“Out-Of-Control Spending” Isn’t One Of Our Many Problems

Jonathan Chait, writing for New York Magazine, commented on a bizarre story that appeared in Sunday’s Washington Post. Chait said the story (“After six budget showdowns, big government is mostly unchanged“) was,

one of the weirdest, and most weirdly biased, news articles I’ve ever read in my life. 

The writer of the Post story is David Fahrenthold, who, as the paper tells us, “covers Congress for the Washington Post.” That would lead one to believe that Fahrenthold is a genuine news reporter, not a columnist or an editorial writer.

But as Chait points out, it is hard to tell that the Post story was written by an objective journalist, since it seems to push a Tea Party message that “government is not shrinking” and it is “really, really big.” I strongly urge you to read Chait’s piece, but I will post here a couple of graphs he used (similar to others I have used on this blog) to demonstrate why government is in fact getting smaller and why it is not as big as you might think:

This graph represents the federal workforce as a percentage of U.S. population. It speaks for itself. No one can seriously argue that, in terms of the size of the federal workforce, that government is getting bigger.

This second graph comes from the Center on Budget and Policy Priorities:

U.S. Government Spends Less than Most Other Developed Countries

The article from the CBPP addresses the misleading meme, spread by right-wing government-shrinking radicals, that “government spending in the United States is 41 percent of gross domestic product (GDP).” As with all statistics, a little context is in order, which the CBPP article provides. To summarize slightly:

♦ That 41 percent number comes from the Organisation for Cooperation and Development (OECD) and which reflects “spending by all levels of government,” federal, state and local, with local governments spending about one-third of the total.

♦ The OECD uses a system of measurement developed for the United Nations, which significantly differs from measurements made by the federal government via the Commerce Department’s Bureau of Economic Analysis (that explains the difference between the dark blue and light blue lines on the graph). The United Nations’ measurement includes, for instance, “the entire cost of running the public-university system, not just what legislators appropriate to supplement students’ tuition payments.”

♦ The year the 41 percent figure is derived (2011) “exaggerates the situation”:

Automatic increases in safety-net programs like unemployment insurance andfood stamps, plus recovery measures that Congress enacted, pushed up the numerator (spending), even as a slumping economy squeezed the denominator (GDP).  This happened in other countries, too.

♦ The CPBB notes that government spending is decreasing and that “the Congressional Budget Office projects that federal spending will continue to decline through mid-decade as a percent of GDP.”

♦ Finally, the CPBB makes two more important points that anyone interested in this stuff should know:

First, this doesn’t mean that government controls about 40 percent of the U.S. economy.  The bulk of government spending goes for payments to individuals through transfer programs such as Social Security, and most of the goods and services that people buy with these payments are privately produced.

Second, government spending in the United States — by the OECD’s broad measure—remains about 2 ½ percent of GDP below the OECD average, and about 8 percent below the average level among countries that have adopted the euro.  While the United States faces plenty of long-run fiscal challenges, out-of-control spending today isn’t one of them.

6 Comments

  1. Duane:

    I loves me them charts and graphs, charts and graphs. Just for fun, I went to the BEA.gov site and downloaded some data to massage in a spreadsheet. Here are some of the results. I used the period from 2007, the beginning of the Great Recession, through 2012, the last complete year available.

    (Note: I separated out the biggest departments in terms of the budget (over 75%), which are the Health and Human Services (HHS) which has Medicare and Medicaid, the Department of Defense (DOD), the Social Security Administration (SSA), and the Treasury Department, from the other 24 departments and agencies.)

    Federal Budget as Percent of GDP
    2007 20.52%
    2008 21.81%
    2009 25.97%
    2010 24.92%
    2011 24.86%
    2012 22.99%
    HHS, DOD, SSA, Treasury As Percent of GDP
    2007 15.97%
    2008 16.99%
    2009 19.85%
    2010 18.18%
    2011 18.62%
    2012 17.14%

    All Other Budget Items As Percent of GDP
    2007 4.54%
    2008 4.82%
    2009 6.11%
    2010 6.74%
    2011 6.24%
    2012 5.85%

    HHS, DOD, SSA, Treasury As Percent of Total Budget
    2007 77.85%
    2008 77.92%
    2009 76.45%
    2010 72.95%
    2011 74.90%
    2012 74.56%

    All Other Budget Items As Percent of Total Budget
    2007 22.15%
    2008 22.08%
    2009 23.55%
    2010 27.05%
    2011 25.10%
    2012 25.44%

    Here the counts of federal employees from the Office of Personnel Management from 2001 thru 2011.

    Federal Civilian Employees
    2001 2,704
    2002 2,696
    2003 2,731
    2004 2,714
    2005 2,701
    2006 2,700
    2007 2,699
    2008 2,756
    2009 2,840
    2010 2,840
    2011 2,820

    Uniformed military personnel
    2001 1,428
    2002 1,456
    2003 1,478
    2004 1,473
    2005 1,436
    2006 1,432
    2007 1,427
    2008 1,450
    2009 1,591
    2010 1,602
    2011 1,583

    Total Civilian and Military Employees
    2001 4,132
    2002 4,152
    2003 4,210
    2004 4,187
    2005 4,138
    2006 4,133
    2007 4,127
    2008 4,206
    2009 4,430
    2010 4,443
    2011 4,403

    Just for fun, I also wanted to see how our businesses faired during the recession. So, here are some stats for corporations.

    Corporate Profits Before Taxes
    2007 $1,175.6
    2008 $878.4
    2009 $1,039.8
    2010 $1,345.4
    2011 $1,441.2
    2012 $1,590.5

    Corporate Profits After Taxes
    2007 $949.5
    2008 $666.6
    2009 $845.9
    2010 $1,069.1
    2011 $1,036.6
    2012 $1,336.3

    Effective Corporate Tax Rates
    2007 19.23%
    2008 24.11%
    2009 18.65%
    2010 20.54%
    2011 28.08%
    2012 15.98%

    That ought to be enough to chew on for a while.

    Herb

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    • The most glaring, and disturbing, of your stat list is, of course, the corporate profits, which although about twice as much in 2012 as in 2008, haven’t produced that many jobs. And, related to that, the effective corporate tax rate is, well, unconscionably low, especially given how our infrastructure is crumbling and other needs go a beggin’.

      I, for one, appreciate the work that went into this presentation, Herb. It tells a story that mostly goes untold in the mainstream press.

      Duane

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  2. Bill Reister

     /  October 30, 2014

    When you start with false assumptions, everything else which follows is likewise false – or at best, random.

    Our fictitious published figure for GDP includes government spending, which is not actually a “product” and thus serves simply as political fodder to claim our “economy” is doing better than it is. Of that spending, $0.40 out of every dollar is borrowed – also not a “product.” Borrow more and spend it? “Look everyone, our GDP has grown and so our economy is stronger!!!” Are we stupid enough to fall for that? Apparently, many are…

    Among other things, by including government spending IN “GDP” the percent which represents “government spending” can never be larger than 100% even theoretically – a tacit un-truth to conceal that it is easily possible to borrow and spend twice what our economy actually produced in real goods and services in a given year.

    The only legitimate apples-to-apples comparison of how our economy fares under different levels of government spending is to compare how we are doing year over year net of that spending. Our government as of 2011 was actually directly consuming over 65% of our actual national productivity (total government spending = 40%; 40/60 = 66.67%) (http://www.usgovernmentspending.com/spending_chart_2010_2019USp_XXs1li111mcn_F0t).

    In addition, effects such as the 5% of GDP hidden tax which is a result of the nonproductive “compliance costs” (http://mercatus.org/publication/hidden-costs-tax-compliance) of our current tax system additionally increase our effective “cost of government.” Such spending likewise cannot be called a “product” because it produces nothing, but in fact simply acts as another tax reducing our collective purchasing power by increasing the cost of products sold in our economy. The net cost to business of non-tax regulatory requirements have a similar effect. These of course do not even include “future unfunded obligations” for entitlements (lavish government pensions; social security and medicare, etc.) which now top $86 trillion (http://online.wsj.com/articles/SB10001424127887323353204578127374039087636).

    When you add it all up, our true total “cost of government” in the U.S. is much closer to 80% than to 50%. Too, if our government were legally required to prepare its books using the same rules they require of businesses, they would be force to declare bankruptcy today and the bulk of our elected officials (i.e. “Board of Directors”) would all be jailed for Fraud.

    So for the misguided souls who still wish to insist that government spending is “not out of control”, there is at least some good news. There is an obscure and under-used science which can help you get your life in order – it’s called “Math….”

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    • Bill,

      Let’s say, for the sake of argument, that all of my assumptions about calculating debt are false and all of yours are true. That still doesn’t support your conclusion that government spending is out of control. All it supports is doing something about the resulting debt, which could mean cuts in government spending or tax increases or a combination of both. What is your remedy? I bet I can guess.

      Duane

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      • Bill Reister

         /  November 4, 2014

        “What is your remedy? I bet I can guess.’

        First off, my comments weren’t simply about your thoughts on debt. Second, any proposed remedy has to be sustainable. Third, as an objective any such solution should be ethical – something our government does not routinely include in it’s mathematics.

        There are a couple of perspectives from which we can look at this issue. One would be “effective taxation rate” but since we’re focusing only on government we’ll explore it’s effect on GDP and why more taxation is unlikely to succeed. Like most honest economists I believe we have simply surpassed the point at which further tax increases could conceivably result in sustaining the status quo, for the simple reason that additional tax increases beyond what we have today are more likely to shrink revenues rather than grow them. That, of course, leaves aside the ethics of “how much taxation is reasonable…”

        And of course “what is right” depends on your point of view. Some pine for the Soviet Union to return; others long for a return to the status quo of 1776. Irrespective of what government actually collects in tax monies or spends inclusive of debt, I take a view of taxation that strips away the political hype. My definition is simple: Anything which reduces your purchasing power as a direct result of government action is a tax or, taken another way, our real GDP relative to government spending is adjusted by everything which does not provide real value to us. Thus, the cost of tax compliance mentioned above is a hidden tax. Another such tax is the cost of regulations, estimated between $1-2 trillion each year including an estimate of $1.75Trillion in 2008 – by none other than now President Obama. http://www.forbes.com/sites/waynecrews/2014/09/10/hairball-the-cost-of-federal-regulation-to-the-u-s-economy/

        So, let’s take a look at the big numbers, because it is harder to hide them. GDP in 2014 is estimated at about 17.5T. http://knoema.com/nwnfkne/world-gdp-ranking-2014-data-and-charts
        Total government spending will be about $6T. http://www.usgovernmentspending.com/total_2014USrt_16rs5n
        If you strip away government spending from a calculation of GDP you are left with $11.5T/yr currently. So, you might say that government is consuming about 52% of real GDP. However, this is not the only effect government has on your spending power, as I mentioned above. Let’s be nicer than Obama’s estimates and say that regulatory costs are only $1.5T in 2014 (6 years after his estimate), and we’ll take it off the top since it is nonproductive waste for an adjusted real GDP of $10T.
        Half of Social Security / Medicare taxes (about $0.5T – http://www.usgovernmentrevenue.com/year_revenue_2014USbt_16bs1n#usgs302) are “paid” by employers. They must add these taxes to the cost of their goods and services just like they add any other cost, or effectively reducing real purchasing power. The same is true for tax compliance (also about $0.5T, see above). Since a portion of what you are “buying” is simply a tax cost, we must reduce real GDP to reflect that and it must fall entirely on the consumer sector to pick that up. Now we are down to $9T in “real GDP,” and government spending is now 67% of Real GDP.

        Is America the worst country in the world? Nah, but that’s not saying a lot. Many of us are tired of the baloney being fed to us from Washington and from “professional economists.” You can provide your own estimates, but you don’t get to use your own math. Productivity is higher than ever, so why do we have to work so hard? it is because so much is taken from us in ways we cannot see.

        So, as for whether government spending is out of control? It’s pretty simple – if it can’t be done with half of the actual value produced by our country each year, it can’t be done at all. If you’re starting with an unachievable goal rather than a balanced budget forcing you to make the hard decisions you’re SUPPOSED to make, it is simply irresponsible spending out of control.

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        • Bill,

          Thanks for the response and the dialog.

          I know there are some folks who don’t like the way GDP is calculated, who believe there are better ways, but somehow I suspect that you are using your objections to obscure what seems to me to be a rather reactionary ideological stance.

          First of all, you don’t get to define, all by yourself, what “real value” is, as it relates to government spending. Neither do I, by the way. Some people don’t think we should spend hundreds of billions of dollars on the military; some think we shouldn’t spend billions on food stamps or school lunch programs. And on and on. Decisions about what constitutes real value regarding government spending is up to the politicians in Washington who vote on spending bills. And in a large democracy like ours, the final product is a compromise, one that is not likely to please anyone entirely. By definition, then, the final product, government spending, is a reflection of our collective values.

          You complain about regulatory costs, calling them “nonproductive waste.” You add those costs to social insurance costs and say the entire thing is a burden on employers that is passed on to consumers, which reduces their purchasing power. Again, for the sake of argument, suppose you’re right. So what? I happen to believe that consumers—citizens—are getting something of real value for that reduction in their purchasing power. In fact, they are actually purchasing something: clean air, clean water, safe food, and social stability. If you don’t see value in those things, value that is worth paying for, whether it be directly or indirectly, then we will always be talking past each other.

          Duane

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