I’m always curious to explore problems from many angles. So, this month I’ve decided to explore some nontraditional angles to examine why governments around the world have so much debt.
To help me on my journey, I tapped the unparalleled expertise of Milton Friedman. In an essay penned in 1991, Friedman discussed the impact of government bureaucracy on output through a process known as Gammon’s Law. The law essentially states that government bureaucracies become an economic black hole — consuming ever greater resources and destroying output simultaneously. This particular paper examines the impact of Gammon’s Law on health care, which is particularly relevant as the Supreme Court hears arguments for and against the Affordable Care Act, the contentious health care reform bill championed by President Obama and passed by Congress, despite staunch Republican opposition in March 2010.
However, the impact of government bureaucracy is far broader than just health care. Consider the following examples from around the world of all manner of government waste.
Officials in Greece recently discovered that 39,000 residents of the Greek Island of Zakynthos have claimed disability benefits for blindness — including a taxi driver and a bird hunter. Hmmmmm. . . . Call me a skeptic, but maybe, just maybe, there are a few people not being completely honest about their condition. The rate of blindness on this island is about nine times the national average. So, either there is an extraordinary concentration of blind people or some of these people are being a little generous with the truth. Nevertheless, tax collection in Greece is no laughing matter. As this article in the Telegraph illustrates, about €15 billion is lost to tax evasion each year.
In China, the government waste is a bit more obvious, as they have built scores of ghost cities with the goal of putting people to work rather than making sensible investments. And when those investments represent trillions of dollars worth of capital, ROI will — eventually — become important. Watch this video produced by SBS Dateline that provides jaw-dropping images of these ghost cities. Interestingly, these cities are built on the notion of a burgeoning consumer class in China. However, China’s investment-driven growth model creates financial repression, because capital controls, setting interest rates ceilings, government ownership or domination of banks, and an artificially low exchange rate favor exporters and manufacturers over households. In the case of China, it literally creates infrastructure growth at the expense of households, as noted by Michael Pettis.
In Spain, the situation is particularly troublesome. With unemployment already at 23% and the country heading further into recession, it appears the government may have altered the fiscal deficit data in 2011 so as to make their numbers appear better in 2012. Really? Well, I guess it shouldn’t be a surprise. At the root of it all are people and money. You get enough of both together and anything can happen.
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