Sunday, February 01, 2009

Further Comments on the Size of Government

Constructive Interference: Size of Government

I'd like to expand a bit on, and clarify, my earlier comments on measuring the size of government by how much its spending contributes to the GDP.

My first point is that governments provide services, security being the foremost, which have value in the market. In today's world, for good or ill, governments also provide a host of other services for which there is some demand in the market. Amongst those are

  • Copyright protection
  • Incorporation
  • Licensing the electromagnetic spectrum
  • Negotiating trade deals
  • Negotiating a stable international regime
  • Health insurance for at least some part of the population
  • Old age destitution insurance (Social Security in the US)
  • Social Safety net
  • Education support

and quite a few others. In any meaningful sense the size of government, or at least its significance to the economy, is a measure of how valuable these services are all told, not simply the fraction of all money spent by the government. If the value, to the economy, of all these services is large compared to the value of all goods and services provided by the rest of the economy, then government constitutes a large fraction of the economy. While I agree that it is difficult to find a metric for assessing the value of these services, there are clear problems with percentage of the GDP.

The first problem is that clearly the copyright protection provided by the government to Disney and Microsoft, as those two companies will let you know, is very large. But if the government charges money for this service and spends it on activities that either serve the interests of its constituents or helps it continue to provide those services, we see government's share of the GDP increase. If, however, the government provides this service for free, with no obligations in return from the recipients, then governments share of the GDP is lower. But is hardly the case that government is being less intrusive in the economy in the later case than in the former. For one thing, in the later case, given that the price for this service is lower, we can expect that it will be used more extensively, making governments involvement in the economy, not smaller.

The options we have, therefore are to either have government create these services or not. If it does create these services, giving them away for free will reduce governments share of the GDP, but there is little real value in that. Government is just as intrusive and just as important a part of the economy. Charging money for these services instead, will discourage there use to an excessive extent, making governments share of the GDP larger, but its influence and importance in the economy smaller.

In conclusion, as I say above, government creates services, that are of some value to the economy. Services which, contrary to a frequent conservative talking point, do indeed help to create wealth and jobs. While giving these services away for free does reduce governments share of the GDP, it does not make government and government authority less intrusive. Two approaches are needed to minimize the intrusiveness of government. One is to have government charge for services at a moderate, but not too steep, discount. The other is to have a government which is subject to frequent, thorough and extensive, critical review, oversight and accountability.

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