Politicians, Bureaucrats have Public Budgets Backward

Politicians, bureaucrats, public-employee unions and special interests have public budgeting backwards. They draw up wish lists of spending, add them up and then see how much they get to (er, “have to”) raise taxes.

What they should do is reasonably project how much resources government agencies will have under current revenue laws, allocate those resources according to public priorities, and stop when the money runs out. I dealt with this as an assemblyman, regent, bureaucrat and Nevada controller, and I’ve observed it at all levels of government.

Nevada families and businesses necessarily use the approach I propose.

Imagine a family using the public-sector approach by adding up the costs of not just necessities and normal expenses, but also including home remodeling, foreign vacations, dining out more, etc., and other things they’d like to enjoy. And then telling their employers they need raises to have all the things they think they need. Good luck with that.

Similarly, imagine a landscaping business totaling their normal expected expenses and then deciding their bosses and other employees deserve a 33 percent raise, they need new all-features mowers and equipment, and they need a much bigger and better office and warehouse. And then telling their customers they need a 25 percent increase in fees to cover what they consider basic human needs and a reasonable return on investment. How fast will customers desert them for their competitors?

Why is the public sector able to use seemingly forever this budgeting approach that raises taxes endlessly? Because its captive “customers” (fee and taxpayers) have very few alternatives, unlike private-sector consumers and businesses.

Taxpayers may vote with their feet, but experience shows the new jurisdictions to which they move will over time follow the high-price leaders. Nevadans know this from California refugees who often seek to institute here the public spending and regulation policy mistakes that made them refugees.

So, total public-sector spending as a fraction of our economy and our lives continues to grow year after year.

In 1960 government spending consumed about 26.6 percent of the U.S. economy. Today it is roughly 40 percent, an increase of 50 percent in 64 years! Such real growth has taken place in local, state and federal government.

What’s the problem with that? A few years ago, as controller, I hired some good UNR economists to summarize the vast empirical literature on the optimal size of government relative to the economy that has accumulated since the 1980s.

They concluded that the optimal range for the U.S. – the portion that maximizes aggregate human wellbeing (economic growth) – is 17 to 26 percent. But the U.S. total government fraction hasn’t been in that range since the Eisenhower Administration 75 years ago!

As the government fraction has increased almost continuously since then, economic growth (human wellbeing) has slowed almost continuously as a consequence.

The private sector delivers ever more value at ever lower real prices in the long run because they are good at innovation and technological progress and thus prevail in competition.

The public sector is poor at innovation and benefiting from technological progress. So, for example, they increase pay and other expenses using inflation metrics (COLAs), while prices in the private sector rise slower than inflation due to innovation and technological progress. Thus, their real costs fall over time.

As one key example, the portion of the family budget going to food a century ago was 25 percent. But it is only 10 percent today, leaving room for purchases of many new goods and services (and more government).

Public choice theory explains how democratic systems in a two-group battle over a given amount of value – for example, public-employee unions versus taxpayers – favors the group with smaller numbers and larger individual stakes.

The smaller groups can afford the transactions costs of getting organized and hiring lawyers, experts and lobbyists and making campaign contributions. Using real budget constraints, not wish lists, for public budgeting will help solve this problem.

(This article originally appeared in Nevada Business.)