Number 487 September 6, 2011

This Week: Is Government Growing?

"Quote" of the Week: "Reducing the Size of Government Was a Goal of the Deficit Plan."
Is Government Growing? Six Factors to Consider


In the last issue of Nygaard Notes I talked about how people in positions of power manipulate facts in order to build political support for their preferred policies. The example I used was the promotion of the idea that "government" is "ever-expanding," "endlessly growing," etc. Once people accept this idea, then the debate focuses on what to do about it, and suddenly we're in an "age of austerity" in which yacht sales are skyrocketing but health care is unaffordable for 50 million of us.

In this issue of the Notes I decided to take a look at the "size of government." I expected to learn that it wasn't growing that much. As it turns out, it's more complicated than that. I will share what I learned about supposedly "simple comparisons" that are often used to "prove" that government is growing. In the process I think we'll learn some lessons about economic reporting and how easily it can mislead many well-intentioned people who are simply trying to keep up. I expected to look at both state and federal spending, but I found that it was sufficiently complicated that I would focus on spending at the state level only. In this issue I present the theory, in the next issue I hope to have a little case study based on state government in my own state of Minnesota. The lessons are broadly applicable.

I also want to take a moment to comment here on the past oddball month at Nygaard Notes. First I went on a 6-day vacation. That was great! Then I came back and a squirrel chewed through my phone line, so my phone and internet connection were out for a couple of days. Then another squirrel (maybe the same one, I don't know), chewed into a power transformer in my yard, in the process blowing himself/herself up and causing a neighborhood-wide power outage. Then my computer got a weird virus, and was out of commission for almost a week. Then Labor Day came along. So, it's been difficult to do the tedious and time-consuming research needed for this issue and the next. But now I'm back on track, and the results are in your hands. Or on your screens, or something. And I hope the next issue will be out after a much-shorter interval than you experienced between the past couple of issues. With a little restraint from the squirrels we should be OK now.

Until next week,



"Quote" of the Week: "Reducing the Size of Government Was a Goal of the Deficit Plan."

On page 24 of the New York Times appeared the headline, "Conservatives Now See Deficits as a Tool to Fight Spending." The article focused on "fiscally conservative House members" who "have adopted a new attitude toward the deficit they once abhorred. They are not fond of it, and they hope it goes away someday, but for now they say it plays a useful role in fighting off something they like even less—government spending."

The article quotes the notorious right-wing economist Milton Friedman, which the Times describes simply as "the Nobel-prize winning economist." Friedman said that

"Deficits will be an effective—I would go so far as to say, the only effective—restraint on the spending propensities of the executive branch and the legislature."

The Times continues,

"On Friday, R. Glenn Hubbard, chairman of the White House Council of Economic Advisers, acknowledged that reducing the size of government was a goal of the deficit plan."

These "Quotes" are from the New York Times of February 11... 2003. The strategy was whole-heartedly adopted by the Bush administration—massive tax cuts accompanied by massive spending in service to a militarized "War on Terror." And it worked. We now are reaping the fruits of the strategy: A widely-shared perception of scarcity that is being used to justify an "age of austerity" in which the expenditure of public resources is increasingly seen as illegitimate. The Bush Legacy.


Is Government Growing? Six Factors to Consider

How does one measure the size of government? There are various ways, but the phrase that gets tossed around the most is "tax and spend." That is, the more a government taxes and/or spends, the bigger it is. (There are other measures: number of employees, reach of jurisdiction, and probably more, but they mostly are related to revenue, after all.) The desire to have lower taxes is ever-present—who doesn't want to reduce their household expenditures?—but the idea that government is "expanding" or "endlessly growing" can be assessed by looking at some facts. Whether revenues are obtained by taxing or by the sale of services or goods or by borrowing or in any other way, we should still be able to measure whether the government is spending significantly more than it used to. Shouldn't we?

In order to do so we have to do a comparison over time. We're trying to see if government is spending more as time goes on, which is the definition of expansion, or growth.

There are five factors—and one mega-factor—that must be considered when looking at spending over time. If one accidentally neglects to consider these factors, then that probably reflects carelessness or ignorance. If one intentionally neglects them, then that indicates dishonesty. So it's important to note when politicians, their supporters, or other prominent figures are habitually neglecting these factors. Once we know that, then we can attempt to decide whether they are careless, ignorant, or dishonest. Or all of the above!

Factor #1: Define Your Terms. What is state spending, actually? Well, some people think it's the "General Fund" which, according to the Minnesota Senate Fiscal Staff is the "largest fund; required to be balanced, tends to be the focus of budget deliberations and of public media attention." But if we look at "All Funds," the State Government actually distributes twice as much money every year than is included in the General Fund, because it spends some money that does not come from state taxes. This includes federal moneys that the state distributes, dedicated funds (like transportation and transit funds), debt service, and a couple of dozen other funds.

See? It's already complicated! I like to talk about the General Fund, since it "tends to be the focus of budget deliberations and of public media attention."

Factor #2: Compared to What? When we compare one moment to any other moment, the first decision to make is one's starting point. This is crucially important, since government has historically always spent more during a recession than in times of expansion. So if we compare a recession year—say 1991—to an expansion year—say 1998—we see that state government spending was higher, per capita, in 1991 than it was in 1998. So, did government get "smaller" during the 1990s? We didn't hear much about that!

On the other hand, if we compare two expansionary years, 1994 and 2001, then we "see" that government "grew" because it spent more per capita in 2001. Or—wait a minute!—it shrank, because the economy had grown so much that state government spending was a smaller proportion of the state's economy in 2001. So, it grew AND it shrank. It's getting more complicated...

Factor #3: Inflation. What kinds of dollars are we talking about? When we factor in inflation, a 1990 dollar was worth $1.50 in 2005. That is, if you purchased something for $1.00 in 1990 it would cost you $1.50 to purchase the same thing in 2005. So, if state government spent 10 billion dollars in 1990 and 15 billion dollars in 2005, it was actually spending exactly the same amount of money in both years, after inflation is factored in. This makes a huge difference when doing comparisons, as we'll see in our case study in the next issue.

Factor #4: The Size of the Pie. How wealthy are we, as a group? If we're talking about dividing a pie, then we need to know how big that pie is. If worker productivity increases (and it almost always does) then the state will get wealthier every year, other things being equal. There's your bigger pie. So, if the state spends the same percentage of the state's wealth as it did before, and there is more wealth, then once again the "same" level of spending adds up to more dollars. It is more, in absolute terms. But it's not more in proportional terms. The same slice of pie from a bigger pie is a bigger slice. So we have to decide which is more meaningful: absolute spending or proportional spending. I go with proportional.

Factor #5: Population. How many people are chipping in? That is, are there more people in the state now than there were in the year we are comparing to? If so, and if they each are earning the same amount of money and receiving the same level of services from the state, then those "sames" add up to more overall spending, even if each person is paying no more tax. More people paying the same amount adds up to more, after all. So here we have to decide which is more important: How much the state is spending per person, or how much it all adds up to. I go with per capita, which is just Latin for "per person." (I think the Latin is actually "per caput" or "by the head." Whatever!)

The Mega-Factor: Values. The values and desires that form the basis for our judgements about whatever facts we may come across shapes our understanding of everything else. For this reason it may well be the most important thing to take into account. Understanding our values and desires requires us to be aware of our answers to a number of questions. What is fair? Do we consider taxes to be a "burden," or do we see taxes as a virtuous pooling of resources for the purpose of serving the common good? Is public spending legitimate in the first place, or would it be just be better in principle if everything were done by the so-called "private sector?" Our answers to these questions will shape our interpretation of any economic reporting we see, which I hope is obvious to the reader. For example, even if we agree on the numbers involved, the spending of one percent of our state's wealth for education might be too much for a libertarian, while a liberal might see it as hopelessly inadequate. (We won't even talk about socialists here.) Same facts, different meanings.

In a nutshell, when someone says to you at this particular time in history that "Government is growing, expanding, getting too big, etc etc," and they tell you that this year's budget is X dollars higher than it was in Year X, remember to ask:

1. Upon which figures are you basing your assessment?

2. Did you factor in inflation?

3. Are you allowing for recession spending? That is, are you comparing similar years, in terms of economic conditions?

4. Has our population grown? If so, are we spending more per capita now, or less?

5. Are we spending more or less now as a percentage of our overall economy as we did in the past?

6. Is some spending coming from other sources, such as the federal government?

Try it At the Fair

Just to illustrate how this can work, I was at the Minnesota State Fair last week. I went to the booth of the Taxpayers League of Minnesota, which is a sort-of Libertarian group that says its members "believe in limited government, low taxation, local control," etc. I asked the guy in the booth if state spending was actually higher per capita now than it was 20 years ago. He had no idea. So, I asked him, how can you say that government is too big? No answer.

Millions of us get our ideas about how big or small government may be from the media. So it's important for us to notice that news reports often mindlessly accept the premises assumed or promoted by powerful people when they report economic news. Our job, then, is to challenge the premises of a news story or, at minimum, to remember to ask some questions in order to see if we're being led in a certain direction by a seemingly "objective" news story.

If you remember to ask the questions offered here—or at least be aware that such questions need answering before you know anything meaningful—then you will be somewhat inoculated against one of the more common forms of budget propaganda floating around these days. Much work and activism and effective organizing will be needed if we want to change the functioning of media so that we don't NEED to inoculate ourselves.

To really get the facts right, and to make meaningful comparisons, and to see what's really happening with government spending is not so simple. In the next issue of Nygaard Notes I'll do a little case study to illustrate how not-simple it is.