Special Interests Politics- Fiscal Disaster Part I

Politics, noun. A strife of interests masquerading as a contest of principles.  The conduct of public affairs for private advantage.  Ambrose Bierce, The Devil’s Dictionary.

The government has become almost wholly responsive to the needs of special interests and almost totally unresponsive to the needs of the people.  Our government now consists of politicians and bureaucrats who spend most of their time listening to various special interest groups begging for a share of the national treasure.  While our legislators and executive like to pretend that they are advocating for sound public policy that improves the lot of all Americans, this is rarely the case.  Government is now all about catering to special interest  and winning the votes and support of that group when running for reelection. All of us, in one way or another, are now members of one or more special interest groups.  This has contributed significantly to the explosion in our national budget, our debt and deficit.  The amount of money spent by the government has exploded beyond anything that the founders could have imagined.   At the same time, the quality of the product delivered by government has deteriorated – consider what government provides in the way of education, roads, airline travel, national security, health care, economic welfare and promise, etc.).

In 1902,  the combined budgets of the U.S. Federal government, all state, and all local governments was less than 7 percent of the Gross Domestic Product (GDP). (Remember that gross domestic product (GDP) is simply the market value of the goods and services produced in a given year.)  Most of that spending (3.5 percent) occurred at the local level. The states spent only 0.76 percent, and the federal government about 2.71 percent. However, now total federal, state and local government spending in the United States is about 40 percent of GDP. Federal spending is about 24 percent of GDP.  State spending is now about 10% of GDP, local spending is about 11 % of GDP.  We now spend 3 to 13 times as much (in terms of percentage of GDP) on government as we did in 1902.  The chart from usgovernmentspending.com illustrates this rather phenomenal growth.  Stop.  Think about this astounding statistic for a few minutes.  Nearly one quarter of the value of ALL goods and services produced in this country now go to support the federal government.  Forty percent of the value of ALL goods and services go to support all forms of government – local, state and federal.  We are being governed to death.

 
 

Figure 1. Runaway Growth in Government Spending

Where does all the money go?

Contrary to popular belief most of the taxpayer’s money is not spent on defense.  The amount of defense spending (as a percentage of GDP) peaked during World War II at 45% of GDP.  During the cold war era the figure was about 10% and is now about 5% of GDP and is expected to decline even further.  This means that fully 15% of our GDP  is being spent in non-defense related activities.  This means that billions and billions of dollars are spent each year on things that are not essential to our survival as a country.  Think about that for a minute!

In investigating where the money goes, we could investigate congressional appropriations or various cabinet level department budgets but this hides the essence of the problem.  We must not only ask where the money goes but why is it going there?

By law, all spending legislation must be initiated in the US House of Representatives.  So ultimately, our congressional representatives determine where the money goes.  But what guides them in this determination?  Unfortunately it is not civic-mindedness or a desire for a better country or parsimonious protection of the taxpayer’s pocketbook.  No, unfortunately your representative is all too often only interested in attaining power and prestige and being re-elected. Unfortunately, it is not the taxpayer who catches the ear of the politician but a representative of a special interest group.  A special interest group is simply an advocate for or against a public policy that benefits their particular constituency.    In today’s political environment this nearly always means advocating that government money be spent to benefit the constituency of that special interest group.

The number of special interest groups is almost limitless.  Opensecrets.org breaks them down into the following major sectors.

  • Business
  • Health
  • Financial/Insurance/Real Estate
  • Communications and Electronics
  • Energy and Natural Resource Exploitation
  • Transportation
  • Ideology/Single Issue
  • Agribusiness
  • Defense
  • Construction
  • Labor Unions
  • Lawyers & Lobbyist (evidently there are lobbyist lobbying for lobbyist)
  • Education
  • Civil Servants and Public Officials
  • Non-Profit Institutions
  • Clergy & Religious Organizations

Each of these sectors includes advocates for dozens of industries and interest groups.  For example, as part of Ideology/Single Issuelobbyist sector we have Human Right, Environment,Gun Rights, Pro-Israel, Foreign and Domestic Policy, Democratic/Liberal, Pro-Abortion Policy, Republican/Conservative, Women’s Issues, Anti-Abortion Policy, Gun Control, Political lobbyist, Retired persons and senior citizens, civil liberties, right to work, various environmental groups, tax reform and tax policy, manufacturing, veterans, parent-teachers, television, highway and auto safety, affordable housing, drug policy, home schooling, consumers, rural lands, prisoners, family businesses, cigar rights, patent reform, border patrol, animals and animal rights, state taxation, various diseases, hotel taxes, balloons, amateur radio, medical research, immigration reform, recreational fishing, commercial fishing, biking, endangered species, fur, climate change, drugs, reptile keepers, archaeology and the list goes on and on.

To understand how insidious this problem is it is only necessary to follow the money trail.  The figure  below illustrates how special interest legislation really works and why it is such a problem.  The source of all the money Washington spends is either taken from the taxpayer (or in the case of our current government – borrowed from Chinese moneylenders).  We simplify the diagram to indicate that only the taxpayer pays since the taxpayer is ultimately going to pay for all borrowed money.  The taxpayer pays either by repaying the loan with future taxes (on the taxpayer, the taxpayer’s children and grandchildren) or suffering the depredations of inflation when the government prints more money to pay the debt.  Regardless, the taxpayer is the only one who pays.

 

 

 

Figure 2. How Special Interest Politics Works

Taxes flow from the taxpayer to the government which then disburses the funds based on the decisions of congressional committees and executive department bureaucrats. This process is heavily influenced by special interest groups, lobbyists, various political pressure groups and requests from diverse constituencies. It is the nature of special interest groups that they all have a noble cause and a heart-rending rationale why money should be disbursed to them. Therefore, the money now goes to the special interests groups. However, the special interest groups need to remain in business. Often, the special interest group really has no desire to solve the particular problems of the constituencies they represent. Rather, they need to continue to receive funding year after year – otherwise they will go out of business. So, while some funds obtained by special interest are used to address their cause, a significant portion goes directly back to Washington. This money is usually in the form of political campaign contributions but special interest also have others ways of “taking care” of their congressional representative or bureaucrat – perhaps through jet airplane rides or Super Bowl tickets.

Since we do not term limit congressmen and bureaucrats, they remain in Washington continually with their hands out to the special interest who help them financially. By attaining seniority, congressmen gain status and power as well as financial benefit. So the process continues. Money goes from the taxpayer to the government, from the government to the special interest, from the special interest back to the politicians, politician to special interest, and on, and on, and on.

There are two classes of special interest groups. I will term them individualized welfare and corporate welfare. Both create insidious problems that are not readily discernible. Further, this process of special interest welfare creates perverse incentives that exacerbate problems rather than solving them.

Individualized welfare. Individual welfare is represented by transfer payments to specific individuals who fit into generally large categories. Examples include financial welfare which are transfer payments for living expenses or health care expenses for poor people, the elderly, and other special classes of individuals. Other individual welfare is in the form of loan guarantees, etc. Medicare and Social Security fall into this category. While touted as either insurance or a retirement fund, they are actually transfer payments to special interests groups.

The problem with individual welfare is that it creates special classes of individuals who are dependent on the government for their well-being. In many ways, these dependent individuals are modern day serfs dependent on the Lord and Master – the government. Since they are dependent on the government, they must vote for the party or politician who is will to continue to transfer funds from the taxpayer to that individual welfare recipient. Consider, if a large number of inner-city black citizens are dependent on the government for their welfare, then two things will happen. First, they will have no incentive to either improve their situation in life (find and keep a job, e.g.) and they will therefore be unable to escape poverty. Further, the politicians who depend on the votes of this group have no real interest in seeing them escape poverty because they need their votes. A person who escapes this kind of government-imposed poverty is unlikely to vote for continued handouts once they become tax-paying contributors to society.

Corporate Welfare. Corporate welfare is transfer of funds to large organizations. In many cases these are commercial corporations. However, there are other recipients of corporate welfare including various educational groups and institutions, state and local governments and research institutions. For commercial corporations, this kind of special interest system creates a problem variously known as corporatism, cronyism, and rent-seeking.

Corporatism is the close relationship between large corporations and the government in which certain government favors (such as favorable tax treatment) are provided certain corporations in return for the corporation agreeing to support various government actions. The Big Pharma and Obamacare agreements are an excellent example (see here). The problem is that while the interest of the government and the large corporations may be satisfied, the interest of the private citizen are not and in many cases the taxpayer ends up subsidizing commercial corporation activities. Cronyism exists when there is a special relationship between mutual acquaintances and government officials. Often grants, contracts, and/or special tax treatment is steered to individuals who are friends (or more likely) political contributors or bundlers for a politician or party.

Rent-seeking occurs when a corporation, other organization or individual uses their resources to obtain an economic gain from others without providing any reciprocal benefits through actual wealth creation. An example of rent-seeking is a corporation lobbying the government for special tax consideration, loan subsidies, grants or tariff protection. These activities don’t create any benefit for society, they just redistribute resources taken from the taxpayer and gives them to the special-interest group.

Rent-seeking impedes economic growth. This is due to the fact that high rent-seeking activity makes more rent-seeking attractive because of the natural and growing returns that one sees as a result of rent-seeking. Thus, rent-seeking becomes valued over productivity. Ultimately, rent-seeking hurts the economy the because innovation is what drives economic growth and when rent-seeking occurs, there is little rationale for investment in innovation.

Corporatism, cronyism, and rent-seeking are all byproducts of a government system focused on special interest politics and special interest money. These ensure that taxpayer funds are wasted on institutions that would otherwise probably not survive in the marketplace or who could not compete because of a lack of innovation and creativity. These are all symptoms of our current economic malaise and must cause one to wonder if run-away special interests are not a major drain on the economy and job creation.

Summary.  Referring back to Figure 2, note that the taxpayer, unless he is a member of the special interest group, receives little benefit or value for his taxes. Any benefit received is nebulous and generally unquantifiable. In nearly all cases, a strong argument can be made that the special interest group’s activity are not the proper provenance of the federal government. Government should return value to all taxpayers, not just those who are members of a special interest group.

In the next posting, we will examine how special interest politics has become such a commonplace and the founders warning concerning special interest (factions) .

Comments are closed.