Tag: government spending

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.

‘Letting the Sick Die on the Street’

Blogger Matt Yglesias has described my CNN op-ed on health care as follows:

Meanwhile, in Harvard economist and Cato Institute senior fellow Jeffrey Miron’s dystopia, if your parents wind up with no money through bad luck or poor decision-making and then you get sick you’ll just die on the street for lack of money.

Did I really say such an outrageous thing? Well, I did not use exactly those words (as Matt makes clear), but yes, that is the logical implication of my position.

And I stand by it. Here’s why.

First, my assessment is that even with no government health insurance, hardly anyone would die on the street for lack of health care. The poor would use their income transfers to buy some health care or insurance. The poor would receive private charity. And health care would be far less expensive due to elimination of the distortions caused by government health insurance.

Second, my position is that government provision of health insurance is enormously inefficient: it means worse health care for everyone, and it wastes resources that can be put to other uses. So the negative of having a few people suffer without government health insurance must be balanced against the good of having better medical care for all and against the good that can be accomplished with those saved resources.

That good might be lower taxes for everyone, or more government spending on education, or greater public health spending to combat HIV in poor countries. Whatever the alternate uses turn out to be, one cannot escape the fact that a tradeoff exists between protecting the poor and other goals.

C/P Libertarianism, from A to Z

Paul Krugman vs. The Daily Show

In a recent New York Times column (“The Uneducated American”), Paul Krugman writes that, “for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars.” As a result, Krugman continues, U.S. education has been “neglected” and “has inevitably suffered.”

Readers who put their trust in Krugman might thus conclude that per pupil spending has stagnated or declined. In reality, as the chart below reveals, it has more than doubled since 1970, after adjusting for inflation.

Paul Krugman may not be an “uneducated American,” but he’s certainly a badly misinformed one.

andrew coulson cato education spending

Much more troubling is the fact that Krugman and the Times are spreading this misinformation on a grand scale. And that got me thinking about Jon Stewart. When Time magazine recently asked Americans to name their most trusted newscaster, the comic and Daily Show host won in a landslide.  Many pundits have taken this as a sign of the Apocalypse, worrying that so many Americans are getting their facts from a presumptively unreliable source. But is the Daily Show really less reliable than Paul Krugman and the New York Times?

To find out how they stack up on this particular question, I Googled the Daily Show’s website for any discussion of education spending. The most relevant hit was an exchange in the show’s on-line forum. In it, a commenter claims that spending per pupil has risen by a factor of 10 since 1945, after adjusting for inflation. That’s not too far off the mark. The actual multiple is just under 8. So folks who get their facts from the Daily Show’s website will be better informed on this subject than those who trust the Nobel Prize winning New York Times economist.

Not only is Krugman wrong to claim that public schools have been financially “neglected,” he is wrong to imagine that higher public school spending spurs economic growth – which is the central point of his column. Better academic achievement does help the economy – but, as the chart above illustrates and many scholarly studies have demonstrated, higher public school spending does not improve achievement. And by raising taxes without improving achievement, it may actually slow economic growth.

Media elites have been wringing their hands over the collapse in public demand for their products, over the two thirds of Americans who now doubt their credibility, and over the fact that more people now get their information from the Daily Show’s website than the New York Times’s.

Perhaps the media might attract more readers and rebuild trust if they were to stop publishing material less reliable than the blog discussions on a comedy show’s website. Just a thought.

What They Aren’t Telling You About the CBO Score

The CBO report that said the health care bill won’t raise deficits makes it clear that the Baucus bill’s reduction in future budget deficits comes not from controlling government spending or reducing health care costs, but because of a rapid escalation in tax revenues.

The bill imposes a 40 percent excise tax on health-insurance plans that offer benefits in excess of $8,000 for an individual plan and $21,000 for a family plan. Insurers would almost certainly pass this tax on to consumers via higher premiums. As inflation pushes insurance premiums higher in coming years, more and more middle-class families would find themselves caught up in the tax.

In fact, overall, the tax increases in the bill are more than double the amount of deficit reduction. This isn’t a health care efficiency bill or a cost containment bill. It is a tax and spend bill, pure and simple.

Cato Launches New Web Site Exposing Wasteful Government Spending

Did you know that the average American family spends $1,000 each year on the U.S. Department of Agriculture, whether or not it consumes that agency’s services?  Or that the federal government annually spends $1,500 per household on net interest costs alone?

In an ongoing effort to shed light on runaway government spending and expose wasteful government programs, Cato launched a new Web site today that examines the federal budget department-by-department to see which agencies can be reformed or terminated. DownsizingGovernment.org describes which programs are wasteful, damaging and obsolete in an era of trillion-dollar deficits.

The research exposes that many public outlays—though vigorously defended by the politicians who created them and the constituencies they purport to help—are remarkably ineffective at achieving their core aims.

Here are just a few examples:

Appearing on CNBC Monday, DownsizingGovernment.com editor Chris Edwards explained more about the site:

Plus, keep track of where your tax dollars are going by following DownsizingGovernment.com on Twitter (@DownsizeTheFeds) and Facebook.

New Video Reviews Evidence against Big Government

The burden of government spending has skyrocketed during the Bush-Obama years. Many politicians claim that all this new spending represents necessary “investments” to boost economic growth. But as this new video explains, both cross-country comparisons and empirical analysis suggest government is far too big – not only in Europe, but also in America.

This is the second of a two-part series. The first installment, which focuses on eight theoretical reasons why excessive government undermines growth, can be viewed here.