The Big-Government Paradox

How big is the U.S. federal government and what are the trends of this size? Here are graphs that tell us. The data for federal-government expenditures are taken from the National Income and Products Accounts. The data are presented in four graphs.

The reader is warned that the first graphs are very "busy" and require close examination. The terminology is that of the NIPA. The quantities plotted are explained in detail later.

Finally, a graph of federal-government civilian employment is displayed as one test of the accounting information. It is another measure of the size of the Federal government. State and local employment is also shown.

The Illusion of Expansion of Government

The first and most difficult graph - and most frightening - shows the rapid exponential growth of the Federal expenditures, expressed in the current dollars of each year. This is the vision of the Federal Government that is in the minds of most people who are in a panic to stop and to reduce the growth of government. This growth can be seen in many ways and is sensed as a real growth. Is it real growth?

Real Growth in a Growing Nation

The growth shown in the first graph is not real in the economic sense. Much of the growth is simply inflation of the dollar. It takes more dollars even if the government is not growing in employees or purchases or money transfers.

Unfortunately, the inflation adjustment is a matter of recent controversy and undoubtedly has a large subjective component. The following graph is based on the conventional consumer price index (CPI) published by the Bureau of Labor Statistics.

In addition to changing value of the dollar, the nation is growing - there are more people. So the graph must be corrected both for the decline in the value of the dollar and for the increase in the population of the nation. This is shown in the second graph. It is plotted in "real" dollars per person.

A Falling Share of Production

There is not only inflation and a growing population to consider. In addition, the productivity of that population is growing. The nation's Gross Domestic Product, GDP, is growing. To have and to maintain the larger production may require a larger government to provide the production infrastructure: roads, airlanes, research, and other public contributions.

The increased production can support larger activities of all sorts, including a larger government. Therefore our vision of the size of government should be proportioned to the size of the GDP.

The following graph plots the Federal expenditures as a percentage of the Gross Domestic Product. Because both are expressed in the same dollars, no inflation correction is needed, eliminating a source of controversy. Because the GDP represents the output of the population, no adjustment for the growth of the population is needed.

The Nature of the Expenditures

Federal expenditures in the National Income and Product Accounts are in five groups:

1. Purchases, Defense
2. Purchases, Non-defense
3. Transfers to persons and foreign
4. Grants to States and local govts
5. Net Interest paid

Added graph lines show:

   6. TOTAL expenditures
   7. TOTAL less transfers and interest, i.e. all purchases + grants

Items (1) and (2) are purchases of goods and services, including government employees. The government buys something, a thing or a service, and consumes it. This is the same way people spend money: they make a draw on the material and labor resources of the nation.

Item (3), "Transfers," is of a different nature. The government gives money to people. This money is either collected from taxpayers or borrowed from investors in government bonds. The money is simply transferred from some people to other people. There is no direct consumption. Those who receive the money may spend it and thereby consume, but those who supplied the money cannot spend it, so must consume less. The net effect on consumption depends on the relative consumption desires of the two groups. Presumably, those who receive the money are in need of it and will spend most if not all of it. Those who supply the money are likely to have saved much of it. Therefore the net effect of transfers is an increase in consumption, but the consumption is by people, not by the government.

Item (4), "Grants" is also a transfer, but to lesser governments rather than to people. The Federal government is acting as tax collector and banker for the State and local governments. The Federal government is itself is not spending and not consuming. However, some of the grant money goes to purchases (bridges, stadiums, employees, etc) and some is transferred back to the people (Medicare, welfare, unemployment compensation, etc.). For the "Total less Transfers" graph line, Grants are lumped with Purchases, not with Transfers.

Item (5), Net Interest Paid, is also a transfer and obligatory. A commitment has been made to pay interest for money borrowed. The borrowing consists of government bonds sold. The money to pay interest is either collected from taxpayers or acquired by additional borrowing. When the government pays interest it is not spending--that is to say: not consuming anything. The net effect on consumption induced by the transfer is difficult to say. At first thought, those who receive the interest are wealthy bond holders and will consume less (they may re-invest in bonds). However, government bonds are held - either personally or in pension funds - by many people who are not wealthy.

Summary: Decline and Growth

The fourth graph shows only the Total expenditure, the Transfers, and the Purchases plus Grants. This graph gives a simpler picture to remember. The graph has a simple, linear scale for the percentages. We see immediately that the growth of the federal government is a combination of falling purchases and rising transfers. In a real sense, the size of the government is represented by its purchases. The transfers are a function, not a measure of size. The clerical costs of the transfers are included in the purchases. The graph over-estimates government consumption by lumping all Grants with Purchases.

Conclusion:
the Changing Role of the Federal Government

The total federal expenditures topped out about 1982 (Reagan was successful - or it was inevitable).

The size of the federal government as measured by its purchases relative to the nation's production has been decreasing erratically but persistently since about 1954.

The Transfers - mostly social security, welfare, and medical care - have increased rapidly since 1954, but especially since 1966. The rate of growth has been somewhat slower since 1983. Transfers are sensitive to the state of the economy, rising during recessions.

The principal money role of the U.S. federal government is now the transfer of money from some people to other people. Its own purchases are of lesser amount. This operation moves money into the hands of those more likely to spend it. It is one a way to accomplish the enhancement of the "aggregate demand." This was advocated when needed (as it was in 1936) by the economist John Maynard Keynes. In an economist's words: these transfers increase the net propensity to consume.

Finally, as confirmation of the decreasing size of the federal government, the last graph shows federal employment relative to total U.S. employment to have been in a steady and rapid decline since 1970, in agreement with the fall in non-transfer expenditures. The increase in state and local government employment is also shown. The rapid increase in this employment ended about 1980. The growth in the size of state and local governments is not independent of the actions of the federal government. Those lesser governments are to some extent at once the beneficiaries and the burden bearers of the transfers and grants imposed upon them by the federal government.

The National Income and Product Account data may be found in the U.S. Statistical Abstracts and at the web site of the Bureau of Economic Analysis