This morning I was making my weekly appearance on KAXE to discuss Minnesota Politics and a thought ocurred to me: A Government Bubble. I made this reference towards the end of our segment (you can hear the entire show, which started around 7:20 AM on May 7, by going to the KAXE audio archives). I have enjoyed doing this radio show and have found it to be good for me.  It has forced me to develop a certain discipline in order to communicate thoughts in a short period of time. Sometimes radio is frustrating though because there is not the time (for good reason....we don't want to put people back to sleep) to brainstorm and develop ideas on the air.

So when the show ended today, I had this immediate rush of thought on this concept of a Government Bubble, contrasting it with the recent housing and financial-sector bubbles. I put my thoughts down into this blog entry, which I sent to KAXE for posting on their Morning Show Blog. I'm going to post it here as well for TPB.com readers, but I invited you to join what is perhaps a broader audience in commenting and discussing on this thought ovr at the Morning Show Blog.

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We ended the conversation this week with some talk about growth in government overall and I proposed the notion, which my Making-Sausage colleague Colleen Nardone did not agree with, that what we have is a “government bubble” in the same way that we have recently been through a “housing bubble” and a “financial-services bubble”.

This is not the classic argument that government has gotten too big and we need to cut it, or hold the line on spending, in order to bring it back into balance.  What I am asking listeners to consider is whether or not we have (innocently or not) grown the government to fundamentally unsustainable levels.

As part of the overall premise, let me agree (for the sake of discussion) that every service the government now provides is essential, or at least important enough where cutting it would cause great pain.  It might be easier to focus on something like a road  - someone else’s road, so it will not affect anyone we know personally – instead of something like health care, where people’s lives are at stake.

In times of plenty, what did we do with roads?  Well, instead of saving our excess monies or focusing on maintaining them in great condition, we built more.  More demand begat more roads, which in turn begat more demand.  Remember calls a few years ago by Republican Senator Dick Day to build a second beltway around the Twin Cities?  It was a fiscally insane idea that was given voice only by the fact that we were in the middle of a government bubble.  Nobody would be proposing this today.

But imagine had we built it.  Like every other public road we have on the map, it would now be a piece of essential government infrastructure.  This is true if it serves a million cars a year or a thousand.  We would never consider abandoning the road, and so we have obligated ourselves to maintain it forever. 

If we went back and could do it over, would we have built as many roads as we have, in the way we have?  Not likely.  Thus, if you are with me so far, we agree that we have a “government bubble”, at least in the area of roads.

Colleen was right to point out that government is different than housing or financial services, but that does not mean that government escapes the realities of economics.  I recently posted a blog entry on www.theplannerblog.com analyzing the obligations of just one Mn/DOT highway district, District 3 centered in Brainerd, MN.  The conclusion: Based on the revenue Mn/DOT has available to it, the District has the next 115 years of funds already obligated to projects that are of immediate “Major Needs”.  These are unsafe roads and intersections where people are dying, and, without a major infusion of funding, it will take us 115 years to address the problems.

Some of my pro-government friends, and perhaps Colleen, will suggest that we need a gas tax increase then to cover our obligations on these roads.  I calculate in the blog post that it would take between 85 cents and a dollar of gas tax increase to handle District 3, and perhaps that is acceptable to some. Regardless, I challenge the people reading this to step back and consider whether or not such an investment would solve the problem or would simply induce a larger government bubble, fueled in this case by inefficient use of resources, that we would someday be even more pained to deal with.

Let me summarize: 

  • We feel an obligation to maintain all roads as part of government infrastructure. 
  • In times of plenty, we built more roads than we could possibly maintain.  
  • The large amounts of roads induced an inefficient development pattern (sometimes called sprawl) and subsidized large parts of the market. 
  • Having created the problem , we are now dependent on the government to solve it. 
  • A large government tax increase to solve the problem will continue the inefficient development pattern, increase the level of dependency on the government solution and perpetuate the problem of obligation we already have, making it much worse. 
  • We have created a “government bubble”.  Ultimately our obligation to maintain roads will run up against our ability to pay for the maintenance (whether that is a no gas tax increase or a $5.00 a gallon increase, it will happen), and the bubble will bust. 

And this is just roads.  If we start talking about other government services – health care and education are the two that come to mind immediately – it is a fair question to ask whether we have, with all good intentions, created an unsustainable “government bubble”.

This is not a partisan argument.  Both the Democrats and the Republicans today are saying there is a limit to what we can cut and we need to find more revenue to meet our obligations.  Perhaps this is true, but are we ignoring the underlying problem and setting ourselves up for inevitable bursting of the bubble?  I think we are.  If so, the pain of getting things under control today (and it would be painful) will pale in comparison to the agony that future generations will experience when the bubble bursts.