Freeman

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Where Figures Fail: Measuring the Growth of Big Government

MARCH 01, 1983 by ROBERT HIGGS

Robert Higgs is Professor of Economics at the University of Washington. He is popular as a lecturer on economic and monetary affairs. His writings include numerous articles as well as books on The Transformation of the American Economy, 1865-1914, and Competition and Coercion.

Everyone knows that government has grown, but no one knows exactly how much. Government has many dimensions, some of which defy precise measurement. Unfortunately, the most readily quantified dimensions are not necessarily the most important. One who restricted himself to an examination of the available quantitative measures, as most economists working in this area do, could easily reach spurious conclusions. Nevertheless, some attention must be given to such measures. Employed with caution, they can provide valuable information.

How Much Has Government Grown?

One widely used measure is government spending (federal, state, and local) for final goods and services relative to the gross national product (GNP). In the early twentieth century, this share stood at 6-7 percent and fluctuated little from year to year. During World War I, the federal government’s procurement and mobilization efforts drove up government’s share to over 21 per cent of GNP. After the war it descended as rapidly as it had ascended, stabilizing during the 1920s at a level only slightly higher than that of the prewar era.

With the onset of the Great Depression, government’s share increased from about 8 percent in the late twenties to a plateau of 14-15 percent during the New Deal era. Notably, the initial rise in 1930-32 occurred because GNP fell precipitously while government spending for currently produced goods and services remained roughly the same. After 1933, government spending increased but GNP rose at about the same percentage rate; hence government’s share stabilized again. The level of 1932-40 was roughly twice that of the pre-Depression era, which testifies both to the vitality of the New Deal spending programs and to the absence of complete economic recovery prior to the defense buildup.

The massive mobilization of the early forties produced by far the greatest government share ever attained. At the peak, in 1943-44, government spending for currently produced goods and services commanded over 46 percent of GNP. Of this, defense-related purchases accounted for nine-tenths. Rapid demobilization dropped government’s share during the period 1946-50 to the range of 11-15 percent, slightly below the prewar level.

The outbreak of the Korean War led to another steep increase of government’s share, from about 13 percent in 1950 to 22.5 percent in 1953. Although some retrenchment followed cessation of the fighting in Korea, government’s share has remained at a high level, about one-fifth of GNP, ever since. Notably, this postwar plateau of the past three decades holds government’s share of GNP at approximately three times the level sustained before World War I. By this measure, then, government during the twentieth century has become three times as important in relation to the economy.

Looking at all government expenditures, not just those for currently produced goods and services, relative to GNP reveals a different temporal pattern. This broader measure, which includes the various governmental transfer payments, shows that government did occupy a somewhat higher level after World War I: 10-12 percent in the postwar period as opposed to 6-7 percent before the war. It shows also the familiar leap in the early thirties and a plateau at about 18-21 percent in the late thirties; the huge increase during World War II followed by a complete reversal by 1948; a sharp rise between 1950 and 1953; and, unlike the index discussed above, an upward trend from the mid-1950s to the early 1980s that lifts the government’s budget outlays from about 26 percent to 36 percent of GNP.

This upward tendency during the 1960s and 1970s occurred entirely because government transfer payments, mainly within the social security system, increased faster than GNP. By this measure, government has grown about five to six times larger relative to the economy during the twentieth century. By including government transfer payments as well as purchases of currently produced goods and services, one obtains a measure better calculated to reveal the emergence of the modern welfare state. Not surprisingly, this emergence appears fairly sustained over the past seventy years, especially during the post-1956 era.

Another commonly employed index of the size of government is its employment share. The temporal pattern revealed here differs from that shown by either of the expenditure indexes. Government employees increased slightly faster than the labor force even before World War I, reaching a share of almost 5 percent on the eve of the war. This share jumped to over 6 percent during the war, fell back slightly in 1920-21, then drifted slowly upward during the twenties, reaching 6.5 percent in 1930.

How Measure Employment?

The history of government employment during the 1930s raises unusual, indeed unique, complications. To tell this tale, one must decide what to do about the “emergency workers.” These people worked on programs administered by such “emergency” work-relief agencies as the Civilian Conservation Corps, the National Youth Administration, the Federal Emergency Relief Administration (under which a state relief agency operated in each of the states), the Civil Works Administration, and the Works Progress Administration. At the time they were not considered “regular” government employees. Subsequently, economic statisticians counted them as unemployed members of the labor force, a procedure that has created confusion and controversy among economists in their description and analysis of the labor market during the Great Depression.

If one follows the conventional practice, counting the emergency workers as unemployed, then the government’s share of the civilian labor force appears to have remained almost constant during the 1930s, falling slightly between 1931 and 1933 before rising slowly to 7.2 percent in 1939. This measure indicates that government’s share jumped much higher between 1939 and 1944, when it reached an unprecedented 11.1 percent. Thus, World War II seems to have stimulated a huge expansion of government’s direct importance in the civilian labor market.

If, however, one treats the emergency workers as government employees—and it is hard to see why they should not be so treated—the course of history looks completely different. Now the jump in government’s employment share is seen to have occurred between 1930 and 1936, with especially large increases in 1933 and 1934. At the peak in 1936, government workers of all kinds constituted 14 percent of the civilian labor force, more than twice their share in 1930. After 1938, as the ranks of the emergency workers thinned, government’s share diminished; and by 1943, when only a handful of these peculiar workers remained, government employed only about 11 percent of all civilian workers, its share having dropped three full percentage points from the earlier peak. According to this more defensible index, government’s enhanced role in the labor market grew out of the Great Depression. Not until 1966, after two decades of steady postwar growth, did government’s employment share exceed the level it had reached in 1936.

Immediately after World War II, government’s employment share fell almost to 9 percent before starting a long-term march upward. Since the late 1960s it has stabilized in the neighborhood of 15 percent—only slightly above the peak attained in the 1930s. Notably, during this postwar period, the lion’s share of the increased government employment has taken place at the state and local levels. Between 1947 and 1981, federal employment rose by less than a million workers, while state and local government employees added almost 10 million to their ranks. Comparing the most recent share to that at the turn of the century, one finds that government’s relative weight in the labor market has become almost four times greater.

The Essence of Big Government

We could continue to examine quantitative measures of the growth of government (e.g., tax revenue, funds borrowed, loans made) but little would be gained by doing so. Though each such index throws some light on the question at issue, each in a fundamental sense does not tell us what we really want to know. The basic difficulty arises because the quantitative measures of the size of government do not correspond closely—sometimes not at all—with the underlying essence of government, which is coercive power.

Government can grow bigger, much bigger in terms of its expenditure or employment share, and still not become Big Government. What distinguishes that capitalized leviathan is the scope of its effective authority over economic decision-making. Under certain easily imagined circumstances, government could be very big yet rigidly limited. It might be necessary, for example, for government to spend and employ at high rates merely to deter external aggression, maintain domestic order, and enforce private property rights. Such a government would severely confine the scope of its activities, yet its performance within its own limited sphere would require a large share of the economy’s resources. Individual citizens would remain free to decide for themselves all the basic economic questions about what and how to produce, determining in this ongoing market process the distribution of income and wealth. Undeniably, government’s command over resources by means of taxation and expenditure would diminish the aggregate of options available to citizens. But within the constraints set by their after-tax incomes, citizens would remain free to determine among themselves the allocation of the economy’s resources. The heavy tax burden would indicate nothing more than the true cost of preserving an orderly and free society.

Differences Not Measured

All quantitative indexes of the size of government share a common defect: their changes may indicate either changes in the scope of effective governmental authority or merely alterations in the level at which government operates within a constant sphere of authority. On the one hand, for example, government may increase its expenditure and employment to extend its regulatory powers over previously unregulated dimensions of private economic decision-making. On the other hand, it may increase its expenditure and employment to enlarge or improve the judicial system in order to provide quicker and more accurate enforcement of existing private property rights. The two cases differ completely in their implications for the nature and workings of the political economy, yet the standard quantitative measures cannot distinguish them.

Further, quantitative indexes may register little or no change even when the substance of governmental power changes enormously. For example, it takes the same resources to operate the Supreme Court no matter whether that high tribunal’s decisions give the owners of private property much or little protection from the intrusions of government and other citizens. Many regulatory agencies operate on tiny budgets, yet they exert far-reaching effects on the allocation of resources.

American government in the twentieth century has been loath to nationalize industry outright; regulation of privately owned industry has been the preferred means of governmental control over resource use. In its most important economic effects, this continued toleration of nominal private ownership may matter little. But the accounts look different.

When the owners of industrial properties spend billions of dollars at the behest of the Environmental Protection Agency or the Occupational Safety and Health Administration, these expenditures are recorded as “private.” The usual interpretation, that private expenditure signifies voluntary choice, is wholly unwarranted under such conditions. And the commonly cited quantitative indexes of the size of government completely fail to capture this critical feature of our modern Big Government.

Governmental expenditure and employment are derivative manifestations of the power of government. Before it can spend or employ, government must obtain the authority to promote a specified public purpose. If such authority cannot be obtained (a legislative question) and sustained (a judicial question), then the matter is settled: no authority, no program. If expanded authority is obtained and sustained, government may exercise its newly acquired power at various levels. Exercising this authority at higher levels of resource cost does not imply a wider scope of governmental authority.

During the past three decades, for example, Social Security outlays for old-age pensions have mushroomed by billions upon billions of dollars. Yet the upward trend of these expenditures does not signify any new accretions of Big Government during that period. Government has possessed the authority to make these payments ever since the Social Security Act was passed by the Congress and upheld by the Supreme Court in the 1930s. The events of the thirties created new potential for governmental activity of this kind; subsequent events have determined only the degree to which that potential would be utilized. Like a limited government, Big Government may operate over a wide range of societal resource absorption.

In Sum

Quantitative measures of the growth of government are certainly convenient; the newspapers report them daily, and everyday discussions make constant reference to them. Used with caution, they can convey valuable information. Yet we must not forget that these indexes describe only derivative manifestations and not the essence of Big Government.

That essence is coercive power. Its extent cannot be accurately measured by indexes of government expenditure, taxation, or employment. The coercive power of government has its source in the actions of legislatures, regulatory agencies, and courts. These governmental bodies can, and often do, extend their sway without expending a single additional dollar or hiring a single additional employee. Of course, additional expenditure, taxation, and government employment frequently follow sooner or later. By the time they do, however, the citizen who opposes the growth of government discovers that the horse has long since escaped the barn: entrenched bureaucrats and program beneficiaries make it virtually impossible to undo what has been done.

Limiting the scope of modern Big Government requires more than containing its expenditure, taxation, and employment. It is essential that the creation and extension of governmental authority be restrained at its sources. Here as elsewhere, an ounce of prevention works more effectively than a pound of cure.

ASSOCIATED ISSUE

March 1983

ABOUT

ROBERT HIGGS

Robert Higgs is a Senior Fellow in Political Economy at The Independent Institute. He is also the Editor at Large for The Independent Review, the Institute's quarterly journal.

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