These days, one is hard-pressed to read a newspaper or watch the news without encountering the phrase “too big to fail.” The debate over TBTF, as it also is known, completely ignores the one institution that deserves attention when assessing the real risks of TBTF: government.
To get a sense of its size, consider government as a corporation. Sam Corp., as we will call it, will have revenues of $2.2 trillion this year against expenses of $3.6 trillion. As of the end of 2008, Sam Corp. employed more than 2.76 million people. The monthly payroll costs for Sam Corp. exceed $17 billion. Sam Corp. has affiliates in all 50 states, and each of these affiliates has subaffiliates at the county and city level.
Data for the state affiliates indicate that nearly 4.4 million people were employed on a full-time-equivalent basis as of 2008. The monthly payroll tab for those employees was more than $18.7 billion. Its county and city subaffiliates employ another 12.3 million people on a full-time-equivalent basis with a monthly payroll of $49 billion.
Compare these statistics to Citigroup, one of the firms at the heart of the TBTF debate. Before the recession, Citigroup operated in six geographic regions with net sales of more than $81.7 billion against expenses of $61.5 billion (excluding provisions for losses). Citigroup employed 380,500 employees and had 1,400 branches and 3,800 ATMs in 46 countries.
Wal-Mart, the country’s largest firm by employment, had revenues of a little more than $404 billion in 2009. It has more than 1.5 million associates worldwide working in more than 3,500 facilities in the United States and more than 1,290 units in Mexico, Canada, Brazil, China, Korea, Germany and the United Kingdom.
Exxon Mobil, one of the country’s largest firms by market capitalization, had sales of $301.5 billion in 2009 (less than 14 percent of the revenues collected by the federal government). Exxon has 38 units in 21 countries and employs more than 82,000 people. All of these large companies pale in comparison to the government, and critically, they operate under different rules.
Private firms can be successful only by providing goods and services to consumers in a manner the consumers want, at a price they’re willing to pay and in a timely manner. If consumers reject a firm’s goods and services, the firm loses money and either alters its approach to achieve success or goes out of business.
This pressure of having to satisfy customers while constantly facing competition and innovation from other firms does not exist with the government. Don’t like your education, transportation, health care, etc.? Too bad. When the income tax, payroll tax, property tax and other bills from the government arrive, you don’t have a choice because there are no other firms to take its place. In so many key areas of life, government intervention leaves citizens without alternatives.
The TBTF debate revolves around what is referred to as systemic risk. Put simply, this means the risk to an entire industry or economy from the failure and mistakes of individual firms. Washington is trying to figure out how best to insulate the economy from those risks while not creating an incentive for firms actually to become TBTF.
What is purposefully ignored is that by design, government is a systemic risk. When the government gets things wrong, which it often does, it imposes the costs of the mistake on the entire country. Ignoring the systemic nature of government risk will impose sizable costs on the U.S. economy for the foreseeable future as government expands.
By any reasonable standard, government is too big. Unfortunately, in the rush to placate special interests and appear to be solving the perceived TBTF problem in financial markets, the government is making itself much bigger.
In doing so, the government is expanding the one truly systemic risk to our economy: itself. This will impose large costs on all Americans – workers, investors and citizens in general – when government inevitably makes mistakes.
Jason Clemens is the director of research and Julie Kaszton is a research fellow at the Pacific Research Institute.