Mr. 3.75 Percent

In my last column, I wrote of the need for us to take a longer time horizon in our planning at home, at work, and in government. One political leader who likes to plan for the really long term is Paul Ryan, the Republican nominee for U.S. vice president. By 2050, Ryan’s budget plan would reduce federal spending outside health-care programs and Social Security to 3.75 percent of GDP, down from 12.5 percent last year, according to the nonpartisan Congressional Budget Office. So, what would it mean to chop away two-thirds of the federal government?

According to the World Bank, government spending minus health care was already lower in the United States than in all of the European Union, Japan, China, and India in 2009, the latest year with comprehensive figures. At just 3.75 percent of GDP, the United States would be one of the world’s lowest spenders. The only countries that spent less in 2009 were Equatorial Guinea, the Democratic Republic of the Congo (DRC), and the Central African Republic.

The first of these three is a small West African country where per capita income is as high as in much of Europe, but life expectancy is just 51 years; a tiny elite monopolizes revenue from oil exports while the majority stays mired in poverty. The other two countries are in the top 10 of Foreign Policy‘s Failed States Index, meaning that their governments barely function and provide almost no services to their people.

Even the meager spending of these governments is greatly subsidized by foreign aid, to the tune of 13 percent of spending in the Central African Republic and 29 percent in the DRC as of 2011. Their people also depend heavily on private charity. Many basic services are provided by nonprofit organizations such as Oxfam and Mercy Corps, and security has been provided by the United Nations in the wake of regional conflicts.

Of course, the United States isn’t going to turn into a war-torn sub-Saharan republic overnight because of budget cuts. But Ryan and his cohorts do want to replicate some aspects of life in Africa’s poorest countries. They prefer to replace public services paid for by taxes with programs run by charities; because the decision to fund the latter rests with the individual, no state power tells you how much of your income to surrender. They also want many of the services now paid for by the federal government to come under local control, as they are by default in failed states. Yet we saw in the past few years what happens when an economic downturn hits the states: massive budget cuts, blanket layoffs of public employees, and services slashed at the moment they’re needed most.

The problem with this approach is that an economically efficient outcome is very unlikely. In principle, a government’s spending has three motivations: 1) it can provide something more efficiently than the private sector, 2) it can ensure quality in a way that the private sector can’t, or 3) the private sector alone doesn’t have an incentive to provide enough of the item in question. These days, the first motivation is rarely relevant, except in small countries where some industries may offer the most benefit to society as publicly run monopolies. But the second often is, as in the case of airport security. And the third covers a huge variety of "public goods" such as infrastructure, scientific research, and vaccinations, all of which have benefits for society beyond the benefits that an individual purchaser would receive.

If we rely on charity to fund all these items, we may simply end up with too little of them. Imagine, for example, a United States with a stripped-down Justice Department, a bare-bones military, and only tiny agencies to deal with issues like highway safety, air traffic control, food safety, and the disposal of nuclear waste. All these would rely on individuals’ goodwill to continue providing services that protect the entire population.

Charity would also have to fund long-term investments like the National Science Foundation and the National Institutes of Health. These organizations dispense just under $38 billion a year in grants for research in the physical, chemical, biological, and social sciences, or about $121 per American. Many projects they fund are too fundamental to have immediate applications for business. Yet these same projects lay the groundwork for waves of innovation in the future. They are not crowding out research in the private sector, either; rather, they are complementary, as additional publicly funded research leads to more research in the private sector as well. Left to their own devices, would Americans support a science charity to the same degree?

In fact, every American would have a strong incentive to contribute nothing and free-ride on the contributions of others. After all, they would still receive the same benefits from things like national defense and technological innovation. Government solves the free-rider problem by coordinating all of us to pay for public services collectively. Without government fulfilling this role, public services may simply disappear.

To rely on charity would diminish the potential of the United States to grow, and it would create new risks that could push the country back through economic time. That the United States has done so well despite much lower spending than many other wealthy countries is a testament to the strength of its private sector and the ingenuity of its people. But there is a limit to how much you can cut.