In addition to its impact on the entire economy, spending by government provides attractive opportunities and subsidies for numerous businesses. Such spending, however, requires revenue that is acquired either by taxation or borrowing, both of which reduce the funds available for private-sector investments. Taxes, moreover, are levied on businesses’ profits and property.
In the United States, government spending occurs at the levels of the national, state, and local governments. As in other modern democracies, public expenditures since the 1930’s have grown substantially more rapidly than the economy as a whole. Not unexpectedly, spending has grown the most dramatically in those program areas that have the greatest appeal for the majority of voters, particularly social programs such as Social Security, Medicare, and Medicaid. In the private sector, the incomes of Americans are quite unequal, but in the political arena, where each citizen has one vote, power is somewhat more evenly distributed. Americans possessing great wealth are outnumbered by those with moderate and low incomes, and on election days, there is a strong tendency for people to vote for candidates and issues according to their perceptions of their particular economic interests. These perceptions may be influenced by advertisements and other forms of political speech available only to the wealthy or to collectively wealthy entities.
Although businesses in the private sector usually express a desire for low taxes, they also demand a variety of services. Because businesses have such different interests, they are unable to present a united front on the issue of government spending. A significant number of industries can exist only by selling their goods and services to government. This is particularly true of those that provide products and research for the
Because of economic growth and inflation over the years, the most significant indicator of government spending is its percentage of the gross domestic product (GDP), which refers to the total amount of money spent on goods and services in the country. Official, nonpartisan statistics since 1929 are available from the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce.
For 150 years, from the time of George Washington until the early 1930’s, government’s share of the economy during peacetime was relatively small and stable. In 1929, spending by the national government was only 2.5 percent of GDP, and total spending by national, state, and local governments totaled about 7.7 percent of GDP. Because the functions of government were very limited, regulatory agencies were few in number, and they did not require large bureaucracies. Although the national government provided modest retirement benefits for veterans, public officials, and civil service employees, it sponsored no general entitlement programs such as Social Security. Americans did not perceive any great threat from abroad, and except for the years of the U.S. Civil War and World War I, the cost of maintaining an army and navy made up a small part of the small national budget.
Government spending, especially at the national level, really began to take off as a result of the
During World War II, defense expenditures exploded, going from 2 percent of GDP in 1940 to almost half of GDP in 1945. As a result, the total national debt increased from 43 percent of GDP in 1940 to about 120 percent in 1946. Following the war, defense spending came down to 7 percent of GDP in 1947. Other spending also declined, but not to prewar levels. In 1947, federal spending made up 15.3 percent of GDP, whereas the total of federal, state, and local spending represented 19.9 percent of GDP. Because of the Cold War, combined with the growth of Social Security and other domestic programs, federal spending by this time was almost equal to the amount spent by state and local governments combined. By the end of the century, federal spending would be almost twice as much as state and local expenditures.
The next big jump in government spending occurred during the 1960’s, primarily as a result of Lyndon B. Johnson’s
Between 1980 and 2007, total government expenditures at all levels remained fairly stable as a percentage of GDP. In 1980, federal spending totaled $591 billion, which constituted 21.6 percent of the GDP (which stood at about $2.8 trillion). In 2007, the federal government spent $2.9 trillion, which represented some 22 percent of GDP (which had grown to $13.8 trillion). Total government spending that year was $4.6 billion, about 33.3 percent of GDP. Because of the aging of the population, however, many financial experts predicted that paying for entitlement commitments, especially Medicare and Medicaid, would become difficult by the third decade of the century.
Government spending is divided into three major types: purchases of goods and services for current use; purchases of goods and services intended to provide future benefits, as in entitlements and research; and transfer payments, as in Social Security and antipoverty programs. Government spending is also separated into discretionary and mandatory spending. Discretionary spending, which makes up about one-third of federal spending, applies to components such as national defense, education, and highway projects. Each year, Congress has the option of determining how much money to spend on these programs. Programs with mandatory spending, which accounts for two-thirds of government spending, are authorized by permanent laws. They include entitlements like Social Security, Medicare, and Medicaid, in which individuals receive benefits based on age, income, or other criteria. Spending levels for these programs depend on how many people qualify for the benefits.
The federal government’s fiscal policies–which include policies governing taxes, expenditures, and borrowing–have a profound impact on the economy. Early each year, the president, working with the Office of Management and Budget (OMB), presents a proposed budget to the Congress, which has the constitutional authority to approve, reject, or change the various proposals. Surpluses, which occur when revenues are greater than expenditures, have been rare since the 1930’s. Deficits, which occur when expenditures exceed revenues, become a part of the national debt.
A significant number of economists, especially those with conservative tendencies, do not agree with Keynes’s theories. Libertarians, distrustful of governmental meddling in the economy, generally advocate minimal public spending under all circumstances. Milton
Economists sharply disagree about the extent to which deficit spending and the resulting national debt are problems. It is difficult to deny, nevertheless, that large deficits have two negative results: They tend to promote inflation, and paying for the interest on the resulting debt limits the money available for other purposes. The majority of economists, therefore, advocate avoiding deficits, except during periods of economic slowdown.
From the end of World War II until the 1980’s, budget deficits were usually less than 2 percent of GDP, and as a result the national debt, as a percentage of the GDP, significantly declined. During the 1980’s, however, because of increases in defense spending without comparable reductions in other areas, the deficit rose to between 3 and 5 percent of GDP, so that the national debt, which stood at $909 billion in 1980, grew to $2.87 trillion in 1989. During the early twenty-first century, tax reductions combined with the War on Terrorism again expanded the national debt. By the end of 2007, the national debt, which was slightly more than $9 trillion, equaled 66 percent of GDP. With growing entitlement commitments from retiring baby boomers, some economists predicted that annual federal deficits by the mid-twenty-first century would perhaps grow to 9 percent of GDP.
Bittle, Scott, and Jean Johnson. Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis. New York: HarperCollins, 2008. Compelling and straightforward analysis of fiscal policies, warning against the harmful consequences of large deficits. Konigsberg, Charles. America’s Priorities: How the U.S. Government Raises and Spends $3 Billion. Bloomington: AuthorHouse, 2008. Clearly written and informed guide to the complexities of the federal budget, finding that the growth rate of entitlement programs must be reduced. Peterson, Peter G., and Neil Howe. On Borrowed Time: How the Growth in Entitlement Spending Threatens America’s Future. Washington, D.C.: Resources for the Future, 2004. Warns that if major reductions are not made in entitlement benefits, the nation will face catastrophe in the years after 2018. Rubin, Irene. The Politics of Public Budgeting: Getting and Spending, Borrowing and Balancing. Washington, D.C.: CQ Press, 2005. Considers federal, state, and local budgeting within a comparative framework, with the thesis that short-term partisan goals often trump long-term public interest. Schick, Allen. Federal Budget: Politics, Policy, Process. Washington, D.C.: Brookings Institution Press, 2007. Explains budgeting at each stage of executive and legislative action, and assesses how the budget effects social issues. Wildavsky, Aaron, and Naomi Caiden. The New Politics of the Budgetary Process. 5th ed. New York: Longman, 2004. Standard textbook arguing that budgetary decisions are based on power, with separate chapters on entitlements, defense, reforms, and deficits. Yarrow, Andrew. Forgive Us Our Debts: The Intergenerational Dangers of Fiscal Irresponsibility. New Haven: Yale University Press, 2008. Discussion of how Social Security, Medicare, and other programs have increased the federal debt, warning of harmful effects if spending is not brought under control.
Federal monetary policy
U.S. Department of the Treasury