Friday, March 19, 2010

The growth of government

This is a partial response to a reader's post (by DouglasR) that raised a number of issues regarding the proper role of government in our economy. This chart shows total government spending (federal, state and local) as a % of GDP. It is thus a good measure of the "size" of government, since it tells us how much of the economy's total spending is managed or controlled by government.

Note that just over 100 years ago, government represented only 8% of the economy, and now it has reached just over 40%. I think this is an alarming number. When I and other fans of limited government urge a reduction in the size and scope of government, we are not talking about going back to 8% that prevailed in 1900. Most of us would be happy with getting government to shrink back to the level of 30% or so that prevailed in the 1950 and 60s. Even that implies that almost one-third of all the money spent in the economy would pass through the hands of government, or that one-third of all the money that is earned is taken (by taxes) by the government. Surely one-third of GDP is not too small a role for government, and many would argue that it is still way too much. Our Founding Fathers, of course, would have been apoplectic at the mere thought that government could one day consume or command one-third of the economy's resources.

There is a maxim worthy of repeating here. For every increment in the size and scope of government, there is a corresponding decrease in the liberty of the individual. Government cannot expand without encroaching on individual freedom. With Obamacare we are seeing close up the extent to which the government seeks to control our lives. Mandating that everyone purchase healthcare insurance, deciding how much insurance companies can charge, prohibiting insurance companies from denying coverage, attaching the wages of those who refuse to cooperate, mandating what types of insurance coverage we must purchase; this is all frightening, something that would put us on a slippery slope that has no foreseeable end.

What about future growth? I would say that we have achieved the status of the greatest nation the world has ever seen in spite of the growth of our government. I think that if we rolled back the size of goverment just a few decades we could see continued economic expansion that would lift the welfare of all citizens, both here and around the world. I believe that only the private sector is capable of creating new and productive jobs, and new and creative ideas. The private sector is abundantly capable of creating solutions to all kinds of scarcities, should they exist. Silicon, one of the most abundant elements on earth, was only recently harnessed to do the drudgery work of hundreds of millions of workers, who might otherwise be at work switching phone calls, etc., thus freeing up those workers to do countless other things that contribute to the general prosperity. Without computer chips, the internet would be impossible, and the internet itself was an unimaginable concept when I was born.

To paraphrase the great Julian Simon, the only scarce resource on our planet is human ingenuity. If government is prevented from smothering productivity, entrepreneurship, and ingenuity, our future can be as bright and as big as our imaginations.


Redbud said...

Excellent sentiments. Thank you for the eloquence.

Benjamin Cole said...

I think we should limit federal outlays to some percentage of GDP, perhaps 16 percent--then we can fight over how to allocate that 16 percent.

Right now, every Senator and Congressman has an incentive to spend heavily in their own districts, and cut taxes. The cumulative effect of such sentiments is, of course, deficits.

I also support an amendment that each state receive back roughly what it sends to DC. Now there is an amendment that the Red State Socialist Empire will never let become law.

alstry said...


The problem with the 40% number is it fails to account for much of health care where private workers get paid by government checks such as medicare and medicaid. If you include the health care spend from the over 20,000,000 government workers' health insurance and we get to well over 50% of GDP.

Right now there are approximately 45-50 million highly paid Americans tha that work for the government, contract to the government, or work in health care where much of the revenues comes from government.

The the above generate the vast majority of the taxes in America plus support most of what we identify as private industry such as insurance, retail, housing, etc....

Basically our nation has morphed from one where the private industry supported government to one where government drives private industry.


If you add in the 40,000,000 Americans on Food Stamps, approaching 20,000,000 on unemployment plus tens of millions on welfare and Social Security.......there is really practically no private industry left in America that is not supported by governent spending.

At this point, tax receipts have dropped so low that governments around the nation are running out of money and borrowing trillions....

at some point we as a nation will have to confront the fact that our economy has morphed from a capitalistic system to one where government borrows and drives practially all.

Although you and I agree, the more you advocate cutting government spending....the quicker the economy we currently exist in will implode as few will have much to spend.

The Therapist Is In said...

Re: Obama Approval Rating Lows..... As a fellow contrarian I would not go short Obama Inc. at these levels, moreover, o ye silly pundits. There's no bull like a burnt bear. We shall see....

W.E. Heasley said...

Mr. Grannis:

“Note that just over 100 years ago, government represented only 8% of the economy, and now it has reached just over 40%.”

This is an excellent point.

An extension of that thought is looking at the economy as 100% private until “government” comes into existence. Government can be large or small and points along the curve. Regardless of government size, a transfer payment must be made from the private sector in order for government to exist.

100 years ago we had a 100% private economy that made various transfer payment to the public sector in the order of 8%. Hence we had 92% private and 8% public sector after the transfer payment to government. However, the 8% represented a transfer payment from the private sector that produced very limited responsibilities of government. Basically those responsibilities enumerated in the U.S. Constitution with the several and many states (state rights) handling the remainder of any government responsibilities as outlined in each state’s constitution.

Today the 8% transfer payment has become 40%. Its still a 100% private economy that now transfers 40% of its earnings/wealth to the government. What was once a limited role of government has become a very expansive, very evasive and very encompassing role of government. That the role and authority of the federal government has expanded at the expense of the authority and role of the many and several states.

Even though state roles and authority have shrunk in regards to federalism, states meanwhile expanded into other areas. In other words the many and several states expanded their role in other direction hence expanding their particular role and need for funding.

Therefore, the 8% transfer from the private sector to the public sector which occurred 100 years ago bought a certain basket of government services. That basket of government services did not remain the same and merely got further funding. Rather, the basket of services became more basic services, a scheme of redistribution of income, a scheme of vast regulatory enforcement, and vast a bureaucracy to administer the thousands of programs and hundreds of thousands of regulations. The vast size of government today and consequential transfer payment to government from the private sector funds a nanny state through regulation and the welfare state through redistribution of income and wealth.

Along the way the bureaucrats administering the government mechanism became higher paid, on average, then the private sector. That the lower paid private sector worker now funds the higher paid public sector worker.

Therefore, the 40% today vs. the 8% one hundred years ago is due to a five fold increase in the basket of government services. Services that are progressive/socialist in nature at the expense of the private sector which is capitalistic in nature. A five fold increase in transfer payments from the productive, efficient private sector to the non-productive, inefficient public sector.

Scott Grannis said...

Therapist: good point. I suppose I'm rather hoping that Obama wakes up and rescues himself by behaving more like Clinton (a very smart politician). But even if he doesn't, he is quickly becoming a lame duck.

Paul said...

"Now there is an amendment that the Red State Socialist Empire will never let become law."

Says Benji who voted for an actual Socialist.

Douglas said...

Much of the computer expansion, and most certainly the Intertubes, despite Al Gore, owe a great deal to Government funded research.

There is something called the Revenge of the Good Fairy. People that want to shrink The Government to the point Grover Norquist wants it should beware... someday they might get what they ask for and then they'll have to live with the consequences.

Scott, I wish you would say some more about Julian Simon, then we could have a discussion on limits to growth.

Scott Grannis said...

Limits to growth? I can't imagine any right now. One big reason for that is that global population is only a few decades away from peaking, after which it is likely to decline. 50 years from now most industrialized countries are going to be shrinking, and that will pose all sorts of problems that no one has ever thought of. I daresay that Julian Simon would agree with me.

Douglas said...

Scott, because you cannot imagine limits to growth doesn't mean they do not exist. There is a large body of evidence, quite apart from the obvious logical evidence, that fossil fuels are reaching, or have reached the peak in gross production or the resource, particularly crude oil. As information improves reserves estimates of the past are being revised downward. A decline in energy resources, and particularly the net energy or Energy Returned On Energy Invested (EROEI) will definitely effect the global economy in a negative fashion. I think this is a much more immediate problem for the economy than climate change. You and I have had this conversation for a long time, I am curious what other readers think on it. Mr Simon seemed to think, in references I have read, that natural resources were infinite, even that, for instance, copper could be made out of other metals if it got scarce.

Since the planet is already in overshoot, with the human population using an annual quantity of services and resource equal to "1.5 earths," which means we are already using the planet in an unsustainable way, which will constitute a most rigorous kind of limit to growth if it remains ignored and unaccommodated. If the population will continue to grow to a peak a few decades off this presents a very serious problem, but one that is pushed aside with a lot of hand-waving but not much serious thought.