In Part I of this series the direct costs of government were discussed. According to a study by the Center For Fiscal Responsibility over 60% of national income was spent by government at all levels in 2011. Americans, on average, only controlled 40% of their earnings and how it was used.

Part II discusses the additional burdens of government, of which Opportunity Costs are focused on. Subsequent pieces will deal with the other burdens.

The Additional Burdens of Government

The burden of government goes beyond what passes through the ledgers of national income accounting. There are other costs, some subjective and others objective, which are substantial. These costs are all in addition to paying for elected officials, their bureaucracies and the costs of adhering to their legislative acts.

It is likely impossible to identify all of the burdens that government imposes. Even those which can be identified are difficult to quantify in terms of costs. The following three categories will be used to group and discuss these burdens:

1. Opportunity Costs
2. Freedom Costs
3. Costs Imposed By Arbitrary or Poor Decisions

1. Opportunity Costs

“Opportunity cost” is an economic concept which refers to what is foregone by taking a particular action. David Henderson provides a simple explanation:

If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.

Opportunity costs are subjective and related to foregone opportunities. These are real costs but not in the sense of GDP accounting. They are also substantial.

In the example above, the price of the movie ticket is included in GDP, but not the alternatives foregone as a result of choosing the movie. When government takes and spends your money, it does not spend it in the manner you would. The opportunity costs are related to the difference between how you would have spent it and how government chooses to spend it.

Macro Considerations

Government produces no wealth or product. It consumes, but does not produce. As James E. Miller stated:

State officials love nothing more than convincing the public they have brought them a standard of living beyond their wildest imagination.  Yet these claims are also completely false.  Government produces nothing; it can only redistribute using its implicit threat of violence.  Welfare transfer payments can’t be provided unless the private sector has produced wealth prior to confiscatory legislation.  Just as production must always precede consumption, government can’t rob Peter to pay Paul if Peter doesn’t first have something to steal.  No matter how hard they try, politicians can’t create a free lunch.  They can only order the citizenry around with the trigger of a gun.

Whatever government takes is unavailable to people, businesses and the economy for savings and capital.

The empirical relationship between size of government and growth, standard of living, etc. is not well documented. Studies can be found where the relationship is an inverse one — bigger government means less growth and a lower standard of living as reflected in this study from the European Central Bank:

This paper analyses the effects in terms of size and volatility of government revenue and spending on growth in OECD and EU countries. The results of the paper suggest that both variables are detrimental to growth. In particular, looking more closely at the effect of each component of government revenue and spending, the results point out that i) indirect taxes (size and volatility); ii) social contributions (size and volatility); iii) government consumption (size and volatility); iv) subsidies (size); and v) government investment (volatility) have a sizeable, negative and statistically significant effect on growth.

But studies can also be found arguing that the relationship is a direct one — i.e, more government means more prosperity.

In most areas of economics, the complexity and number of variables associated with a particular problem makes definitive empirical proof impossible. In something as politicized as how government affects the economy, those doing or funding the research are likely to be the best predictor of ultimate conclusions. Blatant examples of biased research abound. One that quickly comes to mind is the finding that increasing the minimum wage increases employment. Apparently politically pre-determined conclusions override ordinary common sense.

Common sense often enables more definitive conclusions than poorly executed empirical work. Accounting for and controlling innumerable variables, many of which cannot be measured and some are not even known, is difficult even with the best intentions.

The following represents a common sense approach to why government, beyond its minimalist size, harms growth and the standard of living. Wealth is nothing more than accumulated capital. Capital is the essential raw material for economic growth and improvements in the standard of living. The more accumulated capital a society has, the more rapidly it can grow and the higher its productivity can be. Both growth and productivity are essential to a rising standard of living.

When government consumes wealth, there is less available. Ceteris paribus, bigger government means a smaller private sector. A smaller private sector means less wealth creation and less products produced. Milton Wolf describes the negative effects of government:

Government spending, with all its dismal results, crowds out private-sector spending where true innovation occurs and where real jobs are created. As we free the market, some companies will do well and others won’t, but this is how we redirect our limited resources to where they can be most effective, and that’s precisely how our standard of living improves. It also means that some of us will have to change how we do things. That may not be easy, but if generations before us had been afraid to change, we’d still be using the horse-drawn plow and Morse code.

Government taxes increase the public sector at the expense of the private (productive) sector. This shrinkage necessarily reduces growth and the per capita standard of living from what they would otherwise have been. Government can grow only at the expense of the productive sector. Resources provided to government are taken from the private sector. Hence, the larger the government, the smaller the productive sector. Less in the hands of producers means fewer jobs, fewer business investments, less capital and less goods produced.

Thus, I claim the amount of opportunity cost associated with government is directly associated with government size. Massive government eventually results in stagnant or even negative growth and standard of living.

Micro Considerations

Some might argue that they would not have saved anything of what government takes in taxes so there is no macro effect. For them, that might be correct, but not for the overall economy. Even for these individuals there are opportunity costs. Unless you can say that government spends your money as efficiently as you would and provides in benefits exactly what you would have purchased on your own, you have suffered opportunity costs. Obviously, the efficiency or the spending pattern condition cannot be met, even by a government which some consider omniscient.

What about those who receive more in benefits than they lost in taxes? These people can make an argument that they have “gained” as a result of the system. But even here the gain is not as big as the dollar measurements might indicate. Again, the efficiency and spending patterns cannot possibly be as optimal as you yourself would have chosen.

The bottom line is that those who lose via the tax system lose more than the dollar costs indicate and those who gain (i.e., via redistribution) gain less than the dollar amounts indicate.

Estimated Costs

It is impossible to do anything but speculate regarding the dollar amount of opportunity costs associated with government. The macro effect has grown substantially recently as government has ballooned in size. Lowered growth rates of 1 – 2% are probably not unreasonable. That would amount to $1.5 Trillion to $3 Trillion per year less GDP. Perhaps over a ten-year period (these costs compound) a reasonable estimate might be $25 Trillion. To put this into perspective, at the low end this represents about $5,000 per capita in lowered GDP per year or a family of four would, on average, have $20,000 less goods available as a result of these goods not being produced.

It is impractical to even speculate regarding a dollar figure regarding the opportunity costs at the micro level other than to say that they are real and not insignificant. These opportunity costs arise as a result of giving a stranger money to go out and buy what you want or need. He has no idea what that might be. Regardless of how diligent and efficient he might be, his task is impossible. He cannot know how you would spend your money.

In the case of the government taking your money and spending it, the same problem exists. However few would consider the government either diligent or efficient. Political motives ensure that the bulk of your money is not spent in ways approximating what you would do with it.

Part III will continue this series and be available soon.