US Public Spending In Context--Part 1

by: Paul Rosenberg

Sat Apr 11, 2009 at 14:30

As a country, we are on the brink of a substantial, long-term increase in social investment that will move our economy much closer to the mixed, and substantially larger public welfare models, of Canada and Western Europe.

While the arguments Chris marshaled are significant, and deserving of attention, I do not believe that they show what they promise, a "Long-term, Center-left Victory on Public Spending".  But they do pre-position us for intelligently discussing, and eventually advancing that possibility.  The reasons I say this are simple:

(1) Notwithstanding decades of movement conservative rhetoric, public spending does not necessarily directly equate with center-left politics. Increasing and destigmatizing public spending are helpful to center-left politics, but not necessarily synonymous to it.

(2) What is most significant is welfare state core spending-broadly speaking, spending on health, education, retirement and welfare.

(3) Also significant--though much smaller, and less easily identifiable in big-picture budget data--is what can be called welfare state periphery spending, primarily infrastructure and the environment.

(4) But a significant amount of government spending--along with other government activity--does not go to enhance the general welfare, and certainly not to help the disadvantaged. It goes to help those who already have a great deal of wealth and power, thank you very much.

Thus, I will argue, the task before us is to recognize beneficial government spending, and to support it, to recognize detrimental government spending, and to oppose it, and to discover new forms of government spending, or combinations of old forms that will be even more beneficial than those that already exist.  The growth of government spending that Chris points to is potentially quite helpful.  But that's only potential.  It's up to us to ensure that the potential is realized. And to begin that process, we need to become more aware of how that money is already being spent, and with what consequences.

Let's begin by first taking a look at the broad spending categories, how they've varied over time, and how they're projected to change.  Then let's compare the US welfare state with other examples, to see how well it functions, and how it could do better.  The rest of this diary will be devoted to the first task.  A followup will deal with the second one.  In between, I'll post an interlude diary that will provide some background in terms of different types of welfare states.

Mid-thirties equilibrium broken: From fiscal year 1976 through fiscal year 2007, there were only very slight alterations in public spending as a percentage of GDP (32%-37% was the entire range). For thirty years, both public spending and public revenue fluctuated within a very narrow, 5% range. However, as I discussed yesterday, last year this equilibrium was broken, as public spending shot up to nearly 45% of GDP, roughly 7% higher than any year since World War Two:

We have entered a new space. In every previous instance not overwhelmingly related to mass war mobilization, we never returned to normal. The question now is whether we will return to the mid-thirties equilibrium through spending cuts in future years, or have we permanently jumped a level that will be maintained through new sources of revenue (aka, taxes)? Before we can answer this question, we need to first examine where the spending increases came from.

All this is basically sound, I would argue.  But it helps to also have before us the projected fall-off after the stimulus passes through the budget process--not that I necessarily think things will work out this way, but simply to know what Obama has in mind.  And for that, we need the projection through 2014, from the same data source:

Clearly, we can see that the new equilibrium hasrisen over the old one. So far, so good.  But what does that equilibrium consist of?

Here's a graph that includes the four major welfare state categories available from the breakdown used at the usgovernmentspending.com website:

And here's the same four categories, looking only at federal spending:

Visually, we can readily see in both graphs a prolonged period of intense growth from the 1940s through the mid-70s, followed by a period of much slower and more unsteady growth since then.

Honing in on more recent history, in these projections, the only category of federal welfare-state spending that increases from 2001 to 2013 is health care.  All the others decline:

Year Pensions  Healthcare Education  Welfare  Total
2001   4.75       3.85       0.63      1.81    11.0
2013   4.71       5.24       0.59      1.67    12.2

They all increase with state and local spending added in, however:

Year Pensions  Healthcare Education  Welfare  Total
2001   5.78       5.06       5.66      2.86    19.4
2013   6.11       7.01       6.02      2.92    22.1

Still, the lion's share of the increases come from health care, 1.95% of GDP, compared to 0.75% increase for all the others combined. The increase for health care is 2.6 times as great as for all the rest combined, while the combined size of the other three in the base year of 2001 was 2.83 times as great as health care alone.  Clearly, health care increases are the dominant factor here.

Now let's look at the five non-welfare state core spending categories (aside from interest) that are used on the site.  These are federal spending only:

Here we can clearly see the spike in "other" that corresponds primarily to the bailout costs.  And, on the larger scale, we can see how defense declined very significantly from the early 1950s Korean War Era, through the late 1970s, growing again during the early Reagan era, only to resume it's decline again when the Soviet Union collapsed, rising again under Bush II.

Combining all the welfare state core spending together into one supercategory, all the other spending into one category, and adding interest as a separate category, we get the following graph:

Here we see that the decline in the non-welfare state category--primariy military spending--roughly offset the increase in welfare state spending from 1950 though the early 1970s, for a rough equilibrium of around 30%.  As welfare state spending continued upwards, while the non-welfare state decline leveled off, total spending rose to around 35%.  This took only a few short years, then welfare-state spending also leveled off.  This lasted till around 1990, when the welfare spending again went up, for only a few years, and non-welfare spending dropped, for about twice as long.  Finally, both started rising again in the late 1990s, as interest payments stated dropping.

The more recent history can be seen more clearly in the following chart, blowing up the last three decades, since Reagan's election:

Given that total government spending has been roughly in equilibrium since the early 70s at around 35% until quite recently, it's worth noting how dramatically our debt has piled up, beginning with Reagan, coming under control and declining as a percent of GDP with Clinton, and then mushrooming again under Bush II.

Just to make things perfectly clear:

This chart, from another source, shows quite clearly that tax cuts and military spending were the chief culprits under Bush II:

Finally, to give a hint of what's to come in the second diary of this set, here's a chart showing government spending in four different types of European welfare state--a variant on the "Three Worlds of Welfare Capitalism" that I wrote about before. It's from "The Struggle between Equity and Efficiency: Evidence from the Luxembourg Income Studies" (PDF), Luxembourg Income Study, Working Paper No. 498, by Norbert Berthold and Alexander B. Brunner.  The Luxembourg Income Study is a  cross-national data archive and research institute located (oddly enough) in Luxembourg. The first working paper was published in 1985. The  LIS Database includes income microdata from a large number of countries at multiple points in time.

The lowest line in the chart corresponds to the "liberal welfare state" type--also known as the "Anglo-Saxon" model, represented in this sample by Britain and Ireland.  Even with a seemingly straightforward measure such as total government spending one can't be completely sure of true equivalence, but it's safe to say the figures are relatively close.  And we can see that at around 40% of GDP, the US spending levels beyond 2011 or so will be close to those of the liberal welfare states, the lowest tier of the European welfare states. This includes, of course, significantly higher levels of spending on the military, and prisons.  We'll take a closer look in the second  diary of this set, following the interlude, which takes a broader look at the different worlds of welfare capitalism.