Wednesday, October 30, 2019

The public sector is not just another sector

Today the Bureau of Economic Analysis releases the advance estimate of the 2019 third quarter Gross Domestic Product.

Gross Domestic Product (GDP) is a measure of all activity within an economy. Every transaction, no matter its nature, is included. The numbers may be divided into sectors, but the underlying assumption is everything is fundamentally economic. This incorrectly reduces the different natures of various activities to a sense of sameness.

Where the risk of misperception is particularly elevated is with respect to the public sector, that is, government spending.

Yes, it takes economic activity for the government to function, but government function is unlike any other economic activity. Government has very defined purposes, is not a business, and is non-competitive. This is unlike any other sector of the economy.

I remember Newt Gingrich once summarizing socialism as simply a ratio of public-to-private sector spending. His conclusion was the higher the public sector side, the more socialistic the economy was. This ignores those fundamentally different natures of government activity.

Government is first there to punish those who do evil and praise those who do good. In economic terms, this means they're there to crush bad guy economic activity. Government is specifically there to be over that kind of economic activity. Government is only included in measures of economic activity second to that economic activity being necessary for executing its purposes.

Government cannot separately govern and participate in a market at the same time.

When government refrains from economic participation other than to govern it (crush any evil in it), competitors are motivated to outperform each other. Everyone competes to offer their goods and services at lower prices.

When government participates in a market, competitors focusing on matching the level at which government decides to participate. When the government is willing to pay, there's no mystery about price. Government sets prices it will pay, and everyone else falls in line with the dominant customer. No one is left competing to provide less service or take less for payment.

This is exactly what's behind the political argument about “junk insurance.” The Obama Administration set a high bar for covering lots of things, even things for which there is no risk such as maternity care coverage for men. The Trump Administration gave states the option to get 1332 waivers from many requirements to hold down cost. ACA supporters don't like this because then they can't take credit for people having “high quality insurance.”

The bottom line is government has no competition when it participates in markets it regulates. Government, by definition, correctly has a non-competitive monopoly on power for specific purposes. Therefore, it is essential that government is very cautious, reserved, and intentional about any economic activity it undertakes to fulfill those purposes. It can get very dangerous if it does not.

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