Government Incapable of Providing Services, Causing Fiscal Cliff

Nov
14

By Charles Biderman

 

There are two parts to the fiscal cliff equation. Government spending on services and taxes. Unfortunately almost all the discussion about how to fix the long term problem has been about taxes.

 

Focusing on taxes to raise revenues to provide government services requires making a key assumption that governments can effectively provide services. But what if the real problem is that the US government by its nature is incapable of providing cost effective services? I say that government spending on services are not only cost ineffective but probably harmful to the overall economy.

 

Why is no one else saying that government spending is ineffective and harmful? I can even demonstrate that government control of health care has been 70% ineffective.

 

My evidence starts in 1960 when US health care cost $140 billion, which was 5% of the overall economy. Remember 1960 was before the start of the Great Society, Medicare, Medicaid, Obamacare, whatever. As a result of all those programs, health care costs have soared 16 times to $2.3 trillion today. That means that health care costs are now 17.5% of an overall economy that has grown by just 5 times since 1960.

 

To put it more simply, we are spending $100 today to get the same amount of health care that would only be costing $30 today if health care costs grew at the same rate as the overall economy and not three and half times as fast.

 

Why have health care costs soared three and a half times as fast as the economy? Some might answer that it is the quality of health care, and that people live longer. But if that is the case then why do people live just as long in many developed countries that only spend half of what we spend of their economy on health care compared with our 17.5%? . That does not mean that those spending 7% to 8% of their economies on health are efficient. But those countries are 20% to 30% inefficient compared with the US being 70% inefficient. Important to remember, our health care is not better. No. it is just much more expensive and the reason why it is so much more expensive is due to our government.

 

In other words, because of government inefficiencies, health-care costs grew three and half times as fast as the economy. So the US is now spending $100 to get $30 of health care services. And the wasted $70 is solely due to government.

 

Then there is the military. Since 9/11 the US has to have spent close to half a trillion dollars fighting wars in Iraq and Afghanistan. What has that half a trillion accomplished? Are those countries better off? Are we better off? Is anyone other than those who received the half a trillion dollars better off? I do not think so.

 

Ok. I will admit that some of that half a trillion is probably why there has been no major terrorist event here in the US. But how much of that half a trillion did that? Shouldn’t $5 to $10 billion per year have been more than enough to spend on the war on terror without the enormous waste of lives and money that resulted from having US boots on the ground in Iraq and Afghanistan?

 

To repeat the real problem is not insufficient tax revenues to fund the government. No, the problem is that our government should not be in the business of providing goods and services. There is no way any form of government can effectively provide services. Yes, some local entities are fairly efficient at providing water, sewage, police and fire. But that is only for some local services.

 

The bottom line is that many are now realizing that the western world cannot afford to continue doling out ever more money to governments for them to waste by not providing effective services.

 

Charles Biderman
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

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One Response to Government Incapable of Providing Services, Causing Fiscal Cliff

  1. Ed_B on November 23, 2012 at 10:20 pm

    One can only wonder at the clever folks in DC who continue to amaze us all by coming up with classic terms on a regular basis. Take the term “fiscal cliff”. Well, we all recognize that a cliff is a dangerous thing. One could slip off of the edge of a cliff and be seriously injured or even killed. The term definitely puts us on edge, making us wary of whatever comes next.

    The next thing that happens is that a lot of talking heads begin to look into ways that such a fall might be prevented. Notice that they seldom, if ever, mention that there are things in life that sound scary but that are not necessary to avoid and, in fact, avoiding them may well not be in our overall long-term best interest.

    OK, enough of that. How about we REALLY take a close look at exactly what this supposed “fiscal cliff” actually is. Well, primarily, it is a step in the direction of living within our national means. This is something that individual Americans do each and every month unless they too are deficit spenders. While some are, the great majority of Americans DO live within their incomes on a routine basis. If they can do it, then surely the government can do it too.

    Just as no individual, local government, state government, or national government can continuously spend more than it takes in, neither can the US federal government. Yet, every fiber of their being seems dedicated to showing all of us mere citizens that they can!

    Have we learned nothing from the financial collapse of the USSR? They too thought that bureaucratic fiat could trump economic law. It cannot and they proved that by their national collapse. Now, the US government seems bound and determined to make that very same critical error. The Soviets spent more than they had on weapons and the US is spending more than it has on entitlements. While that IS slightly different, we all know in our heart of hearts that it will end just the same… which is to say, badly.

    As a scientist, I recognize that the results of a carefully run experiment are often quite clear and that the experiment does not need to be repeated over and over. Learning to accept “yes” and “no” as final answers is an attribute that most scientists, engineers, and other tech types understand. It is most unfortunate that the political types do not grasp this simple concept. Like moths to flames, they must repeat the mistakes of the past over and over and, yes, they WILL get burned. Unfortunately, a lot of us who really do know better than they will also be burned by their actions, or in some cases, inactions.

    While it is likely that there will be band-aids and can kicking aplenty as the politicians grapple with the issue of spending more than we have, it is likely that they will reach an agreement of some sort on reducing spending and raising taxes. If history is any guide, however, it will be yet another much-trumpeted deal that results in a few spending cuts at some nebulous time in the future and much more immediate tax increases. Guess which is more likely to occur.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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