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Saturday, December 1, 1984

What the Government Takes

Daniel Klein is a Ph.D. candidate in economics at New York University.

Thirty-seven years ago F. A. Harper addressed the following question: Of the average dollar’s worth of goods and services produced in the United States, what portion is taken by the government? He studied the year 1946 and his findings were published by the Foundation for Economic Education as a pamphlet appropriately titled “31¢.”

An investigation of the same question for the year 1983 reveals that the government now consumes 44.2¢ of the average dollar’s worth of goods and services produced, up by 13.2¢ since Harper’s study. (I derived the figure by dividing National Income by total government spending. Harper used Personal Income where I used National Income. The two are very close; my method makes the government appear slightly more villainous.)

This result is most distressing: After approximately 160 years the government take of our income climbed, with some fluctuation, to 31 per cent. Yet in the following thirty-seven years it grew by nearly fifty per cent to 44.2 per cent. If government consumption jumps as much in the next thirty-seven years as in the past, we will be losing 63 per cent of our income to the government in the year 2020. This extrapolation does not take into account the acceleration of the bite.

In 1983, what the government cost us was 128.6 per cent of what food, housing, clothing and shoes combined cost us. Not only did the government extract this enormous amount of wealth from us, but also, unlike our food or clothing expenses, we had almost no control over how the government funds were used. If we could pay for the private provision of many of the goods and services the government ostensibly provides, such as education, transportation, security, energy, and garbage removal, surely we would pay much less and receive much more.

To think that nearly fifty per cent of our wealth is consumed by the government is disconcerting, to say the least, but that figure fails to reflect the full burden on government. The national accounting of the government’s consumption is based on what actually happens in the economy. It does not account for what would have happened if the government had not intervened. It is impossible to judge how much more American business and industry could have achieved if not for thousands and thousands of government regulations, but the magnitude is tremendous. A. W. Clausen, president of the World Bank, said that Americans have to pay $2 to $4 billion more a year for clothing because of import quotas on textiles. According to C. William Verity, Jr., chairman of the executive committee of Armco, Inc., American com panies are losing at least $10 billion a year in sales to the Soviet Union because of U. S. government restrictions. Robert Crandall, a Brookings Institution economist, says that government negotiated quotas on Japanese auto imports to the United States probably cost American consumers at least $4.3 billion in higher car prices in 1983. These are just three cases in the myriad of ways in which government regulation impoverishes us. None of these shows up in the charts of national accounting.

National accounting also fails to include certain government activity which is kept off the books. This activity is problematic because most of it takes the form of loans. Funds go to various government lending agencies which in turn lend them out to the private sector. The government clearly controls the allocation of these funds, but it does not directly consume them. The ultimate receiver of the funds gets a loan that the unhampered market would not have provided. In effect it is like a government subsidy on interest payments. What part of the government controlled and subsidized off-budget loans should be counted in government take? Because the funds are displaced from the proper competitive recipients, economists James T. Bennett and Thomas J. DiLorenzo suggest counting most of those loans. They feel that we can add approximately $200 billion on the annual government take due to off-budget enterprises. This would shift the current measure of the average take of the dollar earned to 52¢.

It is impossible to keep track of all the ways government costs us. All told, perhaps the government lessens what we otherwise would produce by seventy, eighty, or ninety per cent. One thing is certain: F. A. Harper was wise to warn us of this trend back in 1947, though many of us have yet to heed his caution.

  • Daniel Klein is professor of economics and JIN Chair at the Mercatus Center at George Mason University, and associate fellow at the Ratio Institute (Stockholm). At GMU he leads a program in Adam Smith. He is the author of Knowledge and Coordination: A Liberal Interpretation and editor of Econ Journal Watch.