The government share of the economy and the tipping point

Hard as it may be to credit, Steve McCann's fine How the Financial Collapse Would Happen in an Obama Second Term is overly optimistic.

Steve puts US government spending at all levels as over 40% of our GDP, slated soon to go up to 46%. This is correct, but it ignores the costs of the regulatory and legal systems. As government budgets have come under pressure, various special interests have learned that capturing these systems can be even more effective than capturing a Congressional budget subcommittee.

The environmental movement is particularly adept at this, forcing the private sector to spend billions of dollars on environmental protections of limited utility. The movement also prevents any economic use of huge swathes of land, timber, coal, oil, and other minerals, which is much cheaper (for the government) than buying land and making it into a park. But other interests are close behind the enviros, in a long parade of unions, feminists, disability claimants, racialists, the legal profession itself, and on and on. 

No one knows how much of the GDP is actually allocated by governments. The annual CEI report 10,000 Commandments puts Federal regulatory costs at $1.8 trillion, which would increase the total share of governments to over 50%. This is still low, because CEI's work excludes state and local government. It also excludes the depredations of the legal system itself, such as shareholder class actions that benefit no one but the lawyers or medical malpractice suits that compel wasteful tests. Anyone whose blood pressure needs a boost should check out Overlawyered and Point of Law.

Furthermore, the demands of regulatory and legal costs can only go up. As taxpayer and bondbuyer resistance forces governments to tighten the budget screws, special interest focus on these back door benefits will grow.

And the regulatory and legal systems lack any of the discipline that budget processes provide, however imperfectly. As the great economist Mancur Olson said, the special interest gets the benefits while the costs are borne by society at large, so there is "no constraint on the social cost such an organization will find it expedient to impose on society in the course of obtaining a larger share of the social output for itself." (Rise and Decline of Nations, p.44)

James V. DeLong is the author of Ending 'Big SIS' (The Special Interest State) and Renewing the American Republic