Two Myths about Government Spending

by Wyoming Liberty Group Staff

Every time I open the Casper Star Tribune I feel the urge to write another "set the record straight" piece. Just last week I had to correct the Tribune's account on the corporate income tax; this week's exhibit of biased reporting is their July 21 story on government spending reform. The article gives the reader a firm impression of a state government that is spending a lot less money today than it has in the past.

I am not surprised at this narrative. The reporter, Nick Reynolds, is simply recapitulating a fiscal myth that has been going around the state for some years now. The truth is that government spending has not at all decline in Wyoming.

Let us get back to that one in a moment. First, though, we need to address another point where Nick Reynolds apparently has not done his homework. After quoting me (accurately but partially) he turns around and talks about "overprivatization" of government:

"The issue about how to fund any given government is of lower priority than the issue of what government should do," said Sven Larson, an analyst for the Wyoming Liberty Group. "We should definitely have a conversation about tax reform but only after we have begun the work to structurally and permanently reduce the size of government." That road, however, begs the philosophical question of what government should do and the concrete question of what government can do better than the private sector. The overprivatization of government services, some have argued, can be more expensive and unwieldy than doing things internally. Additionally, contracting services out decreases accountability and can occasionally provide more bureaucratic hurdles for the agencies.

Reynolds backs up this over-privatization argument with a link to a 2010 article over at governing.com. However, this article does not talk about privatization.

It talks about outsourcing.

This an understandable but not excusable mistake. Outsourcing is the practice where government pays a private company to deliver a service that government otherwise could deliver itself. Outsourcing does not rely on the free market for the production of those services; the only free-market element is in the bidding process where contractors compete for the contract.

Once the contract is signed, there is no longer any market pressure on the producer to deliver a good product at reasonable cost. Since government is a fixed price, there is no price mechanism at work – even if government outsources a service to several providers.

Reynolds does talk about privatization, but in a context that, unfortunately, misses the very point with structural spending reform (which I have written about 100 articles about). There is, says Reynolds,

no guarantee the elimination of services with no discernible return of investment means there will be a private sector replacement. Some state-sponsored programs — like law enforcement officers committed to livestock issues or adult literacy programs — were either cut down or completely eliminated several years ago and, in the Department of Health, a number of preventative care programs have been cut as well, with no private sector replacements.

There is a simple reason for this. The program eliminations were not coupled with appropriate reforms to regulations and government funding. Government initially promised to provide those services, monopolized the provision through taxes and fees, then walked away from its promise but maintained all the mechanisms it needed in order to be a monopolist.

Imagine a parent who promises a monthly allowance to his kid in return for not allowing the kid to work while in high school. Then the parent terminates the allowance but still won't allow the kid to get a job.

The real way to do privatization – as I explained thoroughly in my 2012 book Ending the Welfare State – is, again, to couple the termination of government programs with the removal of all the legal obstacles, regulations, taxes, fees and other charges that stand in the way of the private sector taking over. This is the successful path to privatization, one that Wyoming has not tried.

Now, let us return to the allegations of spending cuts. Figure 1 reports the growth rate in state and local spending in Wyoming from 1992 to 2016 (the latest year for available data):

Source: Census Bureau

There was actually a tiny dip in spending in 2011 and 2012. Could this be what Reynolds is referring to?

Let's check the actual spending levels:

Figure 2

Source: Census Bureau

The spending reductions in 2011 and 2012 amounted to, in total, 0.85 percent. Spread out over two years and both state and local governments, this is not exactly a reduction in spending that would merit superlative language. Furthermore, in 2013 a 1.2-percent rise in total government spending more than made up for that marginal decline.

Long story short: there have been no government spending cuts in Wyoming that are even worth briefly discussing. While some agencies have seen cuts, the net sum of spending has still ended up higher over time. This suggests that isolated reductions in some government functions have been more than compensated for elsewhere.

There are a lot of myths about government spending floating around in the public debate. It would be great if those myths could give way to facts and good reasoning. The Casper Star Tribune could greatly contribute by enhancing its functions for checking facts in its own articles.