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Can Big Government Spending Make Anything Better?(Newsletter 055)

I'd argue that the single greatest problem in government is lack of accountability: we look only to the desirability of the policy objective and not to how well our policies achieve the intended result.
Can Big Government Spending Make Anything Better?(Newsletter 055)

Greetings fellow travelers.

We will shortly dive into the main topic. I want to refer you to this week's Moral Letters. Moral Letter 109 On Your Associations raises the simple point that we are influenced strongly by those we spend time with. Easily said, but we rarely act on the idea, powerful though it is. When it comes to government spending, consider that our associations can improve our lives or make them worse.

Moral Letter 110 On The Value Of Wealth tackles the tricky questions of what wealth says about our worth, and whether our spending does society, ourselves, or our families any good. Today's article looks at a related question, which is what good comes from government spending?

I came across this headline recently and had to shake my head at the audacity of hope: "Biden Administration Targets Housing Supply Shortage with Affordable Housing Plan." The article described how the government plans to expand federally backed financing for affordable housing and will direct grants toward communities that encourage its construction.

The purpose of the policies is to "make it easier and more economical to build affordable housing." Although supposedly the only things we can be certain of in life are death and taxes, does anyone doubt for a second that the result of these government policies will be exactly the opposite of the intention? That is, government meddling will make it harder to build more housing and will simultaneously guarantee it costs more than today.

Whenever the federal government spends money in pursuit of societal goals, they create two utterly predictable results: (1) regulatory red tape adding time and cost to processes that were formerly easier, and (2) inflation, waste, and fraud from vast sums of taxpayer money needing to be spent.

Before we proceed, let me make two things clear. First, this phenomenon is not specific to one party or administration. The problems caused by government spending occur with all programs and all administrations. Second, we can fully support the societal objective (affordable housing, health care, education, etc.) while nonetheless acknowledging that our chosen methods are counterproductive.

In fact, I'd argue that the single greatest problem in government is lack of accountability: we look only to the desirability of the policy objective and not to how well our policies achieve the intended result. This is worse than wishful thinking and doing nothing, because by wasting limited resources we make it that much harder to achieve real progress.

Let's examine a few key areas of massive government spending in pursuit of societal goals and see how well the pattern holds. We'll look at college education, home ownership, health care, and COVID relief.

College costs more and is failing more students than ever

Since the 1960s, the federal government has been in the business of helping ensure students get access to a college education. They have done this by having the government first guarantee the repayment of student loans and more recently act as the primary lender. Results? The costs of college have consistently risen far faster than inflation. What used to cost students less than $2000 per year in the 1960s now costs more than 20 times as much.

With the government serving as the guarantor, is it any wonder colleges have lined up to the feeding trough with insatiable appetites? No pig on George Orwell's Animal Farm got fat more thoroughly than American colleges did in the last fifty years. The predictable result of government largesse: college debt exploded from virtually nothing to $1.75 trillion today.

Even worse, we are ill-serving students by telling them their only path to success is a college degree. The fear of being left behind means 70% of high school graduates are herded off to college, without regard to their ability. The predictable and sad result: more than half of college students do not graduate within four years, and fully 40% never graduate. They wasted years of their life and incurred thousands in debt for nothing.

With no degree to bolster their earnings prospects, it's no leap to predict epic loan defaults are coming. The talk of student loan forgiveness is in the air. Keep in mind, though, all that money has been spent. Colleges certainly aren't giving it back. If students don't repay their loans, the American taxpayer will take the hit. That's a couple trillion dollars we could have put to other uses.

I offered a solution to this mess in A Solution to the College Debt Crisis.

Home ownership for all turns out to come at a cost

Remember the financial crisis of 2007 to 2009? At the time, it was the greatest financial disruption since the Great Depression of 1929. It's all been swept in the rearview mirror in the era of Trump and now COVID. But it's worth remembering what got us into what many thought would be a civilization-ending crisis: government spending in pursuit of societal goals.

There were many contributing factors, but we can lay serious blame at the feet of affordable housing policies initiated by the U.S. Department of Housing and Urban Development starting in the 1990s. The policy goal was to encourage more Americans to become homeowners. The method was to have the government guarantee mortgage loans, virtually no questions asked.

Banks and financial institutions naturally lined up to satisfy a combination of insatiable demand from buyers (no money down, no credit check!) and inexhaustible government coffers. By 2008 the government-sponsored entities Fannie Mae and Freddie Mac managed to amass a portfolio of 13 million substandard loans totaling over $2 trillion. In plain talk: banks lent money to people who had no hope of repaying it and sold the loans to the government.

It was the perfect storm of mismatched incentives. Individuals were incentivized to borrow money to buy a house because everyone was "entitled" to own a home, and there were virtually no conditions on getting a loan. Banks were incentivized to make loans because they bore no risk if the borrower defaulted. The government was spending other people's money, so took on credit risks that no person lending their own money would have ever considered.

Healthcare costs only go in one direction, but life expectancy doesn't

Remember the promises of Obamacare? There were two: ensure everyone has access to healthcare and stop the increase in healthcare costs. Here we can report at least partial success. The percentage of uninsured Americans has dropped from 15% before Obamacare to something just under 10% today. Pretty good, right? Well, let's restrain our celebration as we consider what happened to the cost of healthcare.

When my wife and I left the U.S. in 1996, the U.S. spent a total of around $1 trillion per year on healthcare. In 2010, the year Congress passed the Affordable Care Act, we spent $2.6 trillion. How did the ACA government backstop play out in the following ten years? In 2020 we spent $4.1 trillion on healthcare. Even by the standards of Washington, increasing spending by $1.5 trillion is impressive. Even more so when the promise was to control costs.

Being generous, we could even forgive our costs increasing so massively, if only Americans were healthier and happier as a result. But we are demonstrably neither. According to the CDC, the prevalence of adult obesity was over 42% (as of 2017-2018), while another 30% or so are overweight. This means only a quarter of Americans are at a healthy weight.

The leading causes of death remain stubbornly familiar, with heart disease and cancer topping the list for decades. The unhappy additions include COVID (more on that momentarily) and accidental deaths. You might have seen the headlines recently noting American has surpassed 1 million COVID deaths. Did you also know that we've had more than that number of overdose deaths? In 2021 alone, we had more than 100,000 overdose deaths, the vast majority from opioids.

The result of all this is a decline in average life expectancy at birth, from 79 in 2019 to 76.6 in 2021. The figure is expected to drop again in 2022.

COVID relief was a real relief ... to criminals

I remember when $1 million was good money. Not that long ago, government spending of hundreds of millions was worth talking about. Somewhere in the 1990s, you needed a billion-dollar price tag to get people's attention. By the time of the 2007-2009 financial crisis, shock and awe required hundreds of billions, although the Trouble Asset Relief Program sum of $700 billion was unprecedented in scope and size.

How quaint. The COVID pandemic response put all this to shame, with Congress doling out $6 trillion in a series of escalating government responses. Here is a rule you can bet on: the larger the government spending, the greater will be the accompanying fraud and waste. Consider just two slices of the pandemic response:

  1. The government doled out $800 billion in the Paycheck Protection Program. Because they wanted to act quickly, they made the application process an on-line one, with almost no questions asked. The predictable, if depressing, result: an estimated 10% or $80 billion went to criminals. (Most of these outside the U.S., by the way. We're not even enriching local criminals, who put some of the money back into the economy.)
  2. Or take the $900 billion we spent in COVID unemployment relief programs. Here too, the government attracted fraudsters in epic numbers, with anywhere from 10% to 40% going to improper payments.

Just stop and think on it. In its COVID gusher, the government has lost to criminals something like half of the total we spent to solve the financial crisis. Do we even care? Do we realize this is real money we're wasting so profligately?

My point with all this is that the government has a dismal track record in spending taxpayer money to achieve societal outcomes. As desirable as those outcomes are, government-led responses reliably result in making things worse, not better. Higher costs, worse outcomes, and ultimately missed opportunities.

I think we can do better as a society. Perhaps one way to start is by not assuming big government is the answer.

Be well.

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