The Federal Government's Leaky Bucket

Advocates for new government programs make federal spending sound simple: the government will collect as much money as it needs from taxation and then steer it to individuals, businesses, and nonprofit groups to achieve a stated objective.

In our new Policy Analysis, Federal Government Spending is a Leaky Bucket, Chris Edwards and I show how deluded this optimistic view is. From the moment the government collects taxes, right up to the moment it pays out any benefits, the main objective of the spending is undermined by waste, inefficiencies, and other costs to society that lower the net benefits of the program.

The paper’s name takes inspiration from economist Arthur Okun, who famously likened government welfare programs to a leaky bucket. But the lesson from his anecdote applies to almost all federal spending, whether it’s buying weapons, funding infrastructure, or subsidizing health care. Our paper provides a comprehensive list of ways government programs leak resources.

Every dollar the government collects in taxes is money Americans can’t spend for themselves. That is the direct cost, but there’s more damage from raising revenue than that. Taxes bring what economists term “deadweight losses” by deterring economic activity that people would otherwise voluntarily engage in. They also push people toward other forms of unproductive tax avoidance or evasion, and impose compliance costs on the payees. All these effects add costs that should be considered in any cost-benefit evaluation of a program.

More resources leak at the level of Congress and government agencies. Waste accumulates in the legislative process as members of Congress trade votes for pet projects that could never have passed on their own. Congress also often bakes-in cost-raising requirements that make achieving the program’s objective more expensive, like Davis-Bacon rules (which raise highway construction costs by 20 percent) or Buy American provisions (which require parts of the government to source costlier, US-made inputs).

Without the discipline of market feedback, politicians make central planning errors, like funding expensive rural broadband to improve connectivity rather cheaper new satellite tech. And even when a program is approved and funded, agencies often fail to deliver on the objectives for public choice reasons. Add to that a range of direct overhead costs for administration, eligibility checks, and program delivery at federal, state, and local level, and there are many ways government activity sees funds lost from the central goal of delivering on the main objective.

Spending itself can create deadweight losses. Welfare phase-outs as high as 50 percent discourage work, while federal flood insurance and disaster aid invite people to build in dangerous places and ensure the real cost of natural disasters will be greater in the future. Government programs also often crowd-out private sector alternatives to the programs, funnel money to people who don’t need it or would have engaged in the desired behavior anyway, and create opportunities for fraud and improper payments. Add to this the hours of compliance for recipients of the programs and the wasteful lobbying activity they generate, and leaks on the recipient side add up quickly.

The overall result is that, for many programs, for every dollar of economic cost – both direct and indirect – the country may receive only 30 cents of real benefit. Or, inversely, some federal government programs run on a cost-benefit ratio of about three to one. And this gets worse as the government expands.

It’s a well-known economic insight that the deadweight losses from taxes tend to grow with the square of the tax rate, meaning each new dollar of tax revenue tends to be more harmful. Plus, as the government grows, it inevitably suffers from Congressional oversight being spread thinner. Congress has neither the time nor expertise to allocate resources efficiently in all the areas it regulates.

Not all federal spending is waste, of course, but the government should more urgently get to work plugging what massive leaks do exist. Many programs’ costs outweigh their benefits and should be eliminated, and policymakers should vet new programs far more rigorously than they do now to achieve value for money. On this front, a war on waste is not enough. There are many more leaks that need plugging.