Sunday, September 16, 2007

Is government a "drag" on the economy?

Back to the issue of government: Right-wing ideologues believe that government is a foreign imposition upon the population, rather than a method for a population to get together to provide common services for their community. A typical statement by a right-wing ideologue is "any government program created is always a drain on the economy and makes the population less wealthy". Is that true?

It is hard to prove such a statement, but easy to disprove it. Since it is a blanket statement, all we have to do is find one (1) example where government actually makes the population wealthier, and we've disproven it. So let's start with the smallest unit of government in America today: The homeowner's association.

A home owner's association provides common services for the community such as, e.g., running the community swimming pool, or maintaining the exterior of the property (for condo associations). Right wing ideologues apparently believe that home owners' associations take money from residents' pockets without providing any services in return, despite the very clear and evident presence of a clean pool, neat landscaping, etc., all of which indicates that services are indeed being provided. I think we can all figure out that yes, the HOA *is* providing services in exchange for the money it is assessing from the condo owners.

Now, the question is, how efficiently provided are the services provided by an HOA? Well, let's take condo complex Y which contains 300 units and has a half-mile of roadway through the center of the complex. The buildings of the complex are surrounded by lush landscaping which increase the value of the condo units greatly. There is a single large swimming pool in the center of the condo complex. This single large swimming pool, the roadway, the greens, and the exterior of the buildings including the roofs and paint are maintained by the HOA.

Now, an HOA is the smallest unit of government in the typical metropolitan area, with typical powers of government such as the ability to tax ("HOA assessments"), the ability to foreclose if said taxes are not paid to the HOA, the ability to levy fines for violations of the rules of the complex, etc. So how efficient is this government compared to the 300 individual condo owners doing things without government involved? Well, one large swimming pool is obviously cheaper to maintain than 300 small swimming pools, not to mention that there is not room for 300 small swimming pools (one for each condo). Unfortunately you cannot divide a swimming pool into 300 individual parts for the 300 individual homeowners to maintain. In this case, the HOA is 100% efficient compared to the individual homeowners.

Okay, so that's a special case, says the ideologue. The roadway can be divided into 300 short pieces, and one assigned to each of the 300 homeowners. So how efficient is it for the HOA to provide road-paving services compared to the 300 individual homeowners? Well, the HOA (government) still comes way ahead of individual action in maintaining the roadway. One road repair contract for 1/2 mile of roadway is much cheaper than 300 road repair contracts for 5 feet of roadway apiece, because of economies of scale.

Now, what about the roof? It has a 20 year lifespan. At the end of that lifespan it will need to be replaced. Once again, one roof repair contract for 50,000 squares of roofing will cost far less than 300 roof repair contracts for 166 squares of roofing apiece individually contracted by the individual condo owners, due to the economies of scale.

So anyhow, I think we can dismiss the blanket indictment that government can never provide services in a cost-effective manner, and move on to something more based in reality. Well, for those of us who are not ideologues, anyhow. The next question is, does Medicare provide services in a more cost-effective manner than private insurance? We have numbers for that, and the numbers say "yes", for much the same reason as the HOA's roofing contract being cheaper in the example above -- the economies of scale. It turns out that government is *very* efficient at taking money out of pockets A, B, and C and placing it into pocket D, which is what health insurance is, in the end, and Medicare leverages these already-existing governmental systems (eg. the IRS's already-existing payroll tax system) in order to provide services less expensively than private insurers will ever be capable of doing (because of that whole economies of scale thing -- the IRS is scaled across all services provided by the federal government, not just the insurance portion of the government, thus will always have greater economies of scale than insurance companies can have when it comes to collecting revenues). The ideologue may jump up and down and scream "it can't be!", but reality is reality, whatever the ideologue may scream. We have numbers, no matter how much the ideologue wishes to ignore the numbers.

So: We have numbers that show government (we the people) can provide certain services more cheaply than private enterprise. Does this mean that government should provide ALL services? Don't be ridiculous. Cost is not the only criteria. If I want to go out and eat at a restaurant, I do not go out to the cheapest restaurant in my area, McDonald's, and buy the cheapest items (those items on their "Dollar Menu"). Choice, quality, aesthetics, and other issues of that nature come into play too. Thus while it'd be cheaper for my local government to contract with a painting company to repaint every house in our town beige every 10 years, most people really wouldn't like that, because they don't want their house to be beige. While it is more expensive to write 25,000 contracts for 25,000 different colors of paint for the 25,000 homeowners in our community, the homeowners rightly have decided that their personal choice of color for their homes is worth the additional cost compared to the efficiencies that could be obtained by a mass purchase of beige paint.

In short, the decision of which services should be provided collectively and which services should be provided individually boils down to three factors:

1. Is it even *possible* to individually provide the service? (In the case of the community swimming pool, the answer is quite clearly "No", you can't divide the swimming pool 300 ways or fit 300 swimming pools into the condo complex).

2. Can individuals cost-effectively provide the service for themselves with a reasonable level of efficiency? (In the case of the roadway through the center of the condo complex, the answer is quite clearly "no", and private health insurance's death spiral is increasingly making this answer "no" for private health insurance too).

3. Is choice in the provision of the service important to the individual? (In the case of house color, the answer is yes. In the case of health insurance, most people really don't care as long as they're covered. In the case of medical services, people definitely *do* care, they want to be able to use their family doctor that they trust. What this indicates is that house painting is not a proper government function, health insurance may be a proper government function, and providing medical services is not a proper government function).

Note that I am not in any ways indicating that government own the means of production or any such Marxist statement (government has by and large proven incompetent at producing actual goods, due to issue #3 above, which is that consumer choice is highly valued for most goods produced in the economy). Rather, I am taking the example of the home-owner's association and scaling it up to derive what I feel is the proper role of government in a democracy. The HOA is perhaps the purest democracy we have in America today, and thus an excellent mechanism for examination of real-life data regarding which services are best provided by government (the HOA board elected by the HOA members) and which services are best provided by individuals. Once we have real-life numbers, we can then say "yay" or "nay" to various ideological statements insofar as their truth or falseness is concerned. For example, we have actual data showing that a government program (maintenance of that 1/2 mile road through the condo complex) is less of a drain on the pocketbooks of the people who live in the condo complex than 300 individual road maintenance contracts would be. Thus we can immediately dismiss silly statements like "any government program created is always a drain on the economy", since in this case we have clear data showing otherwise (the individual owners have MORE money in their pockets compared to individually maintaining the roadway as the result of the government road maintenance program, thanks to the economies of scale possible by the HOA issuing one contract for 1/2 mile of road maintenance vs. 300 individual contracts for 10 feet of road maintenance apiece). Money is money, it doesn't matter whether the HOA (government) takes it out of my pocket or the road contractor takes it directly out of my pocket, if less money is taken out of my pocket than would otherwise be taken I'm happy. Same deal with health insurance -- if there is a system that can provide me a good baseline health insurance for cheaper, but still allow me to supplement it as desired with "gap" insurance, and I get less money taken out of my paycheck at the end of the month to pay for all this... well, I'd have more money at the end of the month. Is having more money a "drag on the economy"? Only in the mental world of ideologues who prefer living in their Little Green Book rather than the real world.

-- Badtux the Economics Penguin
Cross-posted at the Medley


  1. The key words to me are, "common services for their community".

    But each government tends to grow and seek more control and power over all things.

  2. Hi Badtux, :)

    As I have said before, I enjoy your blog for many reasons. I also have no love for the moronic ideologues and their brethren.

    In the example you gave, the condo complex, you didn't mention the power of collective bargaining. :) It is quite true that splitting pool, road, etc maintenance into 300 small parts would be impractical and expensive (if even possible). But if all 300 Condo owners collectively bargained for the services, they could get a good competitive deal. Possibly as good as the local Gov could do, and it has been shown that in some cases better. If, however, yo take the idea further, and ask if the Federal Gov could effectively bargain for those services Nationally, compared to all condo owners collectively bargaining, I believe the answer would then be *yes*! However, this brings up the problem of competition. If the Fed Gov contracted a company to maintain all Condo and other public pools in the USA (for example), what happens to the other companies? And what happens to the Gov bargaining power then? (Halliburton anyone). The sad truth of life is that everything is a trade off... a compromise. What really should be done by the Gov (but rarely is) is to find a good common ground that will work to everyones advantage. (Yes, I am a dreamer! Or, I used to be). :)

    I recently read a report by the Urban Land Institute that basically said that they believe the US infrustrature (road, rail, airports, dams, waterways etc) are in such a bad state, that it will cost a minimum of about a Trillion dollars, and take one or two decades or more, just to bring them up to basic safe standards! Over 3,500 dams are categorised as very unsafe, and all 79,000 or so need some form of maintenance. 97% of US roads need some maintenance. Chicago alone is estimated to need about $6bln just to bring it's subway system back up to safe and efficent service... etc, etc.

    And sadly, as bbc said (above), it becomes about power and control. At the end of the day, the Gov are just people too. and they want what everyone wants... all they can get! "Power corrupts. Absolute power corrupts absolutely." And that is the problem the USA (and many nations) are facing today. And the fault lies ultimately with the people. The people became lax and allowed the Gov to control them. The people forgot (but are now remembering rapidly!) That the *people* in the USA are supposed to control the Gov! I find it amazing that many US citizens don't even know, or understand, their basic rights. Until that is fixed... everything else is not worth worrying about. :) Maybe that old saying is true... People get the Government they deserve.


  3. Really good exposition, BT.


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