At the core of the debate over the proper size and function of government in American society is the assumption that our government is big and growing. But is this true?
In absolute terms, of course, the answer is yes. The United States is the world's largest economy, and our government has grown along with it. In military purchases alone, for example, the U.S. spends about as much as the entire rest of the world combined, even though we only have 5 percent of the world's population. Add in population growth and inflation, and it is easy to draw scary pictures.
In relative terms, however, things look different, whether we look at how many people work for the government, how much government spends, what it produces, or even what it purchases.
More than a decade ago, Gwartney, Lawson, and Holcombe published a paper in the conservative Cato Journal arguing that our government had grown too big. But in their very first table, they showed that total government outlays, relative to Gross Domestic Product, were lower in the United States than in any other member nation in the Organization for Economic Co-operation and Development (OECD). In 1996, the average ratio for these 23 most developed nations was 48 percent, while the U.S. ratio was less than 35 percent, roughly where it had hovered since the 1970s.
Some countries do have relatively smaller governments. For the most part, these tend to be the poor countries, those with dysfunctional economies due to major deficiencies in the rule of law, protection of property rights, transportation systems, education and infrastructure. But in other cases, you still need to be careful to compare apples and oranges.
Hong Kong, for example, does not have a military, while in China statistics show a relatively small government, but state-owned enterprises are not included in the numbers, and China has minimal transfer benefits like our Social Security.
Last year, according to the Bureau of Economic Analysis, total spending by federal, state and local governments summed to $5.5 trillion, about 38 percent of our GDP. The federal government alone spent $3.9 trillion, while states spent about $1.5 trillion and local governments spent about $1.3 trillion. Note that these numbers don't add up, because governments transfer monies to each other.
Another way to measure the size of government over time is to consider the number of people with government jobs, though international comparisons are difficult. At the end of 2010, once the decennial census was complete, about 2.8 million civilians worked for our federal government, less than 2 percent of the total labor force.
In addition to these civilians, of course, the federal government has 1.4 million military personnel on active duty, but this proportion is much less than it was during the Cold War. Another 5.2 million civilians worked for states, and 14.5 million for local governments. In total, government employees account for about 15 percent of the U.S. labor force. It has been almost 50 years since this share was any lower. This share also is much less than total expenditures, because most of what government spends goes either to private companies, such as those that pave roads or manufacture jets, or to private individuals in the form of social benefits.
If you consider only the goods and services that government purchases, either from its suppliers or from its employees, then total government accounted for 20.7 percent of GDP in 2010, significantly higher than the 17.4 percent share in 2000 and slightly higher than the 20.1 percent in 2008. National defense expenditures grew from 2.7 percent of GDP to 5.6 percent over the last decade, while other federal purchases grew from 2.1 percent to 2.8 percent. Meanwhile, state and local government purchases grew from 11.6 percent to 12.3 percent of GDP, mostly in spending on K-12 education.
Why did government's share of the economy grow? Partly, it is because GDP fell, so government spending now makes up a bigger share of a temporarily smaller pie. Partly it is because, as in most countries affected by the Great Recession, government has tried to soften the blow and make up some of the difference in lost income.
We are not alone. In the 27 countries of the EU, for example, average government outlays rose from 46 percent in 2007 to 51 percent in 2010. Most reasonable predictions expect this ratio of government spending to fall once our economy is really growing again.
Except for the rise in national defense expenditures, the growth in federal government spending is almost entirely due to increased payouts in social benefits, particularly loans to the states to pay for extended unemployment benefits. Meanwhile, state and local governments have been shrinking since 2008 in response to falling tax revenues, dampening any effect from temporary increases in federal spending.
Thus, the debate over the proper size and role of government appears to be oblivious to the fact that the U.S. has a relatively small government for a developed nation, and except for the temporary effects of a deep recession, this share has not shown any significant growth in decades.
The evidence that a smaller government would improve our economy is thus limited to a comparison with either an imaginary ideal of what might be, with much different or much poorer nations, or with a time before most of us were born, when our standard of living was much lower and our economy and society much less complex. Such comparisons should probably be taken with a grain of salt.
• Professor Elliott Parker is chairman of the Economics Department at the University of Nevada, Reno.