Nations Aren't Households: Why should government spend tax money on private goods?

• Author: Whyte, Jamie

Government spending in the United States and much of the rest of the developed world has increased dramatically since World War I. In 1910, combined federal, state, and local government spending in the United States was 8% of gross domestic product. By 2019, it had reached 35%. Over the same period, it rose from 16% of GDP to 40% in the United Kingdom, from 14% to 56% in France, from 17% to 45% in Germany, and from 7% to 40% in Canada. The same story could be told for all Western countries.

And the same story could be told about what governments spend money on. In 1910, they provided public goods such as national defense, law and order, street lighting, and public hygiene. They still do. But they now also spend vast sums on supplying private goods such as education, health care, pensions, and unemployment insurance, to name just a few big ones. In 1910, U.S. government spending on health care was 0.3% of GDP. By 2019, it was 8.1%, greater than total government spending in 1910. U.S. government spending on pensions has risen from 0% to 6.8% of GDP; on education, from 1% to 6%; and on welfare, from 0.2% to about 3% (on average through the economic cycle).

Politicians on both the political left and right have brought about this growth. Yet, some politicians--sometimes the very ones increasing government spending--have lamented it. An unfashionable few still do. These dissenters have typically argued that it can't be afforded. More spending will push taxes and government debt too high. Soon enough, the government will find itself in the position of a household that has maxed out its credit cards and has no way of increasing its income.

Enthusiasts for government spending accuse these worrywarts of committing the "household fallacy." Governments differ from households in ways that mean they do not face a budget constraint--at least, not one that the U.S. government has ever been near to bumping up against. Most importantly, governments can print money to pay their bills. Householders who try to do that go to prison. Modern Monetary Theory is the culmination of this line of thinking.

From the absence of an effective budget constraint, many move directly to the view that government spending should be increased. If you can afford a nice house and a Tesla and a yacht and foreign vacations, why not buy them? Similarly, if the government can afford to improve citizens' lives by supplying more or better health care, education, income insurance, roads, museums, television channels, and all the rest of it, why not?

Those who think this way are committing their own household fallacy. It may be true that a household should buy whatever it both wants and can afford. But this isn't true of governments. Even if government spending can be afforded, it's a bad idea because of an important way in which nations differ from households. Politicians are not to citizens what parents are to their children. Whereas parents know and love their children, politicians neither know nor love the citizens on whose behalf they direct government spending. And whereas parents voluntarily spend their own money on their children, politicians spend money extracted involuntarily from citizens. These facts mean that government spending on private goods is simply an expensive way of forcing people to consume things.

LET'S PLAY "SPEND FOR ME"

Imagine you were a contestant on a game show called Spend for Me. The goal is to allocate the spending of people you do not know as they themselves would choose to--say, 30% on housing, 15% on food, 5% on clothes, and so on.

The task would be relatively easy if you were spending on behalf of a pauper. He would put all his income into the basics: food, shelter, and clothing. But imagine you were spending for a billionaire. You wouldn't know...