However, I do not think it is common to sum these sources of revenue and track the total share of GDP which is attributable to these sources of revenue. While inflation and taxes are unambiguously helpful for the government's position, the servicing of the debt is a budget item itself. Inflation does its part to eat away at this balance, but it is none-the-less a liability.
In the recent discussion of the budget what seems to be playing in the center of the spotlight is the issue of raising taxes. However, it is one very small semantic step to view inflation as a flat tax. Ricardo argued that bonds were taxes, but just delayed. So why are these other measures of taxes not more obvious to people? When we raise the level of borrowing, we are committing to future taxes. In short, we may see a growing government, but we are going to wrongly attribute the growth to the current period -- we have been growing all along, so says the spending.
Like a corporation, the issuing of debt is an important part of doing business. Everyone who owns a home understands this lesson. When you qualified for your mortgage, the high number that you were given for the amount you could afford was calculated on the principle that your payment could be as high as 55% of your monthly income (assuming you had no other monthly liabilities). The only question that I have is why we don't think about government the same way we think corporate or individual finances.
Recent reports suggest that government spending is likely to grow to 30% of GDP. This is a huge growth from the historical average which trended in the last half of the century just under 25% of GDP. Basically we will see a growth in government by 20% if these forecasts are correct. That is a large number, but it is nowhere near the debt ratio that businesses and individuals carry. If we view our government as a corporation, then we are OK.
Of course, being an economist, I have an "on-the-other-hand" qualification. Government sits astride a society consisting of individuals and corporations. In welfare theory we assume that government exploits rates of return which are higher than market rates. The issues an omniscient and benevolent governor chooses is one burdened with incentive problems sufficient to make it difficult or impossible to solve in the absence of government intervention. One example of this is the interstate highway system. Investment in infrastructure has been calculated to outperform market returns consistently, yet was not something historically provided at the scale that the Eisenhower system provided. This proved necessary for much of the economic growth that surrounds our cities and higher population density areas. This is strong argument in support for infrastructure. [I ignore the opportunity cost argument for this money]
I do think we should invest in infrastructure; but is it necessarily something we should do as a government? New technology is allowing private capital to be available at precisely the same time that the federal government is hitting a wall with their ability to raise revenue. Bonds are constrained by threats of sovereign debt crises in Europe and inflation is widely understood to cause pervasive damage. This means that any increase in taxes possible is already spoken for. It has to fund existing social security obligations. It is fortunate for us that we can turn to private capital to fund some of the public goods that we have traditionally thought of as public works projects.
Take toll roads for example. Tolling used to be something that we thought was prohibitively costly. We hate toll booths and paying people to sit there all day and collect money faces rising wages and collective bargaining. Now we have E-Z pass and various new GPS technologies private firms (just like Facebook, credit card companies, and others) can manage the pricing of our activities based on our use of the services. The path is open for taking things off of the government budget. I am convinced that technology has solved many of the problems we used to rely on government to solve.
The role of government is open for debate, but I suggest that we can be much more clear about what role that that government should play. If we want to fund programs that provide social justice, that is great. However, let us be clear now about evaluating the impact of health care, education, social security. Are we getting what was promised? These central issues for government are possible to disentangle from the role government plays in managing business. For the role that government plays in regulating industry, I am less convinced after the banking bail-outs that government can do this well at all. It becomes hard to have lawmakers write good laws when all of the information they get about the industry comes from those standing to benefit from the legal changes.
I am hoping that technology is a solution to these problems. Technology helps to eliminate many of the market failures that cause the need for intervention. Technology may decrease monitoring costs for abuses of the system. In short, I am hoping for an increase in transparency. Maybe technology will even help to means-test the provision of social security so that we can help those that need it and avoid the bloodletting predicted in most deficit forecasts. If we want to help the least-well-off, why do people with very high salaries qualify for social security? This might be a first step in decreasing spending.
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