Our Slow-Motion Crisis

Becca and I just went through the process of buying the house that we have been renting for the past few years.  The experience has given me another distasteful brush with state laws and regulations.  Over the years, new laws have only been added, never subtracted, making this house purchase entirely different from the one I conducted only ten years ago.

Yesterday, a backhoe came into the yard to completely expose the septic tank covers (three of them), along with an element of the leach field, which took a lot of digging to find.  Why?  Because the state now requires an inspector to peer into these contraptions to assure that they are working, as part of something called "Title V" regulations.  Once everything was dug up, it took only a quick glance from the inspector, who had to sign off on a piece of paper before the sale could go through.

On the surface, how can one argue that having an inspected and functioning septic system is a bad thing?  However, the way the law is written, it only has to pass inspection at the time of sale.  Every sale.  If we decide to sell the house a week after we buy it, the whole process would have to be repeated.

This entire septic system was professionally designed and installed six years ago.  It has been pumped every year, with full documentation of every step.  But no matter.  The law requires the state inspector to be able to peer into the septic system's innards every time the house changes hands.  No exceptions.  So heavy machinery was brought in and the yard torn up.

We could live here for 25 more years, and we wouldn't have to go through this process again.  Or we could sell it in a week and have to do it all over again.  Never mind the fact that if a septic system is not functioning properly, the homeowners will undoubtedly be highly motivated to get it fixed.  And never mind that there are non-invasive ways to tell if a system is functioning properly.  Those factors are apparently irrelevant in the eyes of the law.

This tale is just a small, state-level story in one person's life.  But it is being replicated a thousandfold in a 2,200-page health care bill, a 1000-page Disability Act bill, a 340-page Patriot Act, and numerous other documents combining into more than 72,000 pages of rules and regulations to go along with more than 60,000 pages of tax code (up 44% in nine years). 

And that's just at the federal level.

How large is large enough?

All of these regulations represent a cost to administer and ensure compliance with.  A cost that we might do well to reconsider as this crisis unfolds.

Even as the federal government runs a magnificent 13% of GDP deficit, state governments are experiencing wrenching difficulties.  Such is the difference between having a printing press and not having one.

We'll cover some of the more compelling stories here at the state level, but I want to note that the larger story is nearly universally ignored.  Perhaps the time isn't right - hey, we're in a crisis, you know? - or perhaps the subject is too painful under any circumstances. 

But it needs to be discussed.

The fact of the matter is that state and federal governments are bloated and are entirely too large to be supported.  It would be a mistake to think that they've been viably supported up to this point and that if we could just get past the crisis perhaps they could be again.  The truth is that the current size of government has been significantly bought and paid for using debt financing.

Money has been borrowed, bonds have been floated, future tax receipts have been pre-sold, and so forth, and the proceeds have been used to create a larger government than could have been bought using tax receipts alone.

If we were to set a definition and agree that over the long run that government expenditures and tax receipts had to balance out (which is a very reasonable definition), then we'd have to conclude that either taxes have to go up a whole lot, or the size of government has to shrink.

Once we factor in a shrinking net energy surplus and our current debt levels, the outcome is all but assured - one way or another, more people will have to be productively employed.  But most government jobs either consume or redistribute wealth.  This is not casting any judgment on those jobs.  I like having clear water and safe workplaces.  But I am merely noting that with declining surplus energy and sky-high debt loads, the fact of the matter is that more people really need to be working in wealth-creating jobs than before.

How much of a shift are we talking about?  A very big one:

How the Government Is Swallowing the Economy

November 9, 2009

You know about the bailouts, the stimulus plan, cash for clunkers, and moola for mansions. But for all the anxiety they've caused, those government giveaways are just a tiny part of a mushrooming problem.

By one measure, the government already plays an outsize role in our so-called free-market economy—and it has little to do with the recession. Economist Gary Shilling has calculated that 58 percent of the population is dependent on the government for "major parts of their income," including teachers, soldiers, bureaucrats, and other government employees; welfare and Social Security recipients; government pensioners; public housing beneficiaries; and people who work for government contractors. By 2018, Shilling estimates, an astounding 67 percent of Americans could be dependent on the government for their livelihood. The implications aren't comforting.

If that happens, more than two thirds of the nation will owe their livelihood to the government, which is unsustainable for a number of reasons. It will require federal deficits far larger than the $1.4 trillion bogy we've got now, which is already alarmingly high. If irate voters don't rein in America's debt binge, market forces will, perhaps because foreigners will stop lending us the money or the rates they demand will rise and effectively bankrupt the country. Higher taxes would help solve the problem—and are probably inevitable—but enacting them on rich people alone won't be enough. At some point not too far off, the U.S. government will have to close the vast gap between its income and its spending, and the pain will be widespread.

What this study says is that if we remain on our current path, in less than ten years fully two-thirds of all Americans will be directly dependent on the government for their livelihoods.  I guess that leaves one-third working really hard and paying a lot of taxes.  Somehow I doubt that's going to fly without some sort of a revolt on the part of the remaining taxpayers.  Or our foreign creditors.  Or both.

Twice as Many Administering as Making

I think this chart, which compares the growth in government workers to the decline in manufacturing jobs, illuminates the entire situation perfectly:

Government employees now outnumber all manufacturing employees by 2:1.

Across all workers, for every 4.8 workers in any occupation, there is a government employee.

Said another way, if there were six houses on a street, five of them would have to earn enough to support the sixth plus pay sufficient taxes to cover all the public infrastructure and operating costs (roads, government vehicles, diesel, etc) for their neighborhood.

I imagine that if you were one of the five houses paying these expenses, and the family living in the sixth house showed up on your doorstep each week to collect their salary from you, you'd probably be pretty keen to know what they were doing for you during the work week.  But in our system, the true cost of this situation is deeply repressed by the fact that so much of the cost of carrying a 4.8:1 ratio is obscured by borrowed money.

The Underpaid Public Servant

Recently, the pleasant myth of the underpaid public servant was punctured by a study from the Commerce Department revealing that public servant average total compensation was twice as high as the average for civilian employees - nearly $120,000 compared to $60,000.

Myth of the underpaid public employee

Consider the lucrative lot of the men and women who work for Uncle Sam. In 2008, according to data from the Commerce Department’s Bureau of Economic Analysis, the 1.9 million civilian employees of the federal government earned an average salary of $79,197. The average private employee, by contrast, earned just $49,935. The difference between them came to more than $29,000 - a differential that has more than doubled since 2000.

Take account of total compensation - wages plus benefits - and the disparity is even more striking. In 2008, total federal civilian compensation averaged $119,982 - more than twice the $59,908 in wages and benefits earned by the average private-sector employee.

Again, without casting any particular judgment on this arrangement, I want to illustrate that such a system is thoroughly unsustainable.  If something is unsustainable, it will someday stop.  It is simply not possible to forever have twice as many people working in government as in manufacturing (while earning twice as much as average) and paying for the gap using debt financing.  Sooner or later, the mounting debts become unserviceable from the meager profits from the productive economy.

And the longer-term trend leads to two-thirds of all people in the land becoming dependent on government wealth redistribution policies by 2018.  Again, this is unsustainable.

Paying For It All

How does the government propose to pay for all this?  With new debt, of course:

$4.8 trillion - Interest on U.S. debt

Unless lawmakers make big changes, the interest Americans will have to pay to keep the country running over the next decade will reach unheard of levels.

November 19, 2009

NEW YORK (CNNMoney.com) -- Here's a new way to think about the U.S. government's epic borrowing: More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest.

More than half. In fact, $4.8 trillion.

Since it really is not sustainable, advisable, or even possible to run up debts to higher and higher levels forever, it's only a matter of time before the issue gets decided by some sort of a funding emergency.

The question before us is this:  Do we want to work out a gentle resolution or a wrenching adjustment brought about by default and failure?

States of Distress

So far, at the state level, the answer seems to be, "Wrenching, please!"

Paterson: NYS Will Be Broke Before Christmas

Governor David Paterson called an unusual joint session of the Legislature Monday to implore recalcitrant lawmakers to close the state's huge budget gap before New York runs out of money.

To some lawmakers it's nothing more than a photo op to help Paterson get re-elected. But the governor is dead serious. He said if the Legislature doesn't cut the budget now the state could run out of money by next month.

"We're going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations," Paterson said.

Christie may declare a financial emergency

As he seeks concessions from state workers to balance his first budget, Gov.-elect Chris Christie is examining the possibility of declaring a financial emergency in the state, according to an official familiar with his plans.

Such a declaration -- invoking the same law as if New Jersey were hit by a natural disaster -- could give Christie broad powers, such as suspending rules governing state worker layoffs. With many state workers due to receive two raises in the next fiscal year and a no-layoff pledge in place through December 2010, Christie's transition team expects to tackle the issue before he takes office Jan. 19, two of his advisers said yesterday.

10 states face looming budget disasters

SACRAMENTO, Calif. – In Arizona, the budget has grown so gloomy that lawmakers are considering mortgaging Capitol buildings. In Michigan, state officials dealing with the nation's highest unemployment rate are slashing spending on schools and health care. Drastic financial remedies are no longer limited to California, where a historic budget crisis earlier this year grew so bad that state agencies issued IOUs to pay bills.

A study released Wednesday warned that at least nine other big states are also barreling toward economic disaster, raising the likelihood of higher taxes, more government layoffs and deep cuts in services.

The report by the Pew Center on the States found that Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also at grave risk. Double-digit budget gaps, rising unemployment, high foreclosure rates and built-in budget constraints are the key reasons.

Through all of these recent articles, I cannot find a single mention of the idea that the size of government has outgrown the economy.  Certainly there are aggressive actions to slash spending to bring it in line with revenues (states have to do that by law in most cases), but where is the deeper conversation about how much is enough, or whether we perhaps have too much?

Instead, I sense the same sort of bewildered confusion that one might expect at the end of an age where the participants cannot see any other way but the past.  A past defined by an ever-increasing number of regulations, incrementally boosted each year with new bodies hired to administrate them, often without any seeming regard to the costs imposed upon the productive (tax paying) side of the economy.

My preference here would be to seek savings, not by trimming a little from each and every state and government function, but by asking the harder (and better) question about whether there could be entire departments or functions that have outlived their usefulness.

Are there no laws that we can trim or eliminate?  Do we need 150,000 pages of rules and taxes to administer ourselves?  Could we do it with 'only' 100,000?  How much would we save in both compliance and administration if we judiciously axed a few rules?  Are there no government functions that are the responsibility of citizens?  Does it make sense to have a tax code so massive and convoluted that even the IRS often has no clue how it works?

It seems to me that the federal government, along with every state, ought to periodically scrub through the books to see what can be eliminated.

My Proposal

Part one of my proposal is to cap all the rules, and their costs, at their current levels.  No more rules can be added without subtracting some others.  Call this part "Cap 'n Trade," which already has some brand essence floating around the halls of power.

This part is quite simple.  If a new rule about, say, inspecting every septic tank at the homeowner's expense is deemed desirable, then an offsetting rule, or set of rules, covering the home sale process need to be scrapped to bring the overall burden of governing ourselves down to its current level.

Part two of my proposal calls for eliminating old, unnecessary, and arcane rules.  Call this part the "Good Housekeeping" proposal.  The idea here is to scrub out all the rules and regulations that made sense in a past world, but not the current one.  This should be relatively quick and easy.

Part three of my proposal calls for shrinking the role of government back to a level that appears to be affordable over the long-haul.  A well-run company would never dream of having a management and overhead structure that consumed 40% of all revenues.  Why should the cost of government be any different?  The level I propose as a starting target is that government should consume no more than 20% of revenues.

Benefits

The benefits to adopting these proposals run far deeper than saving a lot of money.  First, they will create a more livable society, where the average person could at least reasonably start a business or run their life without potentially unknowingly being in conflict with myriad laws.

Second, we'd be more competitive on the global landscape.  It is not reasonable to expect US businesses to compete with countries that choose not to adopt a 40% regulatory and overhead burden structure.

Third, the notion of competing priorities would return to the legislative landscape.  For now, there seems to be no restraint at all on spending.  Health care?  Sure, we'll take a trillion more of that.  Afghanistan?  Sure, send in a bunch more troops.  Deficit spending?  Absolutely, can't live without that.  Military bases in 140+ countries?  Yes, we'll do that too.

The idea of having to cut out old rules and regulations to make way for new ones would create an entirely different sort of conversation and return the concept of setting priorities to the discussion.  For far too long, we've had neither restraint nor active debate and discussion in our decision making.  (Ever watch C-Span and see the nearly empty chambers during each 'debate'?)

Conclusion

We are heading towards a massive funding crisis.  Our self-imposed administrative and regulatory burden is too high.  We can solve both by developing a more rational and cost-sensitive approach to both the number of regulations and the overall size of government.

If we do not, then two out of every three Americans will be dependent on the government for their livelihood in ten years or so.  That is not a sustainable situation and could easily lead to a revolt of sorts among the remaining few being asked to carry the whole weight.  For now, those 'bagholders' happen to be future generations, because we've chosen to mask the true costs with debt.

But debts must always be eventually repaid.

A first act of 'good faith' would be for the state and federal governments to develop a sensible plan for bringing the cost of government into alignment with our actual productive economy.  Capping and then reducing the enormous sets of rules would be an excellent first set of steps.

I would vastly prefer to avoid a massive funding crisis, especially if it's obviously coming and we can head it off at the pass. 

If it's clear that we need to reduce the size and cost of government, isn't now a better time to begin addressing that than later?

I plan on asking all of my representatives, now and on the campaign trail, what they are doing to reduce the size and cost of government.  I encourage you to do the same.