed explicitly to change behavior (as carbon tax proposals demonstrate).

Spending and subsidies intended to influence outcomes can create unfairness as well as distortions and displacement. An example is the corporate welfare, cronyism, and waste of the Export-Import Bank. Federal farm subsidy programs are another example, in which a handful of rich beneficiaries receiving the bulk bid up land prices and shut others out. Tens of millions of dollars go to New York City, Chicago, and Washington, D.C. where there are no farms.

In the government-contracting world, about $1 trillion gets paid out over the course of a decade, with 99 of Fortune 100 firms benefitting. Program inefficiency is not the only concern, as the Government Accountability Office has addressed improper federal government “payments that should not have been made or that were made in an incorrect amount.” The Comptroller General stated that the “government-wide improper payment estimate for fiscal year 2016 was over $144 billion...attributable to 112 programs spread among 22 agencies,” with these payments totaling over $1.2 trillion since fiscal year 2003. So even with chronic deficits the U.S. must borrow still further to sustain invalid, sometimes already distortionary, payments.

All these circumstances and more underscore the fact that, at a time when government spending, deficits, and debt are approaching and surpassing records, federal spending constitutes active, non-neutral intervention into the economy. It is vital to acknowledge the distortion that creates and account for the burdens of intervention, but policymakers commonly do not—just as they do not identify and account for regulatory burdens more generally, but ignore them. On the topic of deficit spending roots and debate, see also Sue Konzelmann, “The Economics of Austerity.”

It’s a century-old story. After the federal income tax and before John Maynard Keynes, there was Treasury Department braintruster and Franklin Roosevelt advisor Lauchlin Currie, a suspected Soviet agent,* who had co-drafted the Banking Act of 1935, which increased independence and strength of the Federal Reserve. Currie favored stimulus spending with “a liberal program of progressive taxes, increases in social security benefits, more public works projects and encouragement of investment (especially in home building).”

Such manipulation-conscious spending ostensibly meant to stabilize and boost economies entails still-disregarded economic costs and diversions of resources and disruptions of business cycles. Exceptions to the disregard of the downside of all this “benevolent” government spending included economists Friedrich Hayek (Prices and Production, 1967) and William H. Hutt (The Keynesian Episode: A Reassessment1979 and A Rehabilitation of Say’s Law, 1974).

Hutt in particular emphasized how the process backfires. Government’s own intervention imposes artificially inflicted barriers to the necessary re-adjustment of prices and wages that sustain healthy economic activity:

[F]airly interpreted, “Say’s law of markets” survives as the most fundamental “economic law” in all economic theory.  It enunciates the principle that “demands in general” are “supplies in general”—different aspects of one phenomenon.

Keynesianism and manipulation never departed, however. Spending stimulus programs continued straight through the “shovel-ready” black hole economic stimulus projects of George W. Bush and Barack Obama, and beyond. They will undoubtedly persist in bipartisan infrastructure discussions in the 116th Congress.

We still await policymakers who will force the reckoning, who will account for the distortions of government spending, even when those distortions are unintended. All too often in modern progressivism, however, the intention to manipulate is explicit. Proponents of spending are not coy about socialism in medicine, college, and adult day care (i.e., a universal basic income).

The problem remains that the accounting for the costs beyond the nominal fiscal will be—as usual—hidden from view and denied. The great progressive spending to come, unless the locomotive is stopped, will be seen by our descendants as mere routine outlays.

This blog post is part of a series on “Rule of Flaw and the Costs of Coercion: Charting Undisclosed Burdens of the Administrative State,” and comprises one element of A Brief Outline of Undisclosed Costs of Regulation.

* Declassifications of documents and 20th century communications may continue to undress an extent of collectivist infiltration that influenced the shape of our government, and that few care to talk about even today: Allen Weinstein, Perjury: The Hiss-Chambers Case, 1978; Jerrold and Leona Schecter, Sacred Secrets: How Soviet Intelligence Operations Changed American History, 2002; John E. Haynes and Harvey Klehr, Venona: Decoding Soviet Espionage in America, 2000; Allen Weinstein and Alexander Vassiliev, The Haunted Wood: Soviet Espionage in America: The Stalin Era, 2000.