12/16/13 – How Much Has the Government Grown?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 16, 2013 5:35:30 AM

and tagged Politics and the Economy

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I got some interesting feedback the other day from a Commonwealth advisor who was commenting on a piece I’d written about the economic recovery. His point of view is fairly common and can be summarized as follows: “The fact is that the sheer size of government has doubled over the past 10 years.” He made other points, but they hinged on government growth being out of control. A fair point, if true, but before we get too far into it, I thought it would be useful to see how much government actually has grown.

Let’s look at employment first. We can see from the following chart that total government employment is up by 322,000, or 1.5 percent. Over the same time period, the U.S. population—a reasonable comparative metric—is up by 8.2 percent, so government employment has grown much less than population.

121613_1

Breaking this down a bit further, state employment is up by 1.4 percent, while local employment is up by 0.8 percent. Federal employment is actually down a bit, net of the Post Office, but up by just under 10 percent excluding the Post Office. Even using the higher figure, this is comparable to population growth. Overall, looking back over the past 10 years, we can see that government employment peaked around 2008 and has declined substantially since then for all levels.

Any way you look at it, though, growth of government employment has either been consistent with, or substantially below, that of the population as a whole.

Another way to gauge the growth of the government is to examine spending. Looking at the following chart, we see that total spending, for all levels of government, has, in fact, increased. Total spending for 2002 to 2012 (since 2013 isn’t yet over) is up around 51 percent on a nominal basis. Adjusted for inflation, spending is up about 9.5 percent in real terms—only slightly above population growth.

121613_2

If we disaggregate this into federal versus state and local government spending, we see that federal spending is up by almost 75 percent on a nominal basis and by a still-high 34 percent on a real basis. State and local government spending is up by 38 percent on a nominal basis and is actually down, by just over 3 percent, on a real basis. Clearly, the rise in federal spending is what’s driving the perception that government is out of control.

Let’s take a more detailed look at federal spending, since that seems to be the problem, to see if we can find out where the money is being spent.

The data analysis software we use here at Commonwealth, Haver Analytics, breaks federal spending down into two primary components: defense and nondefense. Total spending for both is shown in the chart below, and we can see that both components have grown substantially. 121613_3

From 2002 to 2012, defense spending increased by about 79 percent on a nominal basis and about 36 percent on a real basis. Over the same time period, nondefense spending increased by almost 69 percent on a nominal basis and about 31 percent on a real basis.

While the percentages are comparable, the absolute numbers are not. Defense spending rose by $360 billion while nondefense spending rose by $195 billion. Either way, it’s real money, but almost two-thirds of the increase in federal spending was, in fact, for defense, not domestic spending. All of these numbers are nominal.

I don’t have the data right now to break down these numbers further, but I do have some questions, primarily about how much of the spending in both components is for nonrecurring items. That is, how much of defense spending was for, say, the war in Afghanistan—which may explain the decline in the past year or so—and how much of nondefense spending was for, for example, long-term unemployment benefits, which will end soon unless extended. It’s entirely possible that much of the increases could roll off over the next couple of years as the economy normalizes and the U.S. military reduces its overseas commitments. This seems quite possible given the real disconnect between spending and employment numbers. The other question is how much of the nondefense spending increase is due to higher benefit payments, which will be a growing problem in the future.

Overall, depending on how you look at it, there is some justification for the argument that government is out of control, at least on the spending front. Examined more carefully, though, the bulk of the increase in government spending comes from defense, which is being wound down.

Further, almost all of the increase in both government employment and spending came through 2008, with leveling or declines since then. While there certainly was a problem with unsustainable growth, it hasn’t continued over the past five years or so.

The argument that the government is out of control has many merits—with regulation and tax levels being the most important, in my opinion—but the share of the government as part of the economy, at least by historical standards, doesn’t seem to be one of them. There is no question we had a growing problem through 2008, but we’ve made substantial progress since then, and it appears poised to continue.

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