Sometime the most simple ideas spawn the most revolutionary changes. It happened with The Laffer Curve during the ‘80s. Dr. Laffer knew that there was a direct link between effective tax rates and tax revenues. His idea was presented in such a clear and compelling manner that it’s a cornerstone for those who favor limited taxes and limited government.
With the Laffer Curve in mind, may I present The Cofall Curve:
The premise is equally simple and compelling. This is also timely as we feverishly debate the exponentially increasing costs of government, national debt, and deficits.
Simply, there are certain essential costs a society must bear; these costs are represented on the X-axis and are percentages of our GDP. Currently, our total federal government spending is approximately one-third of our GDP. This number exceeds 50% when you consider state, regional, and local government spending.
Certain benefits to our society are derived from these expenditures and these are represented on the Y-axis. Essential services yield benefits. Yet, at some point, expenditures become burdens. Beyond this point, each dollar of government spending has a greater than one dollar of negative effect on society. The negative effects include allocating capital to the administrative public sector and removing the capital from the productive private sector.
For example, private-sector jobs and public-sector jobs aren’t the same. There are essential government jobs without which our economy and our quality of life would suffer: soldiers, food inspectors, intelligence gatherers, law enforcement, fire and rescue, some legislators, and other value-added public-sector employees.
However, past a certain point, the benefit of these employees is overshadowed by the cost to and burden on a society. Bureaucrats, paper pushers, administrators, regulators, layers of middle management, employees doing the jobs that the private sector can do more efficiently, some legislators… these are all examples of costs, not benefits, to society.
Take, for a moment, the very simple fact that it takes the taxes paid by three to seven private-sector jobs to pay the cost of just one public-sector employee. Let’s say the average private-sector employee cost is $50K, including taxes and benefits. That employee pays about $10K in federal income tax. The average public sector employee cost is $70K, including benefits. This means that it takes seven private-sector jobs to pay for the cost of just one government employee. For the moment, we’ll ignore excess state and local taxation and employment, though this curve works at all levels.The benefit to our society of essential public-sector employees vastly outweighs the cost; what prices can you put on our military and our police, fireman, and certain teachers? Yet, once we begin to hire governmental employees just to create jobs, we burden the private sector with unnecessary taxes, more national debt, or a devalued currency based upon merely printing money — monetizing the debt. We must levy ever more taxes just to service the debt created by excess public-sector employment.
At the apogee of this curve, the benefits to our society outweigh the costs. Beyond this point, each marginal government employee becomes a huge burden. I suggest that every public-sector job added beyond this point not only burdens society with excess cost, but the employees become additional drains based upon the bureaucracy and red tape they create. They create burdens to commerce and the exercise of free markets.
As we equate a public-sector job to a private-sector job, we lose sight of how many private-sector jobs are lost paying for just that one public-sector employee. At this point, conventional wisdom becomes counter-intuitive. Past the peak of the cost-benefit curve, the greatest benefit to society becomes reducing government employees and not creating “make-work” jobs. This means fewer burdens on tax revenues, more capital available for investment, and more private-sector job growth.
Due to the leverage of the number of private-sector jobs necessary to support a public-sector job, our economy is dramatically and negatively affected by surplus governmental employment.
Yet dare to suggest today that to provide the greatest benefit to our society we should reduce government employment and you’ll provoke outrage, righteous indignation, and the label of insensitivity. But those excess public-sector employees will find abundant jobs in the private sector and they’ll become producers. They no longer bear the financial burden of make-work government employees nor the excessive regulatory and bureaucratic pressure and they’ll create new businesses and consume more due to having more disposable income.
The essential problem is that we’ve relied upon the fallacy of Keynesian economic policies for so long, it seems intuitive. If we have high unemployment, we should put these unemployed to work for the government. Digging a hole and filling a hole is a noble use of ever more rare taxpayer dollars. An essential element in this debate is that public-sector employees generally administer society while private-sector employees generally produce things and services of transactional value. Though many will call this heresy, may I ask the last time you asked the government to invent anything, to sell you a gallon of gas, to brew a cup of coffee for you, or build you a house? When’s the last time you asked a machinist to renew your driver’s license, asked a dentist to put out a fire, or asked a bartender to record a deed?
As a final thought, there’s a political component of The Cofall Curve. At the bottom left corner, there are no government expenditures and no benefit to society. There’s also anarchy. Move to the bottom right of the curve and the entire GDP of the nation is consumed by government. At this point you’ll find fascism. At some point near the apogee of the curve, there’s the optimal blend of essential government spending and social benefit. Simple though this may be, this represents an efficient and well-oiled Republic. We’ve passed well beyond this point and there appears to be no end in sight. I believe that the finest statesmen and stateswomen that our country has to offer are yet to emerge, and I hope this curve may offer them a simple fiscal and political touchstone.
The elegant beauty of Dr. Laffer’s Curve was that it spoke to people. Its logic was immutable. You needed no values for X-axis and Y-axis. These values would have spoiled the conceptual brilliance. I hope this curve pays homage to that work and provides even more compelling logic to resist the “benevolence” of excess government spending and the unneeded public sector employment at exactly the wrong time.
