Repeat after me...government size is a problem!

Buenos Aires Herald. 2 de abril de 2016.

The bottom line: if more money is printed then there will be more inflation

We are fed up with inflation, know that public services must improve, fear that insecurity will knock on our doors. All those problems are the government’s responsibility, and therefore are government expenditure. But even when those problems were improved very fast, we would still be left with another major and — so far invisible — one.

Public expenditure, at the national, provincial and municipal level, is getting close to 50 percent of GDP. In spite of a record tax collection, the deficit reaches about five percent of GDP. And that is an understatement, since it only considers expenditures paid, and not those accrued. So let’s take those numbers as a starting point, just for the sake of argument. If there is a deficit of 7.5 percent of GDP on expenditure of — say — 50 percent of GDP, that means that government is spending 15 percent more than it is collecting. Imagine you just spent every year 15 percent more than your salary! It is clearly an unsustainable situation. To finance it the government can ask for a loan from the Central Bank, which it will never repay. Children know that means printing money and that creates inflation. Miraculously, the new Central Bank has dramatically reduced this kind of financing, and absorbed “money overhang” from the past government. But it cannot go on for long, or we will face a cringing recession. What needs to stop is the need for money printing.
Unless we stop printing more money there will be inflation. But even if we stopped printing money, there would still be inflation. The reasons are many, relative prices particularly, including salaries, need to adjust. And nobody wants his or her relative price to be lower than it was. Salaries are an easy example, but so are tariffs, gasoline, food prices, the almighty dollar, etc. Even if Argentines didn’t have a long experience with inflation, there would still be a spiral movement of prices: since costs increase, companies must increase their own prices or fear bankruptcy, salaries must go up or people will not be able to buy products at higher prices, imported goods are paid at a higher dollar, and so on. The economy will only find a new balance when some area or sector gives in and accepts a lower share of total expenditure.

There is an obvious candidate: government expenditure. If government expenditure is reduced (in relative terms) then all other areas do not need to lower their own share. However, this has not happened in the last decade, rather government expenditure has dramatically increased.

Financing expenditure is then an additional problem. We all are, or should be, worried about the deficit. We have a mammoth misbehaving in the bazaar. The problem is not (only) its behavior, namely the deficit. The problem is that there is an elephant in the bazaar.

Even if government services were of an excellent quality, total cost would still be a problem. By definition, government expenditure is not productive, but rather provides services that allow the private sector to be productive. Its basic roles are defense, security and justice. It has to provide public goods, and most of us believe it should have a major role in health and education. However it is hard to find any kind of argument for the government as a good producer. Why should a small town have a public cheese factory or a province own a textile industry or the national government a glass work? Why should there be special treatment for all public workers?

Government income comes from taxes, that it can only levy up to some point, and only to those who are productive enough to make some money. If taxes increase too much, there is no incentive to produce, but rather it is far better to get a government job and be paid by whoever is left producing. Government procedures are cumbersome and definitely not entrepreneurial so innovation is hard to find. Let’s improve them fast. And we will see that private sector productivity improves too, just because time is not wasted filling up forms or asking for special treatment. Even those who believe that government should play a big role in the economy cannot and never have advocated for slow and inefficient government.

I believe that if government was efficient its cost would dramatically decrease. There is no need for a number of procedures, mostly paperbased. The people that work in those procedures can be trained to provide other services whether or not they choose to remain as public employees. A minor detail: it is a fallacy that since public employees also pay taxes, they are not a financial burden. Were it true, it would mean that they pay for their own salary. Why go to work at all then?

So, repeat after me: even assuming that the government provides only excellent services, its size is still a problem. Even if there is no public deficit, its size is still a problem.