What if there’s no spending problem?

In 1800, 75% of American working man’s expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%. – The Wall Street Journal, September 20, 1996

That is the miracle of the industrial economy. In 200 years, we have lifted more people out of poverty than ever before in human history. And as Moore’s law suggests, we are continuing to move even faster and more productive for the foreseeable future.

If the nation is so wealthy, why can’t we get spending under control? It appears unsustainable with no end in sight. How can you afford health care and education and infrastructure and other government programs?

But what if there’s no spending problem?

As Andrew Tobias has pointed out, “Every public company in America uses ‘Generally Accepting Accounting Principles’ except the US government. As a result, the way the government does its accounting, investments are counted as spending.”

Imagine trying to balance a budget with all your investments like education or a home are only counted as spending. That would be really hard.

Doug Muder‘s blog post on William Baumol and his theory on cost disease takes it a step further:

The economy as a whole becomes more productive with the advance of technology, but not all sectors progress equally, and some don’t improve their productivity at all.”

As a society, we aren’t doing without manufactured goods because health care is soaking up all our money; we’re just using less of our labor to produce the manufactured goods we want.

But the improvement is almost entirely on the outcome side rather than the productivity side.

Baumol looked at this situation and concluded that medical inflation was here to stay. Not because doctors are greedy or health insurance companies are evil or socialized medicine is inefficient, but just from the nature of health care. While other factors undoubtedly matter, the exponential growth would happen anyway.

Baumol predicts that over time government spending will rise as a percentage of the economy. But we can afford it…in Baumol’s model, government spending isn’t crowding out everything else. As a society, we aren’t doing without manufactured goods [or food] because health care is soaking up all our money; we’re just using less of our labor to produce the manufactured goods [and food] we want…

So is there a spending problem? It is a fascinating question to think about. If we want a better picture of what is actually happening sometimes we need to put down the magnifying glass.

[Andrew Tobias and Doug Muder‘s blog posts are worth reading about this topic over and over again.]