President Trump’s policy actions are causing concerns that he may push the economy into recession. An Associated Press news piece led with, “With his flurry of tariffs, government layoffs and spending freezes, there are growing worries President Donald Trump may be doing more to harm the U.S. economy than to fix it.”
Trump’s tariff wars could indeed tank the economy. But cutting the government will support growth by reducing the distortions created by federal programs. Some federal programs aim to solve real market failures, but most simply reallocate taxpayers’ resources based on political whims and lobbying pressures.
There are two sides to the inefficiency of federal spending. Spending is funded by taxes, which distort the working, investing, and entrepreneurial choices of individuals and businesses. Each additional dollar in income taxes causes about 40 to 50 cents of damage to the private sector beyond the tax amount itself. That damage is called deadweight loss. Republicans seem to understand this side of the fiscal equation, and they push to cut taxes.
However, many Republicans do not seem to understand that the spending itself causes distortions and deadweight losses. Government bureaucracies waste resources, and the subsidy programs they run induce unproductive responses by individuals and businesses. Most federal programs are not worth the cost, as discussed in this study.
As a result of such taxing and spending inefficiencies, pursuing goals through the government is a “leaky bucket.” Former Council of Economic Advisers Chair Michael Boskin described the problem:
The cost to the economy of each additional tax dollar is about $1.40 to $1.50. Now that tax dollar … is put into a bucket. Some of it leaks out in overhead, waste, and so on. In a well-managed program, the government may spend 80 or 90 cents of that dollar on achieving its goals. Inefficient programs would be much lower, $.30 or $.40 on the dollar.
Thus, the taxes to fund a one-dollar program might cost the private economy $1.50, and the program might produce benefits of $0.50. That creates a cost-benefit ratio of 3‑to‑1.
Economics professor Edgar Browning came to similar conclusions in his book on the economics of government, Stealing from Each Other. Looking at the effects of federal taxing and spending, he estimated that “it costs taxpayers $3 to provide a benefit worth $1 to recipients.”
The figure illustrates the idea with a hypothetical business subsidy program. Extracting taxes to fund the $100 million program costs the private economy $150 million. The government bureaucracy consumes $10 million, and then the $90 million in subsidies creates net benefits of just $50 million. What happens to the other $40 million? Perhaps $5 million is lost on private-sector paperwork, $10 million is lost in fraud and errors, $10 million is lost in costly regulations, and $15 million is lost from political misallocations. Since the program costs three times more than the benefits, it should be repealed.
A subsidy project in New York State illustrates the inefficiency. The state spent $959 million to build a solar panel manufacturing plant for Tesla in Buffalo. Alas, they misjudged the market for the panels, and since 2015 the plant has been only partly filled. A state comptroller’s audit “found just 54 cents of economic benefit for every subsidy dollar spent on the factory.” That 54 cents of benefits combined with the tax damage from funding the plant results in a cost-benefit ratio of about 3‑to‑1.
We do not know exactly how leaky the bucket is for each federal program, but we do know that the overall bucket gets leakier as the government grows larger, as explained in this study. One reason is that deadweight losses from taxation rise more than proportionally as tax rates rise. If government spending is financed by debt, it just defers the tax damage.
A second reason the bucket gets leakier is that the marginal value of spending declines as the government grows larger. If we assume that the government does the important things first, additional activities are of lower value.
A third reason is that members of Congress have less time to investigate and prune inefficient programs as the government grows larger. Most members have no idea of the details of the government’s vast $750 billion procurement budget, and they are likely unfamiliar with most of the government’s 2,400 subsidy programs. The federal government is far too large to manage efficiently.
Congress should cut low-value spending in every federal department. That would reduce dangerously high deficits and allow resources to flow back to the private sector and boost growth.
For more on this topic, see here, here, here, and here.