Saturday, July 12, 2008
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I got these graphs from an article on the Armey Curve. Curve claims a direct relationship between economic growth & the proportion of the economy that is government spending.
As governments grow, the law of diminishing returns begins operating. While the construction of roads initially assists output expansion, the construction of secondary roads and upgrading primary roads start to have less added positive impact per dollar spent. Moreover, the taxes and/or borrowing levied to finance government impose increasing burdens. Low tax rates become higher. New taxes, such as income taxes, are added to low consumption levies, with increasingly adverse effects on human economic behavior. Tariffs are raised, thwarting trade. New government spending no longer enhances economic growth.This is a US Federal government figure. It does not include State spending which is about 14% of GNP. It also includes relatively little for health care since relatively little health care is provided by the government. However the US spends about 15% of GNP on health care while Britain's 9% is very largely part of government spending. Adding State spending & say 2/3rds of health care would bring US spending up to at least the equivalent of the 43% of the economy the British government spends so we are not very different.
......The Curve peaks where government spending equals 17.45 percent of GDP. Since federal spending in recent years has been between 20 and 22 percent of GDP, the results suggest that the federal government is 12-20 percent too large from the standpoint of growth optimization.
I don't actually think the Armey Curve is that good a predictor for 2 reasons.
Firstly it implicitly assumes that the degree of efficiency with which government spends cannot be changed. I, on the other hand, can imagine a government with a very big public sector which nonetheless manages efficiently (Singapore, whose government owned airline is one of the world's best for example) or ones with a relatively small public sector which is virtually all going to feed the kleptocracy (much of Africa).
Secondly a very large amount of the costs government enforces on the economy are regulatory ones. The cost to government of enforcing regulation is about 1/20th of the cost to industry of being regulated. If anything this is more economically damaging since money government spends on employees or goods keeps circulating while money spent on the 12/13ths of British building projects which is regulatory merely goes into a hole in the ground.
What the first graph shows is that decadal growth fell from about 49% to 30% from the mid 1960s. The same effect happened in Europe. This is from 4% annual growth to 2.6%. The second graph, while it shows some increase in government spending in the mid 60s wasn't enough to explain the sharp fall in growth. What I think we are seeing is a major growth in purely parasitic government spending & in particular environmental regulation & subsidies for "environmental" solutions.
I have questioned how much "environmentalists" really care about the environment & how much they are merely Luddites under false colours. Beyond that I would suggest hat under public choice theory & Pournelle's Iron Law of Bureaucracy one should expect those running the state to promote philosophies that demand more state spending. What we see is an extremely strong bias by the state & its propaganda mouthpieces (the "respectable" media & particularly the BBC towards ever more silly & expensive sort of "environmentalism". This produces the question - who is running the eco-movement. Is it its leaders or is it the propagandists & donors supporting them. Or is it the empire builders running state bureaucracies. Public choice theory would suggest that the bureaucrats come closest but that even they are held by economic forces in that they will lose control if they aren't sufficiently dedicated to empire building.
In any case, whether we consider we are dealing with villainy or impersonal forces, the effect is that the "environmentalist movement seems to have been responsible for 1% decline in economic growth since about 1965. In fact it may well be larger because we have seen the better run parts of the developed world growing much faster than ever before in history & Moore's Law, that computer capacity doubles every 18 months, would also imply faster growth likely.
However even assuming the foregone growth has been only 1.4% a year since then this means that our economy & therefore all our incomes pre-tax would be at least 1.82 times what they actually are. Our economy currently is worth about £1.4 trillion a year. That means the "environmental" movement is costing us at least £1,148 billion each year (£19,000 for every man, woman & child). Because of the growth seen in the Tiger economies I actually suspect growth could have been significantly above the historical average but that is a sufficiently impressive figure to be going on with.