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O’er the Land of the 39 Percent Free

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I hope you enjoyed last weekend, because Friday didn’t mark just the end of your working week; it also marked the annual Cost of Government Day. According to Americans for Tax Reform, each U.S. resident works 224 days to pay for the cost of government, including spending and regulatory compliance, up 27 days from just three years ago.

At almost 50 pages, the ATR report is far more than just a calculation of government size relative to the economy. Despite many shortcomings, including a cryptic state-by-state ranking, it merits a deeper examination. Brace yourself, because if handing more than 61 percent of your labor to government officials boils your blood, it gets worse.

Measurement limitations

ATR analysts acknowledge that they account only for compliance with regulation, not the inevitable resource misallocations and forgone trade (the “deadweight loss”). So tax filing counts, but money spent on lobbying, tariff-inflated prices, and bans on everything from food trucks to hemp production do not. Moreover, regulator funding has grown by 73 percent since 2000, so the likelihood of counterproductive enforcement has grown also.

Like taxes and spending, regulations are another form of wealth distribution and point to the disparate burden of government, which an “average worker” measurement misses. Tax Foundation research, for example, suggests that the United States has the most progressive income taxes among industrialized nations. Further, all levels of government redistribute annually, through taxes and spending, more than a trillion dollars downward from the highest 40 percent of income earners to the lowest 60 percent.

Regardless of income, the authors note that the Congressional Budget Office’s estimate of 3.7 percent for 2011 economic growth is, to put it mildly, optimistic. ATR compares the cost of government to economy size, so given the growth rates of 0.4 and 1.3 percent for the first two quarters, ATR’s date “may significantly underestimate the real cost of government for 2011.”

Gauging government growth

There is a more fundamental problem with ATR’s methodology, though, in that it presents government growth relative to economy size. The implication is that when government grows at the same rate as the economy, its size remains constant; at least it would translate to the same Cost of Government Day. Using this measure, ATR presents the cost of government in 2001 as lower than it was in 1977. (Click here for ATR’s visual presentation.)

However, federal spending alone, compared with inflation and population growth, expanded rapidly during the period in which the Cost of Government Day arrived earlier. As Robert Higgs of the Independent Institute has publicized, government spending is measured as a component of economic output, so when it grows, so does the metric used as a comparison. That places a downward bias on the result.

Loss of federalism

At first glance, the burden from state and local spending has decreased in recent years. Rather than decrease, however, more of it is simply funded by the federal government. Federal spending is now by far the largest component of the cost-of-government measure. That comes to more than 28 percent of the economy this year, more than twice the cost of state and local governments.

The authors rightly note that federal aid comes with strings to undermine local or state governance. Often imposed by unelected officials, the aid weakens the link between constituents and representative government. To make matters worse, after the aid dries up, the new programs necessitate approximately 40 percent higher taxation at the state and local levels.

The expansion continues

For all of the measured variables, the prognosis for the next few years is towards a later Cost of Government day. Unfunded pension liabilities, in particular, are already coming to bear at all levels. Not only do they generate spending pressure, they divert spending away from current production to fund pensions for people who worked for the government in the past. On the regulatory side, the implementation of health-care and financial-services reforms is yet to be complete, and that is already boosting the federal register with needless mandates.

Another important conclusion, expounded by Wayne Crews of the Competitive Enterprise Institute, is that spending and tax cuts alone have limited capacity to enable economic progress. Regulatory constraints, which impede use of that money by entrepreneurs and assume enforcement dollars, warrant similar attention.

The one glimmer of hope from ATR’s report is the heightened scrutiny that governments face at all levels. Organizations such as the Institute for Truth in Accounting are uncovering gimmickry that conceals government liabilities, so people can better know where their money is going and target their efforts to push back the cost of government.

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    Fergus Hodgson is host, editor, and founder of The Stateless Man radio show and e-newsletter and a policy advisor with The Future of Freedom Foundation.