Government VS private waste

In looking at the question of whether business or government is more wasteful it might actually be possible to use the pro-business argument to demonstrate that business is actually more wasteful.

The argument is that government does not have competition to force it to quit doing something so it continues to do things when they are no longer needed. I agree it is a valid argument.

The argument continues that competition forces inefficient firms to close down and they commonly cite examples of bad firms like Enron or Countrywide to document their case.

But they make their case with a few examples and virtually never look at aggregate data.

There was a study in the BLS monthly Labor Review of May, 2005 that actually looked at this issue.

The looked at how new businesses survive. They found that 33% of new business fail in the first two years and 56% fail within four years. I’ve heard these types of numbers cited for restaurants, but this study found that there really was no significant difference between the failure rate for restaurants and other industries.

The study also looked at other studies of the survival rate or exit rate for established firms. The studies they cited found that for established firms about 50% go out of business every four years and over 60% exit every five years.

The numbers are not exactly comparable, but the BLS study found that roughly 20% of US firms close down every year. That has to be a tremendous misallocation of resources. Remember, these will generally be smaller firms. But it is like the data on job creation. You hear all the time that small firms create most jobs This is true, but they also destroy more jobs so that over time their share of employment never seems to grow.

So what we are looking at is that government is wasteful because competition does not force it to quit doing some things. But on the other hand having some 20% of US businesses closing down every year also seems to be very wasteful. I’m deliberately using the term wasteful, not efficient because efficiency and wastefulness are not exactly the same thing.

On balance I do not how to make a meaningful comparison of these two phenomena. One reason is that I have no estimate of how much of government should be closed down.

So I have no idea whether the private sector or government is more wasteful. But I doubt that very many of the individuals making the case for private business not being wasteful are really aware how wasteful private business really is even though hand having 20% of US businesses closing down every year may be highly efficient because it is the best we can do.

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