Spending like its 1969

by John Hood, John Locke Foundation and NC SPIN panelist, November 2, 2014.

Government is far, far bigger than it used to be. Liberals generally cheer this development. Conservatives regret it. To understand the disagreement about this change, one must first understand the magnitude of the change.

For the first century and a half of the American Republic, government at all levels — federal, state, and local — accounted for a tiny fraction of the economy. Even as late as 1929, the eve of the Great Depression, government spending was just 8 percent of the gross domestic product.

Moreover, most of it occurred at the state and local level in the form of law enforcement, public safety, the construction of America’s first true road networks, and the expansion of public education. These were functions with wide public support, then and now. The federal government focused on truly national and international affairs.

The 1929 stock market crash and ensuing economic turmoil changed all that. First the Herbert Hoover administration and then the Franklin Roosevelt administration dramatically escalated federal spending in an attempt to “prime the pump” of economic recovery through stimulus and redistribution schemes. Many state governors and legislatures followed suit. Total government spending doubled to 16 percent of GDP by 1932, then stayed at or above that level for most of the decade. Total revenue averaged a point or two lower as a share of GDP, resulting in accumulating debt at the federal level and in some states and localities.

America’s entry into World War II resulted in another large leap in the size of government. Total expenditures spiked to 36 percent of GDP in 1945, with total revenues at 23 percent. Even the military demobilization after the war didn’t entire reverse the trend. Total revenues remained at 23 percent of GDP through the 1950s. Expenditures also averaged 23 percent, low enough to avoid racking up additional debt but still far higher than in previous generations.

Still at this point it is important to understand that most government expenditures were either protective (law enforcement and public safety) or productive(infrastructure and education). Social Security and unemployment insurance were universal but not yet particularly costly.

The third category of government, redistributive programs, began a significant expansion in the late 1950s with the instigation of federal disability payments and a joint federal-state program for poor patients in hospitals and rest homes. The enactment of Medicare and Medicaid in 1965 dramatically accelerated the trend, with the latter program inducing states into major redistributive spending for the first time. By 1970, total government expenditures reached 30 percent of GDP, including both the effects of entitlement programs and the war in Vietnam. Revenues were at 27 percent, and would continue to average about 3 points below expenditures during the 1970s, 1980s, 1990s, and 2000s.

The final large expansion of government occurred after another economic panic, the Great Recession. Since 2009, total expenditures have averaged 35 percent of GDP, vs. total revenues of only 27 percent. So a government debt that had already grown excessively from 1970 to 2008 has grown explosively over the past five years.

Liberals sometimes defend the recent upward trend as “public investment” that will pay future economic returns, but this is nonsensical. Most of the new spending is redistributive, not productive. We may debate whether additional increments of education and infrastructure expenditure will generate the productivity gains that previous increments have, especially if additional spending isn’t accompanied by fundamental changes in the way these services are delivered. It would be the height of folly, however, to describe increases in Medicare, Medicaid, disability, and other public assistance programs as “investments.” They are consumption. Saying otherwise debases the language and confuses the issue.

Here’s my impossible, radical, quixotic dream: Let’s spend like it’s 1969, when both revenues and expenditures were 28 percent of GDP and most government programs were still protective or productive. North Carolina can do its part by continuing its policies of budgetary restraint and government reform. The heavy lifting, however, will have to occur in Washington. If you doubt that its denizens can and will bear the load, I agree. Still, there is no choice other than to make them try.

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