Wyoming Liberty Group
Economic Benefits from Limiting Government, Part 1
Last week I presented some rather serious numbers on the Wyoming economy:
- We are the only state with two negative GDP-growth years during the trough of the recession (2009-2011); and
- We have the highest rate of government employees to private employees in the country.
As if that was not enough, the rate is growing every year.
This path is unsustainable. When GDP shrinks, so does the tax base that government is living off. Eventually this leads to serious budget problems, something our federal lawmakers are all too familiar with.
So far, Wyoming has not paid the full price of the troubles in the private sector. Severance taxes and federal funds have shielded the state budget from the true economic cost of excessive government. However, that may change soon. Recent CREG reports have indicated that severance tax revenues may flatten out or even drop slightly over the next few years. Add to that an emerging friendliness in Congress toward spending cuts and our state budget may be in real trouble as early as in the 2014 budget session.
I am confident that our state legislators do indeed want to save us from the hardships that would follow if they would have to resort to massive panic-driven budget cuts in the future. I am also confident that they would want to avoid, at all cost, having to raise taxes massively to compensate for shrinking severance-tax or federal-funds revenues. Therefore I have suggested a number of measures that our lawmakers could consider as they begin to set the course toward a more prosperous, fiscally sustainable Wyoming.
The common theme for these reform ideas is that they open for a permanent, structural shift in the balance between government and the private sector. Our private sector must thrive and our government must shrink.
Such a structural shift would have many benefits, from a diversified and, economically, more sustainable industry to more well-paying private-sector jobs that will keep our young from leaving the state. It would open for entrepreneurial innovation and allow government to keep taxes low, even under a scenario with shrinking severance taxes and federal funds.
The gains from such a balance shift can be substantial, especially in terms of GDP growth.[i] The greatest potential lies in the fact that private-sector jobs are much more productive than government jobs. In 2007 an average employee in the private sector in Wyoming produced an economic value of $116,455.[ii] That same year an average state or local government employee produced an economic value of $49,866.[iii]
This means that an average private employee produced 2.34 times more economic value than a government worker.
In 2010 the value parity had increased to 2.62. During the same period of time, however, the balance between private employees and employees on state and local government payroll had changed notably:
- There were 4,600 more low-productive government workers in 2010 compared to 2007; and
- There were 11,300 fewer high-productive private-sector workers in 2010 compared to 2007.
The imbalance between low-productive government jobs and high-productive private-sector jobs illustrates the problem with our state’s poor GDP growth record. Just to illustrate what difference it would make to shift this balance, suppose the 4,600 people that the state and local governments hired between 2007 and 2010 had gone to private-sector jobs. This would have increased the Wyoming state GDP by $373 million, a net gain of $81,000 per person moved from a government job to a private-sector job.
Needless to say, there is a lot of economic prosperity to be gained in moving labor from government to private-sector jobs. If ten thousand state and local government workers moved to private jobs, state GDP could grow by $810 million. The multiplier effect of this would be significant and could generate as much as a ten-percent total increase in state GDP over two years (assuming that Wyoming has the same multiplier as the rest of the U.S. economy).
It is, of course, unrealistic to expect this kind of sector-to-sector migration of jobs to happen overnight. Nevertheless, these numbers illustrate the significant macroeconomic gains that Wyoming can harvest if we take the prudent steps to reverse the growth in state and local government and give the private sector a fair chance to thrive.
[ii] Adjusted for inflation, using 2005 as base year. BEA offers different base years; for maximized methodological accuracy the use of the latest base year is generally recommended.
[iii] Theoretically, government does not produce any value, as it covers its production costs with coercively taken money, a.k.a., taxes. However, so long as established national accounts principles recognize that government does produce value, it is reasonable to use these numbers for comparative purposes. Furthermore, it is difficult to argue that a physician who treats a patient on Medicaid funds does not make a difference in the patient’s life, but that he would if the patient paid him in cash or with private insurance. The main point here is that a government workers produces considerably less economic value than a private sector employee, a fact attributable to many aspects of government, including its coercive funding methods.