Tag: government growth

The Future of Growth

Just in case you were wondering where future growth might come from, the Washington Post reports:

a new analysis warns that the Washington area doesn’t have nearly enough housing for the wave of new workers that will arrive in coming decades.

Researchers at George Mason University say the area is projected to add more than a million new jobs by 2030.

That’s the future we can expect if we don’t start constraining the size, scope, and power of the federal government: further transfers of wealth from the rest of the country to Washington, from the productive sector to the redistributive and regulatory sector.

Thank You, America!

The Washington metropolitan area is the only major U.S. housing market where prices increased on an annual basis in the first quarter, according to a 20-city S&P/Case Shiller home-price index released Tuesday. The region was helped by relatively stable employment, fewer foreclosures and an abundant supply of house hunters.

Other surveys indicate sales in the area are approaching boom-time levels.

Wall Street Journal

Precedents in Government Growth

As an opponent of government growth, I’m interested in what we can learn from history to help us reverse the trend going forward. We need to understand the mechanisms of government growth if we are to combat the disease.

In a new Federal Reserve Bank of St. Louis article, Thomas Garrett and coauthors provide a useful overview of explanations for the federal government’s historical growth. They note that while the economic depression of the 1930s helped boost the size of the government, the severe recession of the 1890s did not do so. What was the difference between the 1890s and the 1930s?

The authors identify a number of factors that paved the way for sustained federal growth beginning in the 1930s:

  • Path Dependency. Governments have inertia such that once a program is in place it is difficult to remove. When new programs are added during crises, they take root and aren’t cancelled when the crisis passes. Thus, government programs tend to accumulate over time.
  • Tax Bases. The addition of new tax bases provides the means of government expansion. The best example is the addition of the federal income tax in 1913, which fueled huge government growth in subsequent decades. This can be called “feeding the beast.”
  • Ideology. The rise of populism and progressivism during the late 19th and early 20th century broke down the traditional American resistance to big government. 

I would add an additional cause of growth: legislative precedent. Politicians push the envelope on their allowable powers, and they build on the power grabs of prior policymakers. This is evident, for example, when you look at the steady destruction of federalism over the last century due to the growth in federal aid to the states.

In the 19th century, presidents routinely vetoed legislation that provided subsidies to state and local governments. But subsidy advocates started gaining traction in the 1910s with the enactment of a series of new aid programs. The 1916 Federal Aid Roads Act, for example, was an early “matching” grant, whereby the federal government gave states higher subsidies the more they spent.

What started as a trickle became a flood as federal politicians found that they could use state aid to cater to an array of special interest groups that they previously had no access to, such as teachers. The matching idea was copied in dozens of other aid programs, and it has helped to propel Medicaid spending through the stratosphere.  

The health care bill being pushed through Congress contains a number of dangerous legislative precedents, such as the mandate to purchase health insurance. I’m astounded that members of Congress think it’s OK to use government power to force Americans to buy a certain product, or else face stiff fines. Where did they get such an outrageous idea? Well, from the precedent set by Mitt Romney’s Massachusetts health bill of 2006.

If the current health legislation passes, we can sadly expect politicians to pursue the mandate approach further. Will mandatory broadband be next? That sounds crazy, but with the Treasury empty, politicians are looking for ways other than spending to impose their will on the people.

With the health care mandate, Congress is crossing the Rubicon, breaking another traditional restraint on government and ramping up its war on individual rights.

Government and GDP

The expansion in government and poor state of the economy got me thinking about how government growth is reflected in measured gross domestic product. So here is a wonky look at the treatment of government in the Bureau of Economic Analysis GDP data.

Data notes: By “government,” I mean total federal, state, and local. For 2009, I’m using the average of second and third quarter data. All data from BEA Tables here.

GDP measures total production. In 2009, government production was 20.7 percent of U.S. GDP.  Government production is roughly the sum of government value-added (the stuff it produces itself) and government purchases. The first item, government value-added, was 12.4 percent of GDP and mainly consists of employee compensation. For example, the Pentagon produces output by adding together fighter pilots, which it hires, and fighter jets, which it buys.

A more commonly cited measure of government is total government spending. In 2009, that was 38 percent of GDP. The difference between this number (38 percent) and the production number (20.7 percent) is 17.3 percent, and represents the sum of government interest payments and transfer payments to individuals and businesses.

Figure 1 shows how the three measurements of government size have changed over time. Government production has remained fairly stable as a share of the economy, but total government spending has soared. The growing gap between these two lines mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.

12-10-09 edwardschart

How Does Government Growth Affect Measured GDP?

Consider how the recent rise in government spending might have affected measured GDP. First, let’s look first at the production part of government spending. The important thing here is that we don’t know how much government workers actually produce because their output is generally not sold on the market. As a consequence, the BEA measures their output as the sum of their compensation amounts. Also, we know the dollar value of the things the government buys, but we don’t know how much those intermediate goods actually produce when in the hands of the government. So the government production portion of GDP seems kind of shaky, despite the superb efforts of the BEA to assemble all the data.

Anyway, let’s say the government adds a new worker with pay of $100,000, the BEA measures GDP being boosted by $100,000. But it might be that the worker doesn’t actually produce anything useful, and he adds zero to the economy’s actual output.

If the government hires that worker away from the private sector, private GDP would go down by about $100,000. As a result, overall measured GDP would be unchanged. But that would be incorrect because the economy’s actual output fell by $100,000.

So let’s say the government spent $100 billion to hire a million new government workers. Let’s say half of those workers produced as much value as their salaries, but the other half produced nothing of value. The result of this government expansion would be that the BEA would overestimate U.S. GDP by $50 billion. (I am assuming that the government’s hiring doesn’t change the unemployment rate. I’m also ignoring the distortionary effects of higher taxes).  

Now let’s look at the transfer or subsidy portion of government, which equals 17.3 percent of GDP.

Let’s say the government increases transfers by $100 billion, perhaps by increasing Social Security benefits, and funding it by higher taxes on wages.

If there are no behavioral responses among taxpayers and benefit recipients, measured GDP would be unchanged, which would be the correct answer.

But of course there would be behavioral responses. The higher taxes would induce people to work less and the higher Social Security benefits would induce people to save less and retire earlier. The results would be that output would fall, and that would be accurately reflected in measured GDP.

In sum, my purpose here was not to explore how a growing government affects the economy, which is a huge subject. Instead, it was to explore whether measured GDP accurately reflects changes in the size of government. The answer appears to be that the transfer part of government spending (17.3 percent of GDP) would be accurately reflected in a shrinking GDP, but that the production portion of government spending (20.7 percent of GDP) may not be. If workers produce less output when they work for government than when they work in the private economy, the latter portion of measured GDP will be overstated.

Taking Over Everything (2)

“My critics say that I’m taking over every sector of the economy,” President Obama complained to George Stephanopoulos back in September. And I responded:

Not every sector. Just

And now check out the lead story in Sunday’s Washington Post:

Federal Oversight of Subways Proposed

The Obama administration will propose that the federal government take over safety regulation of the nation’s subway and light-rail systems, responding to what it says is haphazard and ineffective oversight by state agencies.

Not everything. But more and more. So much that even the growing opposition can’t keep up with it all.