The ‘Ever Expanding’ Government Illustrated, Part III

Following up on these two previous posts [1] [2], I decided to confront some views commonly held in certain circles with some actual data. To summarize:

  • Real government nondefense spending on goods and services is declining, and is declining relative to real GDP.
  • The ratio of government outlays to nominal potential GDP is declining.
  • Total civilian government employment is declining, and is declining as a share of total nonfarm employment.

Real government nondefense spending on goods and services is declining

leviathan1.gif
Figure 1: Real spending on goods and services at state and local levels (blue area), and at Federal (nondefense) level (red area), in billions of Ch.2005$, SAAR. NBER defined recession dates shaded gray. Source: BEA, 2011Q2 second release.

Clearly, after rising throughout the 2000’s, total government nondefense spending picked up a bit in 2009, after which point is has declined. It’s currently at about 2006 levels.

Real nondefense spending on goods and services is declining relative to GDP

Since these series are in Ch.2005$, one cannot literally add the series up. However, as an approximation which should be pretty good over the last decade or so, I’ll add government spending at state and local levels to nondefense spending at the Federal level. Then, since I cannot divide that series by GDP in chained dollars to get a sensible ratio, I’ll log them both and rescale them to 2000Q1=0. Those series can then be compared in terms of cumulative growth rates.

leviathan2.gif
Figure 2: Real spending on nondefense goods and services at all government levels (teal), and real GDP, in billions of Ch.2005$, SAAR, logged and rescaled to 2000Q1=0. NBER defined recession dates shaded gray. Dashed line at 2009Q1. Source: BEA, 2011Q2 second release, NBER, and author’s calculations.

As is clear from the graph, real nondefense spending is falling, driven mainly by the decline in spending at the state and local levels. Example: See Wisconsin [3] [4].

The ratio of government outlays to nominal potential GDP is declining

Government outlays include transfers (unemployment insurance, SNAP, social security payments, etc.), as well as spending on goods and services. Once one takes these expenditures into account, what does the picture look like? I have plotted this series, normalized by potential GDP, in the figure below.

leviathan3.gif
Figure 3: Nominal outlays at the state and local levels (blue area), and at Federal (nondefense) level (red area), SAAR, divided by potential GDP. NBER defined recession dates shaded gray. Note that Federal nondefense proxied by taking current expenditures and subtracting defense spending on goods and services. Source: BEA, 2011Q2 second release, CBO Budget and Economic Outlook (January 2012) supplemental information, NBER, and author’s calculations.

Since I didn’t have ready access to Federal nondefense outlays, I proxied nondefense outlays by subtracting nominal defense spending on goods and services from total Federal current expenditures. To the extent that there are defense transfers, I am overstating Federal nondefense outlays. The ratio in 2011Q4 is just about the same level as in 2008Q2.

Total civilian government employment is declining, and is declining as a share of total nonfarm employment

In the figure below, I plot the absolute level of government employment at all levels (blue line) and the ratio of government employment to total nonfarm payroll employment (red line).

leviathan4.gif
Figure 4: Total government employment, in 000’s (blue line, left scale), and ratio of government employment to nonfarm payroll employment (red line, right scale), both seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS, January employment release, NBER, and author’s calculations.

These are all graphs based on data readily available at BEA and BLS.

This post originally appeared at Econbrowser and is posted with permission.

4 Responses to "The ‘Ever Expanding’ Government Illustrated, Part III"

  1. Mike Englund   March 6, 2012 at 8:14 am

    The above appears to contradict the notion of an "ever expanding" government. Yet, the above series really cite the primary victims of run-away federal spending. Surging transfer payments (not included in the above expenditure components but the large majority of federal spending) on social security, Medicare, and medicaid, and other transfers passed under the guise of "stimulus spending" and Obamacare, is "crowding out" traditional government. Lets be clear, federal government spending has soared by 25% between the last business cycle peak in 2007 and 2010. One might have expected "stimulus spending" and government efforts to boost the economy to promt a switch in government spending toward purchases of goods and services (building bridges, roads, schools, etc…. remember those shovel ready projects?) but that wasn't this government's priority.

  2. Elliott   March 6, 2012 at 11:18 am

    1. Why isn't defense spending a legitimate function of the federal government?
    2. Employment data do not take into account the outsourcing (use of non-government employees) to carry out specific tasks. Not that anything is wrong with that.
    3. Perhaps a better measure of the relative size of governemt is the ratio of the sum of government revenues + net borrowing to GDP The numerator shows the level of resources withdrawn from the private sector.

    • enrique   March 6, 2012 at 7:02 pm

      1 Who said defense spending isn't a legitimate function…? The point is that many want to reduce the government EXCEPT defense spending: that is, they argue that the the rest of the government is to big, and getting bigger, and that is refuted here.
      2 outsourcing puts employment back in private hands. But the cost is still included in public spending, so both items are correctly measured above
      3 the sum of government revenues + net borrowing is of course equal to government spending (even when net borrowing was negative in Clinton years)

  3. Jay W.   March 7, 2012 at 2:17 pm

    Do the charts include interest expense? I understand that interest rates have declined and total interest expense may or may be increasing, but we can't assume a $15 trillion debt that is growing will continue to be serviced at historically low rates forever.
    it makes sense that state and local government spending has declined as they do not have the ability to outspend their revenue as the Federal Government does. Many commentators sounding the alarm over government spending are referring to the potential increases that may occur if the tax and spend mentality successfully determines policy going forward.
    30 percent of GDP going to non-defense government outlays is troubling in itself, given our lack of infrastructure expenditures, especially if it does not include debt service costs. Greece is at 40 percent, so it's not difficult to see why there is a great ambition to grow ourselves out of the debt overhang.