How and Why Government Spending Diminishes Economic Performance

In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.

Tax the Efficient to Subsidize the Inefficient

The politicians in Washington are looking at a huge laundry list of new taxes to finance government-run health care and one of the items on the list is a 10 percent tax on cosmetic surgery. While I'm tempted to make a joke about this being the "Pelosi tax," there is a much more serious point to be made. Cosmetic surgery is a very good example of how free markets work in the health sector - when they are given a chance. As Mark Perry and Don Boudreux have noted, there are some instances where markets are allowed to work, and they do an excellent job of providing valuable goods at affordable prices. Cosmetic surgery is one of those examples. So should we be surprised, as this National Journal story indicates, that politicians wants to tax the approach that works - a genuine free market exchange between buyers and sellers - to expand the approach - government intervention that expands the third-party payer problem - that doesn't work?

Face-lifts, tummy tucks and hair transplants could be hit with a new tax to help finance the trillion-dollar healthcare overhaul plan, according to sources familiar with the Senate talks. The Senate Finance Committee has discussed imposing a 10 percent excise tax on cosmetic surgery deemed unnecessary for medical purposes. The idea was broached in a meeting with OMB Director Orszag in mid-July, after which Senate Finance Chairman Max Baucus told reporters he had heard some "interesting," "creative," and "kind of fun" ideas. The tax, which has not been officially scored, would plug some of the revenue gap senators are seeking to fill to keep on schedule for a markup the week of Aug. 3. It would target procedures prohibited under Section 213 of the tax code, which deals with itemized deductions for medical expenses not covered by health insurance. The 1990 deficit-reduction law prohibited taxpayers from taking deductions for cosmetic surgery "unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease." The law defines cosmetic surgery as "any procedure which is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease." According to the IRS, deductions for procedures such as reconstructive surgery due to cancer or laser eye surgery would be allowed. But nose jobs, liposuction, teeth-whitening procedures and Botox injections to smooth wrinkles would be prohibited under Sec. 213 and subject to the new tax.

America Suffers When Washington Wins

The Washington Post has a "feel-good" story about how the huge expansion in the federal government has created a strong job market in the D.C.area. The story mentions that the federal workforce will expand by another 200,000 during the Obama years, yet at no point does the author bother to mention (or perhaps does not even understand) that all these new bureaucrats are financed by draining resources from the productive sector of the economy:

They came in droves wearing dark suits and carrying résumés yesterday -- some lined up for a block in the hot sun waiting for the doors to open -- to the only employer in this dismal economy hiring by the thousands: the federal government. More than 6,000 people jammed into the National Building Museum in Washington to apply for openings at 75 agencies, including the departments of Treasury, Homeland Security, Justice, Veterans Affairs and Energy. ...in the government, added Shipp of Silver Spring, "you get stability, you get great benefits and [an opportunity] to move up and progress in your job." The federal government represents about one-third of the Washington region's $401 billion economy. Some analysts said they think the ramp-up in federal hiring and spending will help the area emerge from the recession before most other metropolitan regions. From May 2008 to May 2009, the region lost 55,000 jobs. But during that same period, nearly 20,000 jobs were created, mainly in the federal government and federal contracting sector. ...The Partnership for Public Service, a nonprofit that sponsored the job fair and is surveying federal agencies to determine their staffing needs, estimates that the government will hire about 600,000 people over the next four years, as many as 120,000 of whom would work in the Washington region. The federal workforce, currently at 1.9 million, is expected to grow to about 2.1 million during the Obama administration, according to the Partnership for Public Service. That is comparable to the staffing level during the Johnson administration's Great Society programs of the 1960s.

One of the most shockingly inaccurate parts of the story is the assertion that pay for bureaucrats does not match the private sector. Actually, that statement is technically true, but in the opposite sense of what the reporter writes. As Cato's Chris Edwards has noted, compensation for bureaucrats is far above levels in the productive sector of the economy:

While the government currently cannot always match private-sector salaries, job seekers say it can offer something else: stability in an unsteady economy, a sense of mission and, in some cases, student loan forgiveness and tuition reimbursement programs.

Last but not least, the story concludes with a perfect example of how bloated government hurts growth. It quotes a student who is angling for a job in government rather than doing something productive. We have no idea what Mr. Moore would wind up doing in the absence of a federal sinecure, but even a job at McDonald's would mean contributing to national income rather than diverting it to unproductive uses:

Alexander Moore, 22, who recently graduated with an economics degree from the College of William and Mary, said he hopes the Bureau of Economic Analysis will hire him and help pay for a master's degree. "If you would have asked me six to eight months ago [about his employment preference], it would have been the private sector," Moore said. "Now it's the public sector, because it's becoming a bigger part of our society."

Social Security Administration Bureaucrats Have a Party…and Taxpayers Pick Up a $700,000 Tab

With so much money being squandered in Washington, $700,000 does not even rise to the level of an asterisk. But when that much money is being wasted so that senior bureaucrats from the Social Security Administration can enjoy a party (oops, a training session) at a four-star resort in Arizona, it becomes a symbol of Washington profligacy. An referenced in an earlier post, conservatives already have been complaining about this waste of taxpayer funds, but kudos to ABC news for running a story on this travesty. Make sure to watch the embedded video of bureaucrats "reducing stress" at your expense:

...nearly 700 executives from the Social Security Administration (SSA) gathered for a lavish three-day conference in Phoenix, AZ last week, costing taxpayers about $700,000. ...The conference, which included a performance by a motivational dance company that was captured on tape by Phoenix affiliate ABC15, was held at the Arizona Biltmore, a hotel described as the "Jewel of the Desert" with an oasis of 39 acres of lush gardens, swimming pools and a golf course. SSA executives were invited to join in the dancing.

Parasites Need a Healthy Host

The moochers and special interests who live off government presumably do not (or at least should not) want to kill off the private sector. That is one of the observations I make in an interview with Stuart Varney of Fox News. I also comment on the Laffer Curve, explaining why "taxing the rich" will backfire.