The deficit does not measure the size of government

The deficit does not measure the size of government

In his State of the Union Address President Obama said:

Let me repeat – nothing I’m proposing tonight should increase our deficit by a single dime. It is not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

Let’s set aside for the moment the question that others have raised, the credibility of his claim that his proposals will not increase the deficit. Even if the President’s new proposals don’t increase the deficit they will still make government bigger because they increase government spending.

The deficit does not measure the size of government. It instead measures how economic resources are allocated over time to finance government spending. When we increase the deficit we reallocate some future income to today for government to spend. When we reduce the deficit we are taking less future income to pay for today’s government spending.

When the President says he won’t increase the deficit, he is saying he will not increase the amount of future income taken to pay for increased government spending today. In effect he is promising not to create an additional burden to raise future taxes beyond what’s in current law. He is not saying he won’t increase government spending today and raise current taxes by an equal amount, which is what we mean by government getting bigger.

As a fiscal matter we should measure the size of government by the amount government spends, not by the difference between what it collects and what it spends (the deficit). Suppose in our $16 trillion economy you were to increase government spending by $320 billion per year and increase taxes by the same amount. The deficit would be unchanged but government would be $320 billion per year bigger.

For the 50 year period before the 2008 financial crisis total federal government spending averaged 20.1% of GDP. CBO tells us it’s 22.2% this year and projects that under current law it will average 22.1% over the next decade. That means the federal government is and will continue be 10% bigger than it his has historically been, relative to the economy. If we were to use real dollars rather than percent of GDP we’d measure an even bigger increase. As a fiscal matter the federal government is and will be significantly bigger than it has historically been.

If you increase government spending you make government bigger, even if you pay for that spending with higher taxes. To make government smaller, cut government spending.

In addition to fiscal expansion the federal government has also massively increased its regulatory scope in the past four years, especially in health care and financial services. The President proposes that in the next four years he’ll do the same to the energy sector.

President Obama is correct that we don’t need a bigger government. Unfortunately, that is what has resulted from his first term and what he proposes for his second.

 

7 responses

  1. I agree, in general, that the deficit is not a good measure of how “big” government is. But, there are a number of different criteria to measure the size of government. One measure is not merely how much government directly spends, but arguably also how much government “spends” by granting targeted tax subsidies in the form of “tax expenditures”. For example, is government “bigger” simply because it might lose $385 billion on a loan guarantee to Solyndra instead of granting tax credits of equivalent monetary value to that company? Not everything currently classified by the JCT as a tax expenditure constitutes “spending” in my book, but some of it clearly is spending in all but form and how we formally account for “spending” in the national accounts.

    Obama has proposed closing “loopholes” (a political euphemism to be sure) to raise $600 billion in more revenue. I’m pretty sure that money won’t be used to reduce the deficit but rather to increase direct spending on other constituents he favors. Depending on which subsidies might be eliminated, getting rid of $1 of tax subsidies in favor of $1 of direct spending would not affect the “defict” or, by this criteria, the “size of government”. In that very limited respect, Obama might have a point.

  2. Well said, but it’s worth mentioning a few more wrinkles.

    First, the spending figures you use are “net outlays” rather than “gross outlays,” which add a few more percentage points of GDP to federal spending (for FY2011, gross outlays were 27.8% of GDP and net outlays were 24.1%–page 227 of http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/spec.pdf). It’s true that the difference is mostly “user fees” or premiums that are not collected via the coercive taxing powers, but they are channeled through politically created and managed institutions.

    Second, the federal government is massively involved in providing loans directly and insuring those loans in various ways. The “scored” fiscal impact is much less than the resource allocation effects in the economy.

    Third, the federal government implicitly or explicitly backs various assets (promises of bailouts).

    Fourth, federal spending often leverages state or private matching funds to achieve objectives established by the federal government.

    These impacts are more difficult to measure, of course, but they are also relevant when talking about the size of the federal government.

  3. The problem is even bigger. We don’t have a unitary government. We have 89,004 governments some of which will never touch us but we personally might have as little as two and as many as a dozen that are of daily impact.

    It makes no difference to me whether my liberty is infringed by one government or another or my pocket is picked by one rapacious politician or another. It’s just as damaging for me. It is the cumulative effect that is of importance to our lives and it is the cumulative effect that is least measured.

    89k sounds like a big number but this is not beyond the database, data warehouse, and information analytics technology that we regularly deploy in the private sector to make sure management has a real grasp on what is going on.

    I want to know what the size of government is, all of it. Until we have good insight into that there will always be a dark corner that the rats will scurry to.

  4. This unique article, “The deficit does not measure the size of government
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  5. It’s true that a government can be big or can be spending too much when deficits are small. Deficits tend to shrink when the econmy is growing and/or more tax revenue is being collected. But I’d like to see you admit (or disprove) my contention that our present deficits under Obama are attributable largely to the recession and low revenue, and spending increased more under Bush and Reagan than under Obama.

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