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Thursday, September 26, 2019

Full Size Government, Part 2

Total government spending is not only $7 trillion, in raw numbers, but it is also dominated by entitlement outlays. But wait - there is more...


In Part 1 I reported less-used data from the Bureau of Economic Analysis on government spending and revenue. The numbers showed two persistent trends:

1. Government spending growth structurally outpaces revenue, resulting in an unending series of deficits.
2. There has been a long-term shift in spending from the federal government onto states and local governments.

These trends have the same root cause: the welfare state. We can actually see this if we examine the same data from a slightly different angle.  Using Table 8.1.5 from the same section of National Income and Product Accounts data at the BEA website, we can compare government spending to GDP without distortions from seasonal adjustments.

Using the same moving-total as in Part 1, we get a stunningly clear picture of how the purpose of American government has shifted over the years. Figure 1 reports two types of government spending, isolated using total spending as before, but subtracting government spending itemized as consumption and investment. The blue section represents those two types of spending, which are payments for work of some sort (government employees performing services or contractors doing work on behalf of government), while the grey section represents all other spending. This latter type is also known as "transfers" or financial transactions, in other words payments for which the recipient does not have to do any work. Social Security is a good example.

Let us add together the two types of spending, by federal, state and local governments:

Figure 1
Source of raw data
Bureau of Economic Analysis

Figure 1 reveals a dramatic, long-term shift in government spending. Before the 1990s, consumption and investment - in other words production of services and construction of roads, airports, bridges and other structures - dominated total government outlays. From the 1990s, the transfer category slowly edged ahead. Figure 2 views the same data from another angle, reporting how much the federal government spending on transfer per $1.00 it spent on producing services and investments: 

Figure 2
Source of raw data
Bureau of Economic Analysis

The deeper we got into the War on Poverty, the more we shifted government spending away from services and investments into just handing out entitlements to constituents that Congress thinks deserve them.

Handing out cash - which is the blunt meaning of transfers - is a hallmark component of economic redistribution. By giving cash to lower-earning households government evens out the differences that the free market has produced. Even Social Security works this way: you earn more points for Social Security benefits on the lower end of your income than on your higher end, but up to the tax cap you pay the same percentage in tax to fund the system.*

It is interesting to compare the character shift in government spending to the deficits reported in Part 1. Let us look again at that graph:

Figure 3
Bureau of Economic Analysis

Even more conspicuous is the comparison between the total entitlement share of government spending - in this case represented by the federal government - and the budget deficit. As soon s the entitlement share starts accelerating after the War on Poverty begins, our governments start having problems with their budgets. Again, some services that fall under "government consumption" are actually entitlements, hence the big share of total spending that goes toward economic redistribution:

Figure 4
Source of raw data
Office of Management and Budget

Plain and simple: the moment Congress decided that the main purpose of government was to redistribute income and consumption between citizens, they also doomed government to perennial deficits. 

If, and only if, we do away with the welfare state can we bring our government budgets in balance. Plain, simple and brutally challenging - but quintessential for the future of our country.

*) If the decline in "points earned" corresponded exactly to a declining tax rate, the system would of course be proportionate. Then, again, there would be no need for government to be involved; the only reason why the federal government is involved in funding retirement is for the purposes of economic redistribution.

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