Gvt Spending as a % of GDP — A Crisis of Capitalism
Not many have realized this. Capitalism is failing to survive without the presence of an increasingly big government to underwrite the existence of capitalism and bail out capitalism when it runs into a crisis.
The ratio of government spending as a percentage of GDP shows us how big the government is in the economy. The increasingly large sizes of governments have not metastasized because politicians want power. The scenario has unfolded out of necessity.
Capitalism by its very nature is bifurcated. It brews huge inequality gaps, by consistently siphoning value from those who sell labor in the market to those who buy that labor and own the means of production. Capitalism creates an extremely rich class and a poor class. The era where capitalism created a healthy middle class is over. There is no more middle class. It's just lies and debt. The middle class is dead. It's only the rich and the poor. That is what the modern versions of capitalism have done.
Because society is bifurcated into haves and have-nots, it becomes necessary to have a big government. An increasingly big government is born out of a necessity to try and preserve capitalism. A bigger government is needed to ensure there is peace, to ensure that the poor do not murder the rich. A big government is needed to administer all sorts of programs meant to ensure the poor stay alive (social services, public housing, public education, public transport, public services, public this, and public that). The biggest number of jobs in most economies are created by the government. These jobs exist to address the inadequacies of capitalism known as market failure.
Government spending as a percentage of GDP is higher in countries that are developed.
A big government is warranted to sustain capitalism because capitalism cannot sustain itself. It is inherently unsustainable for a system to consistently steal from the have-nots and give it to those who have.
If capitalism is so wunnerful as they say it is, why does it need such a big government? Why does it need to be underwritten by such a big government? Why does it need to be validated by such a big government? Why does it need to co-exist along with a very big government? The existence of a government is not being questioned here. It is the size of the government that is being questioned. The size is necessitated by the size of market failures.
What is the Government Spending On?
- Addressing Market Failures
- Interest Payments on debt
- Subsidizing Capitalistic Industries
If we are to remove the veil on the broad term called government spending, we would realize that most of this spending is simply addressing the numerous market failures that exist. Because the amount of effort needed to address the numerous government failures is huge, most governments are running perennial budget deficits. These deficits are financed by borrowing which carries interest. The interest on government debt is now a big expenditure item. The other expenditures by the government are funds spent on subsidizing local industries in order for them to produce certain goods or services locally.
Where is the Government Getting Money From?
- Sales Taxes (VAT) carried by consumers
- Income Taxes
- Debt + printing of money
It has been argued that the rich capitalists are not paying their fair share of taxes. The biggest tax heads are sales taxes and payroll taxes levied on the worker. Corporate income taxes are huge but most of the contribution for that tax head comes from small and medium businesses. Large businesses have clever tax specialists and witty lawyers who find clever ways of reducing the tax burden.
Another source of money for the government is debt. This has also gone up over the years and has been monetized oftentimes and will need to be monetized at some point in time.
It is the worker who is largely funding the government in order for the government to address the failures of capitalism. The worker is paying twice, firstly in the form of his labor that is underpriced by capitalists and secondly as payments to the government for the government to sustain capitalism. The worker is sustaining the capitalists and the government. The government is sustaining the capitalist and the social order. The capitalist is actually sustaining no one at all. He is extracting from both the worker and the government.
The Twisted Welfare States
What we have are essentially welfare states that are twisted in that they subsidize the rich just to keep this economic order going. How much money has been spent on bailing out banks? In the past two decades, the USA for example has bailed out banks, insurance companies, and large motor vehicle producers such as General Motors. This is in addition to huge perennial subsidies to large-scale farmers.
In China the state plays a very big role in setting up big companies, nurturing them through subsidies so that they become big “privatized” entities that can compete on a global scale. The government plays a very huge role in subsidizing capitalism there. However, China has now become more capitalistic than whilst most western nations have become more socialistic.
Capitalism is like a snake that grows up to eat its own tail. When capitalism develops it does so via the process of accumulation. This process is asymmetrical. Accumulation happens at the top, or rather at the center. Surplus tends to concentrate around a center. The local baker, the local brewer, and the local butcher that kept the community going under a free market get replaced by bread giants, larger countrywide breweries, and large meat chains. How does that happen? One small winner in one local market expands into another, becomes big, accumulates more, expands again, becomes bigger, and accumulates even more, until it's a countrywide chain, and sometimes a global chain. It becomes large enough to swallow every other little fish. This process is enabled by free markets themselves. The idea here is not to argue against free markets. Free markets are good.
However, when these larger-than-life firms grab entire markets, they start to eat the very same free market that enabled them to rise. They become monopolies and oligopolies. They start lobbying the government for rules that favor themselves. They hire lobbying firms, and they donate to politicians that are aligned with their interests. In essence, they capture the regulator (government). Instead of arguing for less government intervention, they beg for government intervention. They ask for subsidies. They ask for protection. They ask for exemptions. They ask for handouts. They ask for bailouts. They ask for the government to de-unionize workers. They ask for lower taxes. They beg to get away with emissions and basically ask for anything they want. Ask and ye shall be given.
Thus, Monopolistic Capitalism morphs out of Free Market Capitalism. Monopoly Capitalism starts to eat into capitalism like a snake that eats its own tail. Eating the very same foundations that made capitalism prosper. That's how capitalism collapses under the weight of its own contradictions. It cannot be trusted to sustain civilizations forever because it's inherently unstable. This is the main argument against capitalism, not the inequality argument.
So, here we are, in an era of Monopoly Capitalism characterized by the Big Everything (Big Pharma, Big Tech, Big Agri, Big Retail Chains) that are “too-big-to-fail” and “too-big-to-be-challenged”. They are extracting value from both sides (the worker and the government). Because they can capture the state, the state becomes a twisted welfare state that exists to serve monopoly capitalism and to clean up after the messes of monopoly capitalism. The state exists to address the numerous failures of monopoly capitalism.
How far can the Government Go?
How far can the role played by the government in the economy go? It can go as high as 100%. That’s the final limit. A point where capitalism unfolds, and communism steps in. Before the ratio goes to 100%, Lemon Socialism exists.
Government spending as a percentage of GDP has grown as capitalism has morphed. When you check the last decade alone, you would think that it has somewhat stabilized. The dirty little secret is government debt. Most governments have not been able to collect as much in tax revenues as they want to spend. They have been forced to increase borrowing. Debt to GDP ratios have ballooned.
Now that interest rates have to go up, there is nowhere to hide anymore. Governments have to increase interest payments which increases government spending. New debt can only be issued at higher rates, guaranteeing higher interest payments and higher spending. The problem of government debt was hiding the problem of government spending because of artificially low-interest rates. If interest rates were normal, government spending as a percentage of GDP would have shot upwards a long time ago.
The debt problem is also a problem of monopolistic capitalism that is failing thus needing the government to take a larger role (larger than the revenues it rakes in).
In the UK, government spending shot up to more than 50% of GDP. That's half. Why such a big government? Under classical capitalism as explained by capitalists, the government’s only role is to guarantee rule of law and address a couple of bothers called market failures such as the army and the police. That's how the story goes. How do capitalists explain this 50%? Half of GDP just to address a couple of bothers. The government was supposed to stay away from business, and not contribute this big. What happens if the government withdraws its spending? GDP collapses. The dirty little secret will be out. Capitalism’s shortfalls will be exposed. It will be clear that the free market which morphed into Monopoly Capitalism will fail many.
Increasingly bigger governments signify an increasingly inefficient capitalistic system that is failing to deliver. Failing to live up to its expectations. When government spending contributes to 50+1% of GDP in an economy, it means economic growth or de-growth is now being directly determined by government spending in a major way.
Why is rising government spending a crisis of capitalism? The short answer is that the government solely exists to provide that which capitalism cannot provide or fails to provide.
It is that simple.