Posts Tagged ‘Growth of Government’

Looking through the freedom index data over time, it can look like a depressing series of new laws and restrictions on people’s lives. Now, freedom has increased at the state level on certain issues (local gun bans overturned, sodomy laws overturned, medical marijuana laws passed, eminent domain reforms enacted, same-sex partnerships spreading). But there are ever more areas in which state governments find new ways to intervene: E-Verify mandates (which are likely coming to the entire country soon), smoking bans, online gambling bans, salvia bans, DNA databases for arrestees (recently upheld by the U.S. Supreme Court), trans-fat bans, and ever-more occupations coming under the license Raj.

Libertarians often look at this endless march of new regulations and dourly quote Thomas Jefferson, “The natural progress of things is for liberty to yield and government to gain ground.” Yet what this ignores is the explosion in the unregulated areas of human life. Ever-lengthening statute books do not necessarily mean more restrictions on what people are actually doing.

Advocates of positive freedom have always celebrated technological change as liberating. More options mean more choices mean more freedom. Traditional libertarians don’t often seem to want to think this way, probably because they think of negative freedom as more important: i.e., the absence of restrictions on peaceful choices. I agree with them there: positive freedom is desirable but not at the expense of negative freedom.

I am arguing here that technological change enhances negative freedom, even if the number of laws and formal restrictions remains constant. How is this possible? Most importantly, technological change opens up new domains of human endeavor that have yet to be regulated. Secondarily, certain technological changes can disrupt government regulation. Finally, crowded agendas mean that governments stop enforcing certain laws, which leads to new social expectations about what laws will be enforced.

To understand the first point, it is important to recognize that human life is finite. Therefore, (more…)

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Stephen Moore has a depressing piece in today’s WSJ. Money quote:

Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

One only wishes that Moore would have concluded his piece with two words: “April Fools.” Alas, he did not.

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Harry Truman (if I recall correctly), frustrated with the economic advice he was receiving from the Council of Economic Advisors, asked for a one-armed economist who could not say “one the one hand…on the other.”

Ten former CEA heads have issued a joint letter on the long-term budget crisis: Martin N. Baily (Clinton), Martin S. Feldstein (Reagan), R. Glenn Hubbard (Bush I), Edward P. Lazear (Bush II), N. Gregory Mankiw (Bush II), Christina D. Romer (Obama)Harvey S. Rosen (Bush II), Charles L. Schultze (Carter), Laura D. Tyson (Clinton), and Murray L. Weidenbaum (Reagan).

While they disagree on some of the details, “we find ourselves in remarkable unanimity about the long-run federal budget deficit: It is a severe threat that calls for serious and prompt attention.”

While the actual deficit is likely to shrink over the next few years as the economy continues to recover, the aging of the baby-boom generation and rapidly rising health care costs are likely to create a large and growing gap between spending and revenues. These deficits will take a toll on private investment and economic growth. At some point, bond markets are likely to turn on the United States — leading to a crisis that could dwarf 2008.

Bottom line: they “urge that the Bowles-Simpson report, ‘The Moment of Truth,’ be the starting point of an active legislative process that involves intense negotiations between both parties.” Reducing waste, fraud and abuse and cutting domestic discretionary spending are simply insufficient. Entitlements, defense, and significant tax reform (elimination of expenditures) must be central to any solution.

Of course, the fact that the Bowles-Simpson Commission, former GAO head David Walker, the Congressional Budget Office’s Long Run Budget Projections, and now ten former CEA chairs agree on the fundamental problem may not be sufficient to outweigh the short-term incentives of our elected officials who remain—with a few exceptions–addicted to rent extraction, mud-farming, and kicking the can down the road.

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As Congress turns attention to regaining rediscovering discovering fiscal responsibility, one would assume that a good place would be eliminating unnecessary duplication of government effort.

Last week, the GAO released a study—the first in what will be a statutorily mandated annual exercise—on waste and duplication. In the first part of the report, the GAO has identified 34 areas where agencies have similar or overlapping objectives. “Reducing or eliminating duplication, overlap, or fragmentation could potentially save billions of tax dollars annually and help agencies provide more efficient and effective services.” You can read a summary of the report or download it here.

Take the example of education. The GAO reports on 82 distinct programs in 10 agencies designed to improve teacher quality. When addressing the 60 programs administered by the Department of Education, the GAO notes: “Education officials believe that federal programs have failed to make significant progress in helping states close achievement gaps between schools serving students from different socioeconomic backgrounds, because, in part, federal programs that focus on teaching and learning of specific subjects are too fragmented to help state and district officials strengthen instruction and increase student achievement in a comprehensive manner.”

In the second part, it expands its scope to explore “47 additional areas—beyond those directly related to duplication, overlap, or fragmentation—describing other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue collections for the Treasury.” The reforms that GAO identifies could yield “ financial benefits ranging from tens of millions to tens of billions of dollars annually.”

Of course, although reasonable people might disagree on what precisely government should do, one would assume that all would agree that it should do it efficiently (to the extent possible). Unfortunately, every effort to reduce waste and redundancy is easily portrayed as “an assault on _____________” (you can fill in the blank or wait of the NYT editorial page to do it for you).

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I am assuming that most readers of this blog have a commitment to freedom of association and, as a result, are quite willing to accept voluntary self-organization of labor via trade unions in the private sector. Management and labor can negotiate over the terms of the labor contract and, if it appears that higher levels of compensation are compatible with corporate profitability, mutually beneficial exchange may occur. If the two bargaining partners miscalculate, they bear the costs (e.g., through declining market share reducing profitability and the demand for labor). They are free to renegotiate the terms of their agreement in subsequent rounds.

But what of unions in the public sector? There seems to be a clear public choice problem: public unions and elected officials engage in mutually beneficial exchanges—generous compensation packages for political support and campaign finance—while shifting the costs on to the unorganized taxpayers. On the face of things, this seems no different than the dynamics intrinsic to Stigler’s economic theory of regulation.

In the case of Wisconsin, it is clear (at least to me) that the effort to eliminate collective bargaining for public sector unions is as much about politics as it is about long-term budget imbalances. The Wisconsin Education Association Council (WEAC), which represents some 98,000 workers, charges membership dues that run some $1,000 per year. Some of these funds, in turn, are spent to support candidates and incumbents (largely Democratic) who will prove overly sympathetic to union demands for higher rates of compensation.
As an AP story by Ryan Foley explains:

WEAC is typically among the largest-spending special interests in Wisconsin politics, helping former Democratic Gov. Jim Doyle win two terms in office and often trying to sway key legislative races with television ads and mailers. It also contributes to other groups that run political ads in favor of Democrats and against Republicans.

WEAC’s political arm has spent more than $11 million in donations to campaigns and spending to support and oppose other candidates since 1998, nearly all of it helping Democrats, according to McCabe [Mike McCabe, director of the Wisconsin Democracy Campaign]. The group endorsed Milwaukee Mayor Tom Barrett, a Democrat, in his race against Walker for governor last year.

McCabe said WEAC’s campaign spending dwarfs that by other unions — including American Federation of State, County and Municipal Employees, which represents tens of thousands of state and local workers in Wisconsin. But he said they were all a key part of the Democratic party’s coalition in a state that has generally leaned to the left.

By eliminating collective bargaining, forcing annual union certification, and ending the automatic deduction of union dues, Walker would eliminate a potent source of Democratic campaign finance while changing the dynamic that is driving the long-term growth of health care liabilities. Whether Walker’s campaign is driven primarily by budgetary concerns or the desire to solidify Republican control in the state government is anyone’s guess. Both will result if the bill is passed.

There could be institutional changes that would alter the dynamics and allow for the continuation of collective bargaining for public sector unions (e.g., public financing of political campaigns, bans on union contributions to political campaigns). But they seem unlikely. Absent such changes, the public choice problem remains.

It seems difficult to escape the conclusion that public sector unions are different.

Update (h/t Naben)
This morning’s Milwaukee Journal-Sentinel reports:

The 14 Wisconsin Democratic senators who fled to Illinois share more than just political sympathy with the public employees and unions targeted by Gov. Scott Walker’s budget-repair bill.

The Senate Democrats count on those in the public sector as a key funding source for their campaigns.

In fact, nearly one out of every five dollars raised by those Democratic senators in the past two election cycles came from public employees, such as teachers and firefighters, and their unions, a Journal Sentinel analysis of campaign records shows.

The 14 senators raised $1.9 million since the start of 2007, with $344,000 from public employee unions and government workers. As the story notes, this does not count donations of under $100 and independent spending (e.g., “the Wisconsin Education Association Council, the state teachers union, dropped nearly $1.6 million in independent spending in four Senate races last fall”). No surprises here, of course. Transfer-seeking is ubiquitous and is not reserved for businesses, even if they tend to be the most adept at the game.

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“Over the past decades we’ve talked of curtailing government spending so that we can then lower the tax burden. Sometimes we’ve even taken a run at doing that. But there were always those who told us that taxes couldn’t be cut until spending was reduced. Well, you know, we can lecture our children about extravagance until we run out of voice and breath. Or we can cure their extravagance by simply reducing their allowance.” Ronald Reagan, February 5, 1981

One of the claims often made was that the Reagan administration broke the back of stagflation—the combination of high inflation and stagnant growth—by departing from the crumbling Keynesian orthodoxy and embracing supply side doctrines. Of course, the credit for price stability can be assigned to the tight monetary policy enacted by Paul Volcker and the Federal Reserve. Let us turn to the question of growth.

Most certainly, the Laffer Curve received a good deal of play in those days with its promise that a reduction in marginal rates could not only stimulate growth but raise greater revenues. The promise of higher revenues at lower marginal rates was unfulfilled, as subsequent analyses confirmed. But what of growth? In the last posting, I noted the failure of the Reagan administration to reduce the size of government. In fact, despite the President’s analogy in the above quote to reducing the allowance of a spoiled child, the de facto policy was to hand the fat boy a credit card with no spending limit.

As we all know, the Reagan administration and Congress ran significant deficits each year, creating a high level of stimulus that looks quite Keynesian (recall that taxation is a policy instrument that can be used for Keynesian ends). The average annual deficit during the Reagan administration was 4.2 percent of GDP (the peak deficit, in 1983, was 6 percent of GDP, the largest since 1946 and greater than anything experienced in the pre-war days of FDR and the New Deal).

To place these figures in context, consider the following (calculated from OMB Historical Table 1.2):

1950s: average deficit 0.4 percent of GDP
1960s: average deficit 0.8 percent of GDP
1970s: average deficit 2.2 percent of GDP
1981-1988: average deficit 4.2 percent of GDP
1989-1992: average deficit 4 percent of GDP
1993-2000: average deficit 0.8 percent of GDP
2001-2008: average deficit of 2 percent of GDP

In terms of deficits, the Clinton presidency looked a lot like the Kennedy-Johnson years; the Bush II presidency looked a lot like the 1970s. The Reagan administration…well, it stands alone as having provided the highest level of stimulus since World War II.

And while the administration’s policy mix did result in recovery, the rate of growth (average of 4.3 percent, 1983-88) is not all that impressive when we recall that the 1960s experienced an average growth rate of 4.4 percent with annual average deficits that were remarkably lower (0.8 percent of GDP compared with 4.2 percent of GDP). See Table B-4, Economic Report of the President for percent change in real GDP.

The large deficits incurred in the 1980s reversed a long-term trend in the national debt (the following data is drawn from OMB Historical Table 7.1). In 1946, gross federal debt was 121.7 percent of GDP, a product largely of World War II. Over the course of the next several decades, the national debt declined steadily relative to the economy, reaching a low of 32.5 percent of GDP the year of Reagan’s inauguration. With the passage of the Economic Recovery Tax Act, revenues fell from 19.2 percent of GDP to 17.5 percent of GDP; when combined with unrestrained spending, the inevitable result was a ratcheting up of the debt. Indeed, by the time the Gipper left office, the debt was 51.5 percent of GDP (effectively erasing 25 years of progress).

Things would get much worse in subsequent years (indeed, gross debt as a percentage of GDP is projected to exceed 100 percent of GDP in 2012) so the mix of policies embraced by the Reagan administration and its successors is only part of a larger story that must include the uncontrolled growth in entitlement spending (a product of program design and demographic trends).
Was there a supply side miracle? Certainly marginal rates were slashed and the administration introduced a cost-benefit analysis-based system of regulatory review (executive order 12291) and continued the process of deregulation initiated by Ford and Carter. But the economic recovery looks more like a closeted return to Keynesian stimulus than a sharp turn to supply side revolution.

So much for Reaganomics.

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Reagan at 100

February 6 was the 100th anniversary of Ronald Reagan’s birth. Several commentators have reflected on the Reagan legacy and, as one might suspect, these assessments have been quite divergent. Some thirty years after Reagan’s first inaugural, there remain many on the right and the left who claim that there was something amounting to a Reagan revolution.

The basic narrative runs something like this: after years of stagflation and mounting evidence that the welfare-regulatory state inherited from the New Deal and Great Society was failing to achieve its objectives and undermining the incentives for growth and entrepreneurship, Ronald Reagan assumed the presidency with a clear message: government is the problem, not the solution. Over the course of the next eight years, he worked diligently to reverse the changes of previous decades.

High marginal tax rates were slashed via the Economic Recovery Tax Act and the Tax Reform Act.

The size of the government was reduced through significant cuts in domestic spending and a series of welfare reforms that set the stage for the elimination of AFDC a decade later.

The regulatory state was disciplined through the application of cost-benefit analysis –based regulatory review (executive order 12291), reductions in regulatory budgets, and further deregulation.

Inflation was eliminated via tight monetary policy and, when combined with tax cuts, the foundations were created for an era of steady non-inflationary growth.

The selective protectionism of the past was eliminated by fidelity to free trade. The administration’s efforts led, ultimately, to NAFTA and the creation of the World Trade Organization.

Carter-era détente was cast aside for a policy of “rollback” that led, ultimately, to the collapse of the Soviet Union.

While Reagan may not have achieved all that he hoped to achieve, subsequent presidents (George H.W. Bush and Bill Clinton—with the prodding of Republican majorities in Congress) consolidated and extended his accomplishments. In subsequent decades, the key features of the US political economy would be largely in accordance with the broad vision articulated by Reagan in 1981.
Analysts may well diverge on their evaluation of this new order and whether the changes rise to the level of a “revolution.” But there is little question that Reagan was the key architect. At least this is the argument…

In a few postings this week, I would like to provide my interpretations of the Reagan revolution and his long-term legacy. Lets start with the low hanging fruit.

Reagan and the Size of Government
In 1981, Ronald Reagan famously noted: “government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule…Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?”
It is commonly claimed that Reagan implemented his broad vision by waging a war on the sprawling state that had been constructed during the New Deal and expanded dramatically during the Great Society and the 1970s. To evaluate this claim, it is useful to turn to some empirical indicators.

To simplify a bit, let us just consider federal outlays as a percentage of GDP. All figures are from OMB Historical Table 1.2

In 1940, on the eve of US entry into World War II, the federal government was spending 9.8 percent of GDP. Spending had actually peaked at 10.3 percent in 1939.

In 1950, federal outlays were 15.6 percent of GDP

In 1960, federal outlays were 17.8 percent of GDP

In 1970, with a hot war in Vietnam and the welfare state expansions of the Great Society and War on Poverty, federal outlays were 19.3 percent of GDP

In 1980, the last year of the Carter presidency, federal outlays had reached 21.7 percent of GDP, more than twice the level relative to the economy as had been reached during the peak year of pre-war New Deal spending.

During Reagan’s first term in office, federal outlays averaged 22.8 percent of GDP. During his second term in office, federal outlays were an average of 22.1 percent of GDP. The average for the Reagan presidency as a whole was 22.4 percent of GDP.

Did the Reagan administration shrink government (the problem, not the solution)? The simple answer is: No! If fact, government expanded during this period such that relative to the economy, the Reagan administration spent 20 percent more than the Johnson presidency that was so reviled by the critics of the Great Society.

Now, one might argue that there were good reasons for this pattern of spending (e.g., a deep recession, the growth in defense spending designed to bring an end to the Cold War). Regardless, there is no evidence to support the contention that Reagan ushered in an era of small government.

Domestic per capita spending
In a post last year, I provided a different indicator of government growth: per capita, inflation adjusted domestic spending. I argued at the time that this is a useful measure because if GDP grows faster than the population, the government’s claim on GDP could overstate levels of spending. I focus on domestic spending not because I think that military spending is unimportant—in fact it is quite important. But a focus on domestic spending allows us to see the trend more clearly. Figures are derived from data in OMB Historical Tables 3.1 and 15.3, and expressed in 2005 dollars.

In 1940, the federal government spent $715 per person.

By 1960, federal non-defense spending was $1,332 per capita, and by the end of the Johnson presidency, it has reached $2,286 per capita.

By 1980, non-defense spending rose to $2,633 per capita.

By the last year of the Reagan presidency, nondefense spending had risen to $4,827 per person—more than twice the level of the Great Society.

In sum, when we look at per capita domestic spending in constant dollars, the data reveals significant expansion under Reagan.

Once again, there are explanations to consider, some of which I may touch on later in the week. For now, let us be content with a simple but important take home message: for all the claims that Reagan ushered in a period of small government, the government actually expanded during the Reagan presidency and, depending on your indicator, the expansion may be characterized as significant.

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