Federal Government Failure

HUGE SIZE AND SCOPE

Failure has plagued the federal government since the beginning. A federal effort to run Indian trading posts starting in the 1790s was beset with waste and inefficiency.[i] Corruption afflicted numerous federal agencies during the 19th century.[ii] And federal infrastructure spending has always suffered from cost overruns and pork barrel politics. An 1836 Ways and Means Committee study, for example, criticized the waste in river and harbor spending, having found that many projects were substantially over budget.[iii]

So federal failure has always been a problem. But it is much worse today because the government is so much larger. Federal spending grew from 4 percent of gross domestic product (GDP) in 1930 to more than 20 percent today. Some people argue that the growth has stemmed from citizen demand for bigger government.[iv] But this study has described structural features of government that have promoted excess expansion.[v]

Whatever the causes of the federal government’s large size, that large size itself is generating failure. Some of the causes of failure already discussed get worse as the government expands. For example, there are so many programs today that they must be bundled into massive reauthorization and appropriation bills, rather than each being voted on individually. As a consequence, logrolling has become a more important institution because Congress does not have the time to evaluate each program separately.

This section looks at three additional reasons why we should expect the government to fail more as it grows larger. First, policymakers have become overloaded by all the activities that they are supposed to oversee. Second, new spending is likely to be worth less than existing spending. Third, deadweight losses increase rapidly as tax rates rise.

Policymaker Overload

The huge size and scope of federal activities is overwhelming the ability of lawmakers to allocate resources efficiently and make needed reforms. Consider that the federal budget of about $4 trillion is 100 times larger than the average state government budget of about $40 billion.[vi] The federal government has many more employees, programs, contractors, and subsidy recipients to keep track of than any state government. So even if federal legislators spent their time diligently scrutinizing programs, the job is simply too large for them to do effectively.

The federal government is not just large in size, it is sprawling in scope. In addition to handling core functions such as national defense, the government runs more than 2,300 subsidy and benefit programs, which is double the number as recently as the 1980s.[vii] The government has spread its tentacles into many formerly state, local, and private activities, such as education, energy, welfare, housing, and urban transit.

Congress does not have the time or expertise to allocate resources efficiently in all these areas. Members are spread too thin, which is evident from the fact that they routinely miss all or parts of congressional hearings.[viii] Congress grabs for itself vast powers over nonfederal activities, but then members do not have the time to properly monitor how their interventions are actually working.

Legislators and presidents are being distracted from performing their basic constitutional duties. As one example, many shortcomings in security and intelligence agencies went unfixed before the 9/11 terrorist attacks, as policymakers were too busy with other issues.[ix] And on that terrible day, President George W. Bush was in Florida promoting local school programs, which epitomizes the federal entanglement in nonfederal activities. Even in the years after 9/11, members of the House and Senate intelligence committees apparently did not make intelligence matters their highest priority.[x]

In recent years, numerous failures have erupted into major scandals, and each time the White House has claimed to be unaware of the developing problem.[xi] Numerous foreign policy developments have also caught the White House by surprise. The government is involved in so many activities that warnings about brewing failures are not filtering up to the president’s desk until it is too late. Paul Light noted that President Obama seems to be “either too distracted to concentrate” or “too bored by the nitty-gritty of management” to ward off developing crises.[xii]

Meanwhile, members of Congress spend their time fundraising, securing benefits for their districts, and giving speeches, but little time actually learning about policy. Members usually blame government failures on the executive branch, but they fail in their own oversight role. When the Secret Service and the Department of Veterans Affairs scandals erupted in 2014, the public found out that the problems had been developing for years, but went unaddressed by those two branches of government.

The government is doing too much and doing little well. It is like a conglomerate corporation that is involved in so many activities that executives are distracted from their core business. Markets force bloated corporations to refocus and shed their low-value activities, but no mechanism forces the federal government to do so. Milton Friedman noted, “The tragedy is that because government is doing so many things it ought not to be doing, it performs the functions it ought to be performing badly.”[xiii]

While legislators are overwhelmed by the size and scope of the government, the bureaucracy has also become unmanageable. Paul Light thinks that one reason for the increase in failures is the “ever-thickening hierarchy” of departments.[xiv] He says that “communication continues to be a major source of failure, in part because information has to flow up through multiple layers to reach the top of an agency.”[xv] President Obama’s frequent appointment of “czars” partly reflects the recognition that the traditional bureaucracy is not working.

The more programs the government has, the more likely they will work at cross purposes. Some programs keep food prices high, while others subsidize food for people with low incomes. Some programs encourage people to live in risky flood areas, while others try to reduce flood risks. The government promotes breastfeeding, but it also subsidizes baby formula. Many programs subsidize health care and infrastructure, but regulations raise the costs of those activities. The government is too large for it to coordinate its activities. Many failures during Hurricane Katrina in 2005 stemmed from the excessively complex array of emergency response agencies, laws, regulations, and procedures.[xvi]

In his book Government’s End, Brookings scholar Jonathan Rauch used the word “demosclerosis” to describe how government becomes less effective as it grows larger.[xvii] Because government rarely eliminates failed programs, it becomes more wasteful over time. Rauch argued that “the rise of government activism has immobilized activist government,” such that “the more different things it tries to do at once, the less effective it tends to become.”[xviii]

Ironically, even as Congress has created many new programs to supposedly help the public, the public has not grown fonder of the government. Instead, people have become more alienated. Milton Friedman observed, “As the scope and role of government expands … the connection between the people governed and the people governing becomes attenuated.”[xix] One reason is that the larger the government gets, the more resources it forcibly transfers between people, which in turn generates “diametrically opposed interests” in the public.[xx]

Public polling supports these points. Even though Americans have become more dependent on the federal government, Pew Research Center finds that the share of people who trust government has plunged.[xxi] Trust in the federal government fell from more than 70 percent in the early 1960s to about 30 percent by 1980, even though that period was one of government expansion. Trust edged upward slightly during the 1980s and 1990s when domestic spending was being trimmed, but it has fallen since 2000 as the government has grown again.

In sum, as the government has grown larger, leaders have become overloaded. They do not have enough time to understand programs, to oversee them, or to fix them. The more programs there are, the harder it is to efficiently allocate resources, and the more likely it is that programs will work at cross purposes. Within departments, red tape has multiplied, information is getting bottled up under layers of management, and decisionmaking is becoming more difficult because more people are involved. The government is failing more, and the public is getting ever more disgusted.

Declining Value of Spending and Regulating

As the government grows larger, each increment in its size is likely to have less value. If the Air Force adds a fighter jet, the marginal benefit to national security will be less than the benefits of jets it already has. If education spending grows, each added dollar produces less benefit than the last. If food stamps are expanded to 47 million people, the 47 millionth recipient is likely to be less needy than the first. The same is true for regulations. Each new regulation for, say, clean air is likely to have less value than the initial rules passed decades ago.

Legislators do not seem to appreciate this idea of declining marginal value. They often say things like “education funding helps students” or “defense spending protects the nation.” They confuse the average value of all the current spending with the marginal value of the last dollar spent. The marginal value is lower because we already spend a lot on these activities.

Declining marginal value also occurs as the scope of the government expands. Each new activity is further removed from the government’s core functions and likely generates fewer benefits. Historically, the government focused on constitutional functions such as national defense and ensuring open interstate commerce. The federal government is uniquely qualified to carry out those high-value functions. But as the decades have passed, newer federal activities are less unique and more likely to be duplicative of existing state, local, and private activities.

Furthermore, as the government expands, more of its activities are focused on narrow benefits, not the general welfare. With a larger government, the power of special interests is increased.[xxii] Milton Friedman noted why state and local governments are more likely to generate value than the federal government: “The smaller the unit of government and the more restricted the functions assigned government, the less likely it is that its actions will reflect special interests rather than the general interest.”[xxiii]

Why do policymakers support continued federal expansion, despite the declining marginal value of its activities? For the reasons discussed above in the politics and bureaucracy sections. But also because of the “halo effect” of government. People regard the government’s core functions, such as national defense, as so crucial that it creates a positive halo over government in general. The government is powerful, so people assume that it can solve many problems in society. If the government can fight foreign wars, for example, it should be able to fight a war on poverty and a war on drugs.

The reality is that America is a great country because the government has fulfilled its core function of guaranteeing our basic freedoms. The mistake that people make is to assume that the nation’s greatness can be extended by government into an endless array of other tasks.

Rising Marginal Cost of Funding

This study discussed how taxes create damage called deadweight losses. Taxes not only shift resources to the government, but the process of extracting taxes from people causes harm in itself. Each added dollar of federal income taxes creates roughly 50 cents in deadweight losses.[xxiv] So a $10 billion federal project would cost the private sector $10 billion directly plus another $5 billion in deadweight losses.

The magnitude of deadweight losses depends on the tax rate. As the tax rate rises, deadweight losses increase rapidly. Harvard University economist Greg Mankiw explains: “It is a standard proposition in economics that the deadweight loss of a tax rises approximately with the square of the tax rate.… If we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold.”[xxv]

Federal spending is funded by taxes, either current taxes or deferred taxes in the form of deficits. Higher spending eventually requires higher tax rates, and that causes rising economic damage.[xxvi] A study for the European Central Bank stressed the importance of this fact: “Each additional dollar of spending, requiring an additional dollar of revenue, will impose additional and rising marginal costs on the economy unless that dollar comes from reducing some other spending. The concept of efficiency in public spending must take this into account.”[xxvii] In other words, policymakers should consider the escalating tax damage when they are thinking about raising spending.

Because federal taxes are already high, any new spending faces a high hurdle for it to make sense because of the elevated damage caused by funding it. Programs that might have made sense when the federal government was smaller may no longer make sense when the government is larger. As the government grows, it is more likely that new spending will fail, meaning that the benefits fall short of the costs.

 

More Government, Less Prosperity and Freedom

Let’s put these ideas about taxes and spending together. The harm from taxes and the inefficiency of much spending creates a “leaky bucket” problem.[xxviii] When the government transfers money from taxpayers to welfare recipients, for example, it induces both groups of people to work less. That reduces economic output and overall incomes, which is like losing water when you pass a leaky bucket from one person to another.

Economist Michael Boskin estimated the size of the leak: "The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar."[xxix] So a new program might cost the private economy $1.50, but produce benefits of, say, $0.50, for a 3-to-1 ratio.

Economist Edgar Browning came to similar conclusions. Browning is an expert on the effects of taxes and government spending, and he summarized his research in the 2008 book, Stealing from Each Other.[xxx] Looking at the federal government overall, he roughly estimated that “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”[xxxi]

The government’s bucket gets leakier the larger the government becomes. As the government grows, the marginal value of spending declines, the marginal cost of taxation rises, and policymakers get overloaded, which causes more failures. As the government grows, the net value of new activities declines and turns negative, which drags down the overall economy.

Figure 4 illustrates this idea. It shows the relationship between government size and average incomes.[xxxii] On the left, tax rates are low and cause little damage, and the government delivers useful public goods such as securing property rights and combating crime. Those activities create high returns, so incomes initially rise as government expands.

As government grows further, tax rates rise, people reduce their productive activities, and deadweight losses increase. Meanwhile, government expands into noncore activities that create fewer benefits. New regulations are piled on top of existing regulations, and it becomes increasingly difficult for individuals and businesses to deal with all the paperwork and restrictions. Policymakers get overwhelmed by all the programs, and they have less time to reform or prune the ineffective ones. Government accumulates a growing pile of losers.

In Figure 4, average incomes peak and then begin falling as spending and taxing increases. Government enters negative-value territory. New programs add little value but impose rising tax damage. Economic output and average incomes fall. Of course, different taxes and spending programs have different effects, and the chart represents an aggregation. But the point is that the larger the government, the less likely that new spending will generate net value.[xxxiii]

Government spending at all levels in the United States was 38 percent of GDP in 2014.[xxxiv] The federal government is responsible for two-thirds of that, and if it were located on the line in Figure 4, it would be on the right-hand side. In his book, Browning reviews federal taxing and spending activities and concludes that the government’s excessive size reduces average U.S. incomes by roughly 25 percent.[xxxv] Such a large loss represents government failure on a grand scale.

Economist Richard Rahn presented a chart like Figure 4 in the 1980s, and numerous scholars have since made statistical estimates of the curve.[xxxvi] Some scholars have described the peak of the curve as the “optimal” size of the government because incomes are maximized at that point.[xxxvii] But incomes are only one dimension along which the government affects our well-being. In a 1957 speech, Ronald Reagan said, “Remember that every government service, every offer of government financed security, is paid for in the loss of personal freedom.”[xxxviii] He is right. So we could draw a similar figure but with personal freedom on the vertical axis. Sadly, America today would be on the right-hand side of that figure as well—that is, in the region of declining freedom.

Some people might argue that today’s big government, nonetheless, improves our well-being in other ways, such as by increasing our life expectancies or improving education. Economist Vito Tanzi examined that question for a sample of high-income countries using the United Nation’s human development index (HDI). He found “no identifiable relationship between levels of public spending and HDI.”[xxxix] So today’s large governments in the United States and elsewhere reduce incomes and freedom, and they might generate few, if any, compensating benefits.