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The Laws of Diminishing Returns and Increasing Cost Apply to Government Expenditures
Raymond Richman, 7/4/2018

Congress appears to be unwilling to eliminate any program which has been in existence for years if any citizen’s group supports it. Congress appears to be unwilling to eliminate instances of wasteful spending even when they are reported in the media and are well-known. Even worse is the overspending on ongoing programs because of Congress’s failure to control legitimate spending.

The most grievous policy mistake is to neglect two of the most important economic laws, the Law of Diminishing Returns, and its related Law of Increasing Cost. Over-spending on existing programs is probably the rule rather than the exception. The former says that given the fact that all factors are limited, e.g. capital and labor, increasing the employment of one factor relative to another to produce a particular product will result in less than proportional increase in output. Increasing costs means that, given the fact that total resources are in limited  supply, to produce more of one product requires giving up more and more of another or other products.

The reasons we don’t see these effects is that the economy is too complex and too dynamic. There are so many sectors and industries, some of which are affected without calling our attention to them. And over time, there will be invention of new products, improved methods of production, technological change, innovations, and other changes. But we are better able to discern their effects as government grows and its subsidies increase. The need for subsidies is evidence of diminishing returns and of increasing costs. If we were able to calculate benefits and costs of new government expenditure programs, we would observe that most of them are due to the diminishing returns and increasing cost of existing programs.

These require increasing diversion of funds from the private sector. For example, increased defense spending is at the expense of increased costs of goods in the private sector. When government spends more money on global warming projects, it is at the expense of increased costs of other goods people buy. Since electricity produced by wind and solar power is more costly than electricity produced from fossil fuels, the increased cost effect reduces private purchasing power twice, as private sector costs increase and second by the law of diminishing returns as government expenditures on climate change increase.  

Failure to pay attention to diminishing returns means that government expenditures on many if not most programs exceeds the amount that cost-benefit would justify and many expenditure programs should not have been initiated at all.  Government would get increasing returns by reducing expenditures and the private sector would enjoy increasing returns and reduced costs as government expenditures are reduced.

Admittedly, this makes a case for reducing the size of government. There can be little doubt that federal government spending is excessive on a wide range of programs in nearly every department and agency. Depending on whom you use as the source, there are 78 to 137 independent federal government agencies most of which you probably never heard of. How much it costs the federal government to ignore the cost of overspending in the programs of these agencies and how much it costs the private sector because too much is spent by the federal government is unknown but a reasonable estimate of the cost of spending too much on existing prorams would probably be around $250 billion. Estimates of the cost of continuing failed programs is likely to be on the order of another $250 billion. Everyone should be aware of the fact that in Chicago, St. Louis, Pittsburgh and other cities high-rise buildings built only a few decades ago by the Department of Urban Housing and Development had to be torn down because they were too expensive to maintain. Billions wasted. They build low-rental housing whose cost per unit exceeds the cost of luxury housing, diminishing returns.  

Poor administration probably accounts for another $250 billion. The GAO reports that five federal agencies alone spent $3.1 billion on workers placed on administrative leave in a two-year timespan. (Source: National Review). Heritage Foundation reported that Washington spends $25 billion annually maintaining unused or vacant federal properties; Government auditors spent the past five years examining all federal programs and found that 22 percent of them -- costing taxpayers a total of $123 billion annually -- fail to show any positive impact on the populations they serve.; The Congressional Budget Office published a "Budget Options" series identifying more than $100 billion in potential spending cuts.  Sen. James Lankford (R, Oklahoma) wrote in a recent report that there was over $473 billion in wasteful spending in one recent year. Why these instances of administrative incompetence are ignored can only be blamed on Congressional neglect of waste and abuse.

Together, ignoring the two economic laws and Congressional unwillingness to do something about known instance of waste are costing taxpayers somewhere close to $750 billion.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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