In praise of government consumption

Merijn Knibbe

DOGE, a new branch of the U.S. government, does not escape the Iron Law of Bureaucracy. It is hiring. It is also wrecking the U.S. by trying to neuter almost everybody else working for the civil branch of the U.S. Federal government. It is reminiscent of the demise of the USSR during 1991. The USSR consisted of rather independent regional-national entities held together by the centralized communist party and Gosplan. Once the communist government disappeared, many of these entities gained independence. Something comparable seems to be happening in the US. DOGE is trying to dismantle the administrative state, one of the foremost institutions that keeps the U.S. together. Mind that the implosion of the USSR led to large-scale misery and an unprecedented peacetime decline in life expectancy. The outcome of dismantling a state can be dire.

An unspoken idea behind the DOGE quest is that governments do not add value to society. This idea is widely shared by, among others, neoclassical macroeconomics. The blame for the present situation is partly upon them. The idea of an unproductive government is an unnecessary default assumption of their macro models. It is perfectly possible to assume a productive government which adds value. One example is an article by Russell Kincaid (from 2008). He states:

“Abstract Dynamic stochastic general equilibrium (DSGE) models typically (as do many models) treat government spending as wasteful; such spending does not contribute to enhancing privave recently introduced productive government investment spending into their models … This article takes a similar perspective but it also introduces government consumption as good in general … econometric models (e.g., the Oxford Economic Forecasting Model) and DSGE models (e.g., ECFIN, IMF) assume that the government buys goods and services produced by private firms. This paper takes the alternative approach developing a model where government production has a major role in the allocation of social goods.”

There are also comparable examples from 2013 and 2023. These examples show that the assumption of a government as a producer of goods and services is even consistent with DSGE models (improving the models’ ´fit´). However, they also demonstrate that, as a rule, most neoclassical macroeconomic models still do not accept this idea. Their default option still is the assumption that all government expenditure is wasteful by definition. This means that these models yield the result that cutting government expenditure frees resources, which will (due to the general equilibrium assumption) be used by the private sector. Meaning that, according to these models, cutting government expenditure leads to a larger private sector and hence, by assumption, to higher welfare.

Even though it is often argued that this is the case, government money spent on rockets to Mars is not the best way to spend it. Moreover, money used to enhance food safety, health care and
much more does not only add to public and private welfare but also to social stability. It is money well spent. Economic statisticians have recognized this for a long time. They divide government expenditure into different categories. Investments (coastal levees, for example), public consumption (the rule of law, defence, street lights) and individual consumption (healthcare, education). Figure 1 depicts a table for the Netherlands. As can be seen in this table, the (largely redistributive) expenditures for health care have ballooned (due to institutional changes), just like expenditures for education, largely aimed at the ´production´ of education.

Of course, government expenditures can be detrimental. According to Wikipedia, building the interstate highway system in the US displaced a million people. That´s not what you want. But such problems cannot be solved by abolishing interstates. There are problems with government priorities and expenditures. But without them, there will be other, larger problems.

Source: Real World Econ Rev blogs
https://rwer.wordpress.com/2025/01/31/inpraise-of-government-consumption/