U.S. Government Spending Will Increase in Lockstep with Bigger Bureaucracy
Former senior U.S. Treasury Department fellow Larry Summers believes that “Big Government” is here to stay. That’s bad news for U.S. government spending, as federal expansion cannot lead to lower outlays. Fiscal hawks and libertarians should consider hiding sharp objects before reading on.
At a recent think tank event, Summers outlined four reasons why the U.S. government will only get larger, going forward. His reasons are best summarized by the acronym DIRD—Demographics, Inequality, Rising Relative Prices, and Defense. (Source: “Why the US government can’t be downsized,” Larry Summers, September 12, 2017.)
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Let’s take a look at the reasoning for each topic.
Reason #1: Demographic Decline
America is aging rapidly. The share of the adult population over 65 was 12.5% in 1990; by 2030, it will be 19%. Further gains in life expectancy should propel these numbers higher still.
How does that relate to bigger government? As people age, dependency on central government increases. That’s best seen through larger usage rates in government programs like Medicaid and Social Security.
Unless Uncle Sam makes a concerted effort to walk away from retiree obligations; the government will continue growing on this basis alone. The aforementioned 19% of the population will equal roughly 75 million people by 2030.
That’s a lot of mouths to feed and medical benefits to dole out.
Reason #2: Growing Inequality
Growing inequality is a fact of life in modern-day America. The percentage share of assets and wages enjoyed by the “Top 1%” is the most concentrated ever. Yes, even more than during the Roaring Twenties’ industrial renaissance, which saw American capitalism speed into overdrive.
With the humanistic advancement of society, one would think that wealth inequality would narrow over time. Unfortunately it hasn’t. Greed is among humanity’s most powerful emotions. The “haves” continuously strive to keep getting more. Since the “haves” own most of the wealth—and by extension, much of the political influence—only government interventions (i.e. labor laws) prevent a total rout from those in control.
Growing inequality is one of the four main causes that Summers cites for expanded government. He feels that the government serves to ameliorate inequality through social distribution. The larger that inequality gets, the more pressure the government will feel to expand the social contract.
That takes money and manpower—a bigger government footprint.
Reason #3: Rising Relative Prices
The price of goods that the federal government purchases has soared. According to the consumer price index (CPI), the relative price of a hospital bed and TV rental has surged by a factor of 100 since the 1980s. That’s unbelievable cost inflation.
Summers believes that rising relative prices for what government buys necessitates larger government. As outlays increase, more federal employees will be responsible for the segmentation of funds into different divisions. More monitors and investigators will be needed to make sure the money gets spent wisely.
It’s much the same in the private sector. The difference in headcount between a $10.0 million company and $50.0 million company relative to industry is proportional. All things being equal, the larger company will produce more, have bigger marketing budgets, and employ more support staff and human resources. The larger the company, the greater the requirement for operational labor.
The federal government is no different.
Reason #4: Defense Spending
Strong and continuous defense spending is expected. Unless the military downsizes considerably, it will be hard to curb the federal employee headcount.
After all, 30.9% of all federal employees were military veterans (2015 numbers), according to the Office of Personnel Management. (Source: “What percentage of federal workers are veterans?,” Military Times, January 31, 2017.)
Although the proportion of veterans working in different departments varies widely, the military-civilian footprint is everywhere. It’s in the Central Intelligence Agency (CIA), Federal Bureau of Investigation (FBI), Department of Homeland Security (DHS), Secret Service, Coast Guard, U.S. Department of Veteran Affairs (VA), and more. Even the president’s chief of staff was once a General in the Navy.
Needless to say, the military industrial complex requires great manpower to run. Perhaps battlefield personnel might diminish in the future, as advanced robotic warriors roll out. But servicing a fleet of artificial intelligence (AI) fighting machines will require lots of support on the back end.
Summers concludes by mentioning that, in the future, defense spending will need to be calibrated to adversary defense spending. The days of America spending as much on defense spending as the whole world combined may soon end.
Love him or hate him, Larry Summers has never been accused of being an inept economist. Some would argue that Summers is a purveyor of extreme debt expansion to subsidize consumer demand. But Summers was not the treasury secretary or the Federal Reserve chair—just a key adviser. We’ll let history judge how much of the debt aftermath rests on his shoulders.
Ultimately, Summers makes logical points on why U.S. government spending and headcount will keep growing. It’s easy to argue that the government should contract to trim the excesses which exist in most departments.
But the conversation is not about the ideal size of government; rather, it’s about what will actually happen. Regrettably, I’m siding with Summers on this argument.
U.S. government spending and size will keep ballooning as long as deficit spending continues unabated. It’s the lubricant that keeps the cogs running. The situation is no different than in past empires. Eventually, a tectonic shift occurs, which forces the superpower du jour to scale back operations. Think of the Roman Empire circa 400 A.D. or the British Empire at the end of the 19th century.
Some think that runaway deficits and unfunded liabilities will be that trigger for the United States….eventually. Many more even embrace it. But small-government proponents shouldn’t expect that moment to happen anytime soon. The whole world is hostage to the same debt trap that America faces.
That doesn’t mean serious amounts of pain aren’t coming to stock market returns and the economy. But America may be among the least dirty shirts in a large pile of laundry.
