Don't overdose on government

Mar. 02, 2013 @ 03:12 PM

Do you take vitamins? You probably should. It ensures that even if you don’t always maintain a varied and healthful diet, your body gets the baseline level of nutrients.

But vitamins are worth taking only at normal doses. If you take three or four times the recommended daily dose, you don’t get three or four times as healthy. You just waste your money, give your bodily fluids an interesting hue, and in some cases risk a dangerous condition known as hypervitaminosis.

In other words, there really can be too much of a good thing. The concept has broad application. While buying a home is often a good investment, for example, some people go overboard, buy more house than they need or can afford, lose income they would otherwise have received from alternative investments such as stocks, and in extreme cases go bankrupt.

In public policy, the distinction between what is valuable on average and what is valuable at the margin often mirrors the distinction between progressives and conservatives. Take higher education. There is no question that, on average, college graduates receive hundreds of thousands of dollars more in income over the course of their working lives than do those who lack college degrees. But this statistical fact does not prove that sending additional people to college today would significantly boost their incomes or economic productivity in general.

Most high-school graduates who are likely to finish college with an income-enhancing degree are already there or headed there. Other high-school graduates who might be induced to go to college with additional tuition subsidies or lower admissions standards are unlikely to achieve the average result. That is, many will either fail out of college or pursue degrees in less-demanding fields with low rates of return in the job market.

More generally, when conservatives argue that adding new government programs is unlikely to generate sufficient benefits to offset the cost of the new taxes or debts necessarily to fund them, that does not mean that conservatives deny the value of government as a whole. Doctors who counsel you not to overdo it on multivitamins don’t doubt the value of vitamins at lower doses.

The past two decades has produced an explosion of new research on the effects of government taxes and spending on economic growth. A key insight from these studies is that the question can’t be answered by a simple yes or no. The right answer is often “it depends.”

If a given economy has no infrastructure to speak of, for example, then building roads, bridges, ports, rail, and water systems can have huge effects on productivity and thus on income growth, even after subtracting the cost of the necessary taxes. But once you get to a certain level of infrastructure investment, only certain kinds of additional investment are productive. Many projects end up generating too little benefit to justify their cost.

The same can be said for other services traditionally monopolized or dominated by state and local government, such as public safety and public education. General increases in public budgets reach a point of diminishing returns. That doesn’t mean that continuous improvement in the quality of public services has no value. It does – but only if you achieve that higher quality by becoming more productive with existing dollars. Otherwise, new dollars spent on public capital just means fewer dollars spent on more-productive private capital, as economists Melissa Yeoh and Dean Stansel demonstrate in a new Cato Journal study of local economic growth patterns.

Are we at the point of diminishing returns? Remember that all North Carolina taxpayers are also federal taxpayers. Total government spending on current operations is now at a post-World War II high as a share of GDP. Moreover, a higher share of that spending is devoted to transfers – to Social Security, Medicare, Medicaid, and other consumption subsidies rather than public investment – than ever before in the history of the country.

That’s not a vitamin. It’s a poison pill.

 

• John Hood is president of the John Locke Foundation, which has just published First In Freedom: Transforming Ideas into Consequences for North Carolina. It is available at JohnLockeStore.com.