The Expanding Industry of US Government

No lobbyist left behind!

That’s the new motto of the whole Washington establishment. Every spending bill has something in it for everybody.

Today is a holiday in America. It’s “Presidents Day,” a day set aside for Americans to honor those who rule over them. Most Americans think of Washington, Lincoln and Roosevelt…but here at The Daily Reckoning we honor America’s truly great presidents – William Henry Harrison, Chester Arthur and Warren Harding – those who didn’t make things worse.

But look on…ye dead chiefs…at what your country has become:

Europe has only 1,800 registered lobbyists. There are 15,000 of them in the US. Most of them probably live in our new neighborhood…getting in our way as we drive around the Beltway…taking our parking places…hogging the tables at Starbucks… The parasites!

The Financial Times reports that companies spent more on lobbying in 2009 than they had the year before. Investment in new plants and equipment fell dramatically. But investment in lobbying rose by 5%.

You don’t need a Ph.D. in political science or economics to figure out why. Returns from lobbying were higher. That is the big shift in the US economy…the final shift.

We’ll come back to this theme in a minute. First, let’s look at what happened on Friday. Just to set the stage…we’re trying to figure out whether the stock market has entered a declining phase. At the beginning of last week, we thought so…by the end of it we weren’t so sure. And on Friday, the evidence was mixed. The Dow fell 46 points, but still ended up for the week. Gold dropped $4.

As to the economy, the evidence was mixed too. Consumer spending rose in January…but consumers are still reluctant to spend. And they don’t have any money to spend anyway…

So let’s return to our Presidents Day theme…

The US economy began as a frontier economy on the tidewater area of the East Coast…with a few big planters, but mostly small farmers, merchants and artisans.

Then came the entrepreneurs with their mills and factories.

Then, a few of the entrepreneurs grew to be captains of industry – the Vanderbilts, Carnegies, and Rockefellers.

When the inventors, founders and innovators died off, their businesses were taken over by corporate managers.

And then the leading corporations shifted their focus, from making things to marketing them. This shift corresponded roughly with the ascendancy of New York over Chicago…and, then after 1980, the focus shifted again – to financing. Wall Street grew rich. Motown – Detroit’s automotive industry – fell into decline. For a while, even the auto businesses made more money financing cars than they made building them.

Finance blew itself up in 2007-2009. Now, there’s a new shift underway…from the private economy to the government. Mommas in the ’20s and ’30s wanted their babies to grow up and go into manufacturing. In the middle of the century, marketing was more rewarding – Madison Avenue was the best address in America. And by the end of the century, the best and the brightest were headed to finance.

Where should bright young grads go now? Well, follow the money…! Where’s the money now? Not in manufacturing…at least not in US-based manufacturing. And not in marketing either – gone are the days of selling soap to big families with big pay raises. How about finance? Forget it. The boom in credit lasted more than 50 years. But who can borrow now? Only the feds. Sure a few big banks will make money by helping the feds raise cash. But the big expansion in consumer credit is over.

Now, government is about the only major industry that is expanding. The feds have the money now. They’re even handing it out. Get in line!

Remember our Daily Reckoning Dictum:

Anyone can make a mistake, but to really make a mess of things you need taxpayer support. Well, now the feds are getting plenty of it…

Over the last decade, federal spending in the US has gone from less than 35% of GDP to well over 40%. In Britain, the increase has been even more dramatic, from about 36% of GDP to nearly 55%.

Not only are the feds taking up a bigger percentage of GDP, they’re also becoming bossier. During the Bush years the federal register recorded 7,000 more pages of new rules.

And, of course…they’re making a monumental mess of things. They’re spending money they don’t have on things no one in his right mind would pay for with his own money.

Want an example? Go to Jonestown, Pennsylvania. They’ve got an airport there that is the envy of travelers everywhere. Lots of airport, in other words…few passengers. That’s because John Murtha – when he was still among the quick – used his power in Congress to build an airport that would be convenient for him…and reward local contractors and unions who had supported him over the years.

Few politicians dug more deeply into the pork barrel than John Murtha. But almost all stick their hands in it. Why else would you bother with the trials and tribulations of ‘public service?’ There’s got to be a payoff that makes it worthwhile, right? Of course, there are a few – like our friend Ron Paul – who are just trying to do the right thing. But for every Ron Paul there must be dozens of Congressmen and federal employees who are in it for the power, the money – or both. (Neither Stalin nor Hitler squeezed much personal wealth from the taxpayer tube. Mao Tse-tung, on the other hand, knew how to live – with plenty of palaces and young women. Most government employees are probably more like Mao than Adolph. That is, they are motivated by money as well as power.)

Have you wondered why the costs of running for public office have soared? That’s obvious too – because the stakes are higher. As the federal budget grows so does the pork that each member of congress can pull out of the barrel.

The number of congressmen is more or less constant (though it grows with population…after a 10-year lag for the census). But the amount of money given out increases…making each congressional seat more lucrative. You can do the math yourself, but the point is – crime pays. At least, for a while…

The trouble with crime is that it only makes the criminals rich. Everyone else gets poorer. That’s the problem in places such as Nigeria and Haiti. Crime pays. Nothing else does. Economists have done studies of this…and, of course, they’ve discovered the obvious. In “high trust” societies, people are wealthier. No wonder; when people know they won’t be ripped off, they accumulate more money.

A high trust society is one where property rights are respected…and where the rules of the game are known…and change very slowly. A change in tax rates, for example, discourages wealth – especially if it comes unexpectedly. So does a change in monetary policy. When people don’t know what to expect from the currency they become reluctant to invest for a long-term payoff. Instead, they invest in lobbying.

For the most part, tax rates haven’t gone up. Instead of taxes, government gets its money from borrowing. The immediate effect is much the same; resources are absorbed out of other sectors of the economy and into the public sector. Once in government service, they are used inefficiently or completely squandered. Result: John Murtha gets an airport…a kid in Brooklyn doesn’t get a bicycle… The long-term effect is unknown…but will almost certainly be unwelcome. The government will eventually be unable to borrow at low rates…and unable to finance its deficits. This will result in default…or hyperinflation…or both. In anticipation, trust in the future will go down…and so will America’s wealth.

That’s why the shift to politics is the FINAL stage of an economy… It is inherently wealth-destroying. In politics the rewards are distributed according to who you know or who you are. What you know and what you can do scarcely matters. Trust declines…because the rules change as wealth is taken away from some and given to others. The incentive to produce new wealth declines. Investments in new capital, new businesses, new innovations and so forth go down. Investments in lobbying go up. The insiders get rich. The rest get poor. And the nation’s wealth declines…along with its economy and its power. This will continue until the political sector blows itself up – either in default, bankruptcy, hyperinflation, revolution or defeat by a foreign power. Then, the cycle can begin again.


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning