Tag: nanny state

Does the CPI Understate Inflation?

REVISED AND RE-DATED

A website called Shadow Government Statistics offers an alternative estimate of inflation. According to SGS, “methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.” (Related post, here.) According to a chart at the linked page, year-over-year inflation is now about 9 percent, as opposed to the official government figure of about 2 percent.

The claim by SGS has merit, and not only because the definition of inflation has shifted. Specifically:

  • Government spending (at all levels) rose by 6 percentage points between 1980 and 2009. (See the graph at this post.)
  • Most government spending is inherently inflationary.

The inherently inflationary nature of government spending can be grasped by considering the case where government spending is financed by taxes:

  • Suppose that in the absence of government the GDP of the United States would be, as it is today, about $15 trillion. (Actually, as I show here, GDP would be a lot more than today’s $15 trillion were government to do nothing more than provide defense and justice.)
  • Suppose, further, that a bunch of governors arrives on the scene one fine day to announce: “You Americans need our services, so we’re going to tax you $5 trillion in order to provide things that we want you to have.” About 20 percent of the $5 trillion — the money spent on defense and justice — will be of value to almost everyone because (among other things) it protects economic activity. But most of the things our governors wants us to have — a hodge-podge of programs and regulations — will be valued mainly by those governors (i.e., politicians and bureaucrats) and narrow constituencies. The hodge-podge of programs and regulations, along with our governors’ habit of taxing success, raises the real price of government to far more than the $5 trillion shown in our national income accounts.
  • Our governors’ “generous” confiscation of $5 trillion has the same effect as if the producers of $5 trillion worth of real (non-government) goods and services walk off the job. More accurately, it’s as if they walk off the job and begin to vandalize their capital (homes, commercial buildings, computer networks, etc.). Specifically, according to the chairwoman of Obama’s Council of Economic Advisers, tax increases have a multiplier effect of about 3 (i.e., every dollar of a tax increase yields a 3-fold decrease in GDP). Another economist estimates that the supply of labor declines by 1.9 percent in response to a 1 percent cut in wages (a tax is equivalent to a cut in wages). Even transfer-payment schemes (e.g., Social Security) have a negative economic effect because they penalize producers for the benefit of non-producers.
  • Despite the reduction in real output that accompanies government,our governors pretend that they are producing $5 trillion worth of services, so (1) they levy taxes for those services, most of which taxes fall on the productive sector, and (2) they pay the producers of government services (government employees and contractors)  with those taxes.
  • In sum, government pays the producers of government services in “empty dollars,” which those producers then try to spend on real output. And so we have $15 trillion chasing $10 trillion worth of real goods and services.

That’s real inflation. No deficit spending necessary. And it happens every time our governors commandeer additional resources, thus widening the gap between what the productive sector could produce and what it actually produces.

What if government were to borrow the $5 trillion instead of imposing $5 trillion in taxes? Borrowing doesn’t change the outcome, just the way we get there. There is still $15 trillion chasing real output of $10 trillion.

Now, not all of that government spending is inherently inflationary. The protection of citizens and their property from foreign and domestic predators (defense and justice) is essential to economic growth and the orderly functioning of free markets. Government spending on defense and justice currently accounts for 8 percent of GDP, whereas government spending (at all levels) currently accounts for 36 percent of GDP. Let’s say, for the sake of argument, (1) that the “right” level of government spending is 10 percent of GDP (the level that obtained in the early 1900s), (2) that the 10 percent is funded by a system of taxes which isn’t punitive toward investors and entrepreneurs (e.g., a single, flat, tax rate), and (3) that the 10 percent is not accompanied by burdensome regulations. Even in the absence of punitive taxes and burdensome regulations, the increase in government spending from 10 to 36 percent of GDP caused prices to rise by 25 percent. Inflation of 25 percent, when spread over 80 years and more, may seem inconsequential. But it is real — real theft, that is.

Moreover, the growth of government spending has been accompanied by punitive taxes and burdensome regulations. As a result, real GDP is 68 percent below its potential. In other words, in the absence of the regulatory-welfare state, real GDP would be more than 3 times its present level.

Visible inflation is bad enough; invisible inflation is a real killer.

The Perils of Nannyism: The Case of Obamacare

Nannyism is bad, even when it’s good. Suppose, for example, that Obamacare — as finally enacted by Congress — miraculously obtains the following impossible results:

  • No one who had insurance before Obamacare will find the cost of his insurance rising because (for example) the law stipulates that insurers must ignore pre-existing conditions and must cover certain previously uninsured conditions.
  • Everyone who is forced to buy insurance (or, alternatively, pay a tax penalty) will find that the additional cost is offset by insurance benefits.
  • The costs of subsidizing those who cannot afford insurance will be defrayed by eliminating “waste, fraud, and abuse” in Medicare, Medicaid, and various other government programs — “waste, fraud, and abuse” that has heretofore been tolerated because it is a natural concomitant of government programs and cannot be eliminated without eliminated the programs themselves.
  • Insurance subsidies will not be extended to illegal aliens, whose addition to the rolls would burden taxpaying citizens, even though Democrats relish the thought of converting those illegal aliens to Democrat-voting citizens.
  • The prices of various drugs and medical services will not change by more than they would have in the absence of Obamacare. That is to say, the extra demands generated by government mandates and the addition of some 47 million persons to the insurance rolls will somehow be met with additional supplies of drugs and medical services, despite the disincentives created by government control of drug prices and fees for various medical services (via the government-run insurance program).
  • There will be no rationing of medical care by government or government-approved bodies — no “death panels” — even though government control of medicine will choke off the provision of non-approved drugs and medical services.
  • The federal government’s budget deficits will not become larger than they would have been in the absence of Medicare. Nor will federal spending on Obamacare, Medicare, Medicaid, and Social Security swell to well more than 50 percent of GDP in a few generations, thus — in combination with necessarily higher taxes and the usual accretion of regulations — giving government almost absolute control of the American economy.
  • Because the federal government’s deficits will not rise any more than they would have in the absence of Obamacare, further tax hikes (above those already in store) will be unnecessary. It will especially unnecessary to further bleed “the rich,” whose incomes are an especially important source of funding for the business start-ups and capital formation that yield economic growth.
  • The federal government’s almost-absolute control of the American economy, accompanied inevitably by various social dictates favoring certain groups, will not complete the work of undermining true social cohesion (which is attained through voluntary associations), personal responsibility, and entrepreneurial initiative.
  • America, in short, will not be driven into the ranks of economically stagnant, morally bankrupt “social democracies” on the European model.

Given that those miracles occur — because Americans who care about such things have been promised (more or less) that they will occur — what could be wrong with Obamacare? Why are tens of thousands of Americans taking to the streets to protest it? Don’t they know a good deal when it’s offered to them?

Could it be that there are still millions of Americans who know instinctively and through observation (if not education) that those miracles will not occur? Could it be that those millions of Americans understand all too well that Obamacare will be just another well-intentioned program that paves our way to financial and bureaucratic hell?

Or could it be that millions of Americans value true liberty, the kind of liberty that is assured by the observance of social norms within a framework of government-protected negative rights? Is it possible that millions of Americans value true liberty and all it entails: the opportunity to make one’s own way in life, to make mistakes and learn from them, to choose from among alternative goods and services (including medical ones), and to choose even where the resulting choices may not be the “best” ones according to the calculations or preferences of academicians and bureaucrats?*

There’s the answer: Millions of Americans — even after decades of nannyism — simply want liberty because it is of value to them, in and of itself. (How unimaginably retro!) They prefer to decide for themselves what’s good for them, and are tired of having academicians, politicians, and bureaucrats make those decisions. In a phrase, they prefer liberty to nannyism.

(Related reading about “perfect” government oversight of economic affairs is here, here, and here. )

Related posts:
The Perils of Europeanism
Reclaiming Liberty throughout the Land
Secession
Secession Redux
A New (Cold) Civil War or Secession?
Fascism with a “Friendly” Face
Fascism and the Future of America
Selection Bias and the Road to Serfdom
Beware of Libertarian Paternalists
Monopoly: Private Is Better than Public
The Price of Government
Why Is Entrepreneurship Declining?
The Commandeered Economy
Rationing and Health Care
Law and Liberty
Rights, Liberty, the Golden Rule, and the Legitimate State
Parsing Political Philosophy

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* It is true, for example, that the portion of GDP going to medical goods and services has been rising, in part, because Americans want, and can afford, more and better medical goods and services. It is also true that prices of medical goods and services have risen, in part, because of government policies: the subsidization of consumption through Medicare, Medicaid, and the tax-favored treatment of employer-paid health insurance; the restriction of supply by the FDA and various licensing agencies, as discussed here, here, and here.)