Government Bubble, Continued

Last week I wrote, literally in about ten minutes, a quick blog post on the idea of a Government Bubble. I wrote it after having the concept occur to me while on the air on KAXE (yes, those shows are really live and not scripted). I had not really thought it out and more threw out the idea to see if it had any legs.

From the name-calling from man-known-as-"Gord" to a commentary by Aaron Brown, this thought has generated a lot of feedback and discussion, both on the web and with me personally. I think that is good, especially since the more I have thought about it myself, the more I think there is at least a small something there.

If this thought is to progress any further (sorry Gord), we probably need to define what exactly is a "bubble". I've search for a definition and offer this entry from Wikipedia as the blend of them:

An economic bubble is “trade in high volumes at prices that are considerably at variance with intrinsic values”

While we don't trade shares in government, we do "invest" in government programs and services. Those "investments" are sometimes easily comparable to the intrinsic (market) value, which is why the fictional $600 hammer is an oft-quoted metaphor for government waste. Many times there are not easy comparisons (what is the value of the investment made in the Mars Rover?).

Another line in the Wikipedia entry caught my eye.

Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances.

So positive feedback is a mechanism that drives up prices, while a negative feedback mechanism would restore them to equilibrium.

To combine these thoughts and rewrite them for government, one could say a Government Bubble is:

A situation where the feedback mechanism of a government expenditure inflates the value of that expenditure beyond what would be experienced if the demand for the expenditure was based on purely market forces.

It's late and we'll need to think that all over for a while.  While we do, here are a few more examples of bubbles that have been created by government, many of them economically not sustainable.  

• Flood insurance. The government provides it for the sole reason that private insurance companies would price it so high that nobody could afford it. This has enabled many people to build in sensitive and hazardous areas where they otherwise would not be able to, thus creating the need for more government insurance subsidy. 

• Investment Bank Bailouts. We've recently been subjcted to nearly a trillion dollars in bank bailout money and the concept of "capitalism on the way up, socialism on the way down." Does the government induce reckless behavior, and thus more need for government subsidy, by saving the system from itself? 

• Defense Spending. How many defense spending projects are government works looking for a defensive department need? We hear of this all the time. It is the essence of the military-industrial complex. 

• Health Care Spending. Probably nowhere is this problem more acute than in the issue of health-care funding, where government spending (combined with the third-party approach of employer-paid private insurance) has pumped trillions into Medicare and other health spending programs. This has happened to the point where nobody knows what anything really costs and the solution is health-care rationing (also called, cost control through universal coverage). 

• University Tuition. The government obviously pays for the majority of public university spending. There have bee some very good analysis done on how the costs of administration for universities has grown dramatically beyond any other rate of growth.  All those expenses are need, though, right? They have not been brought about because the decision to do them or not was not subject to real economic scrutiny? 

• Welfare. The late Patrick Moynihan wrote extensively on how the way some welfare programs are structured has undermined family systems and, in the end, increased the need and demand for welfare. Moynihan brings added credibility to the discussion as he was quite liberal on social issues, and so one would not anticipate the more critical eye on social spending. 

So in a very quick brainstorming, I have listed a number of ways in which our government spends, and that spending induces a demand for even more spending.

The real bubble question is: If there is a bubble, can it burst, or is government immune from such things because they are government?

What does this all have to do with small towns? Most small towns exist in the form they do today because of state and federal government subsidy. Government as a sector of the nation's economy has grown to a size that has not been seen in American history. Is this sustainable, or is it a bubble that will ultimately deflate (rapidly or not). If it is a bubble, what will the impact be on small towns that have grown dependent on this system of subsidy?