How to Spend Government Money

I think I have enough material now to outline what the government should be spending big bucks on. I’m assuming that about 7% of GDP goes to relatively small things like infrastructure and scientific research, in order to concentrate on the big items on the budget.

1. Every country needs a military. However, some countries overspend on it, usually for no good reason. In today’s world, the only developed country that is militarily threatened by anyone is Israel. The rest just fake it to placate irate Generals. A good rule of thumb is that if you spend more than 1.5-2% of GDP on defense, including military intelligence and weapon R&D, you’re wasting money.

2. Health spending is typically 8% of GDP. But most health spending is on things that don’t usually cost more when national income goes up by a little bit, like building and equipping hospitals, or buying prescription drugs, or maintaining hospital staff. So a better figure than 8% would be $2,000-$2,500 per capita. In the US, 6% would be about right, as it would in Norway, the number two public spender on health care in the world.

3. Education spending averages about 5% of GDP, but rises faster than GDP. In the US, which spends almost 7%, the main sources of wasteful spending are the need to provide teachers with health insurance, which costs $1,000 per student; overall educational disparities, which reduce performance on their own and require a higher average spending to compensate; and out of control college tuition. Note that just making college free costs 0.25% in the US. Tacking on free daycare adds another 1% or so.

4. Welfare costs money. The exact amount depends on the poverty line and the ability of unions, worker retraining, etc. to get people out of poverty without handouts; in the US, a good guaranteed minimum income program will cost 4.5-5%, and unemployment insurance costs another 2%. Finally, social security spending ranges from 2% in Canada to 9% in Sweden. Part of it is explained by the difference in dependency ratios, but it’s also due to Sweden’s paying a lot more than Canada. The US is somewhere in the middle with 4.5%, which will be perfectly fine if health spending takes care of prescription drugs.

8 Responses to How to Spend Government Money

  1. SLC says:

    Mr. Levy thinks that Israel is threatened by somebody. Now where could he have gotten an idea like that in his head since his and Mr. Packards’ hero, Juan Cole, insists that Amadinejad has been mistranslated. Oh well, even a stopped clock is right twice a day.

  2. madmouser says:

    To comment on #3 Education, I understand that almost 70% of the money is spent on administrative costs. If this is true, then we need a complete overhaul immediately. I also heard the President of the University of Michigan receives $750,00 per year. I would like to see her job description and evaluate the true value of her duties. Admn should be scaled back and more attention spent on the needs in the classrooms. I feel certain we could have a better and more productive result oriented school system on half the amount of money we are currently spending, besides where does it say that the Federal government is responsible for education anyway. I think they have overstepped their boundaries.

  3. SLC,

    I don’t think that Ahmedinejad is who Alon had in mind, since as of right now Iran poses little threat to a nuclearized country with the fourth most powerful conventional military force in the world (not to mention which current enjoys the greatest per capita support from the most powerful player on the global stage). From a logistical standpoint Israel is de facto threatened as a country the size of New Jersey with neighbors on all sides who at the very best unfriendly.

  4. Alon Levy says:

    Madmouser, that may well be true in tertiary education, but not in primary and secondary education. The greatest item in any country’s education budget is teacher compensation, which typically takes about half the overall spending. There’s very little leeway to cut that, save increasing student-to-teacher ratios. Technically, a complete overhaul that cuts enough chaff to produce reasonably educated people in less than 16 years could shave costs even more, but it’s something that has to be done wholesale rather than retail, which means it won’t be done.

    Federal regulation of education serves several purposes. First, it can uniformize costs, which prevents the best teachers from concentrating in just a few high-income districts. It also prevents the states from competing with one another for resources, which increases costs but not performance. Second, it can uniformize standards, which prevents schools from getting away with teaching substandard curricula.

  5. SLC says:

    Re DiPietro

    In the short run, Mr. DiPietro is undoubtledly correct. In the long run, however, a nuclear armed Iran is the existential threat because it is ruled by looneys who will not be deterred by Israels’ nuclear arsenal of 200 – 600 devices. Whackjobs like Amadinejad would be quite willing to contemplate the loss of several million Iranians in exchange for removal of Israel from the map in a nuclear exchange. Now Mr. Levy contends that Amadinejad is only a figurehead (a pretty face? in his language) who does the bidding of the mullahs who really run the country. Even if true, I see no evidence that the mullahs are any less nutty then Amadinejad.

  6. […] Funding the US Government As I explained earlier, in the US it takes about 32% of GDP to fund government seriously (I’m ignoring federal-state distinctions here – I’ll talk about them later). It’s a little higher than the current level of spending, but with somewhat different priorities – less defense and farm aid and health care waste, more welfare. In other countries, where welfare payments need to be higher relative to GDP, it’s a higher proportion, probably in the mid-to-high 30s. […]

  7. […] I'd cut politicians' and other public sector salaries as well especially the ones at the top. How to Spend Government Money Abstract Nonsense Federal Budget Spending and the National Debt __________________ Main: Gigabyte EP35-DS3R, Q6600 […]

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