The Cofall Curve: Why Government Spending & Jobs Are Burden

Smaller is better…really…

If there was ever a time to make a more compelling case for smaller government, this is it.

We are in the midst of a slow motion, economic dream sequence wherein a rapidly aging work force yields declining personal consumption. There is a virtual absence of any wage pricing power, predominantly due to the effects of globalization on a maturing economy and an education system that now ranks 14th in the world and getting worse. Short-term deflationary pressures will tip the hand of the Fed and debt monetization will become the norm. Property values continue to decline and taxes at all levels of government continue to decline.

Deficits are unsustainable and will soon become unserviceable if we have any hope of retaining any semblance of dollar purchasing power.
Our options are quickly diminishing but every scenario requires, at its very core, smaller government at every level.

Yet this is much more about the financial viability of the Republic as opposed to a political position. In 1980, our national deficit was about $1T. Today, it is in excess of $14T. This is a GDP to national debt ratio of 1:1. This is third world territory, at least according to the International Monetary Fund (not one of my favorite sources, however). Both parties are responsible for this debacle.

As our economy continues to contract, only the most “experimental” economists (“Keynesian” if you prefer) believe that increasing taxes will right the ship and increase wages and employment. This leaves us with only Hobson’s Choices (a choice with equally negative alternatives) and each and every scenario includes shrinking government.



It is imperative that a simple and irrefutable case be made directly to the American public.

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 30% of our GDP. This number approaches 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 significant social benefits. Yet, at some point, government spending becomes discretionary and detrimental. Beyond this point, each dollar of government spending has a greater than one dollar of negative effect on society. The negative effects include inefficient allocation of capital to the essentially administrative public sector and the equally inefficient and insufficient capital allocation to the productive private sector.

For example, private sector jobs and public sector jobs are not the same. There are essential government jobs that, without which, our economy and our quality of life 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 and not benefits to society.

Take for a moment the very simple fact that it takes the taxes paid by 5 to 10 private sector jobs to pay the cost of just 1 public sector employee. Recent data suggests that total compensation to each public sector employee is approximately $120,000 -double that of the $60,000 compensation for each private sector employee. Let’s say the average private sector employee cost is $60,000, including taxes and benefits. That employee pays about $9,000 in federal income tax. The average public sector employee costs $120,000, including benefits. This means that it takes 13 private sector jobs to pay for the cost of just 1 government employee. For the moment, we will 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 out weighs the costs…what price can you put on our military, our intelligence community or food inspectors, just to name a few? Remember, first responders and teachers are the fiscal responsibility of local, regional and state governments. Yet, once we begin to hire federal governmental employees merely to create jobs, we burden the private sector with unnecessary taxes, more national debt and 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 out weigh the costs. Beyond this point, each marginal government employee becomes a huge burden. Every public sector job added beyond this point burdens society with excess costs as well as the almost incalculable additional fiscal burden upon the private sector created by these massive bureaucracies and the resulting red tape and excessive and conflicting regulations.

Once we begin to equate a public sector job to a private sector job, we loose 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 private 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.

The debate about how large our federal government should be is as old as our country. This argument becomes more essential as federal spending dramatically escalates at the same time as federally mandated state spending is bankrupting virtually every state. And states can go bankrupt. Remember, states do not have printing presses. But these excess public sector employees will find abundant jobs in the private sector as tax payers, who no longer bear the financial burden of make-work government employees nor the excessive regulatory and bureaucratic pressure, will create new businesses and consume more due to having more disposable income.

The essential problem is that we have relied upon the fallacy of Keynesian economic policies for so long, it seems so logical that if we have high unemployment we should put these unemployed to work for the government. 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. Don’t believe this? 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 morning coffee for you or build a house for you? When is 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? And, yes, this example does not take into account the amazing accomplishments of our military and intelligence communities and DARPA that have created everything from the Internet to space travel. Remember, we said that there are such things as essential government employees.

We need to resist the “benevolence” of excess government spending and the unneeded public sector employment at exactly the wrong time. We cannot fall for the trap of substituting the immediacy of “feel-good” public sector employment producing virtually no long term benefits for the more difficult to create yet more sustainable and valuable private sector job growth. This will be one of the most difficult decisions a politician or central banker will every make – bring on the “Big Reset” now, face the financial pain now and shorten the recovery time OR make the easy choices, kick the can and grow government. This should separate the statesmen from the politicians.