Government Spending as a Proportion of GDP

Running with the US Government spending theme of the last few posts, I grew curious to see the total US Government expenditure over time, which is publicly available via the St. Louis Fed’s FRED database. Going back to 1947, one can see the growth of US government spending over time (in nominal dollars) to 2010. Because we only have data for the first half of 2010, the full spending for 2010 is estimated as twice the recorded spending in the first half of 2010.

Here is the chart of government spending based on the FRED data. Federal non-defense spending comes from FRED series FNDEFX, federal defense spending is series FDEFX, and total government spending (including state and local) is series GCE.




Woah! That looks like spending is going way out of control, rising exponentially (except for the recent decline in state and local government spending). No wonder it looks like spending is running away like wildfire.

But, of course, the entire economy has been growing at the same time, also exponentially. So what is really more important is not so much the total dollar amount of spending, but the proportion of GDP that government is responsible for. Spending may be going up, even in real terms, but that doesn’t necessarily mean that the government is taking over the economy, socialism, and all that fun stuff the Tea Partiers like to crow about. Now, I don’t claim that this is a unique insight; government spending as a proportion of GDP is a fairly common measurement in comparative political economic analysis. As a note, measuring spending as a proportion of GDP also helps control for the effects of inflation, since both nominal GDP and federal spending will track inflation at more or less the same rate.

Here is the growth of government spending as a percent of gross domestic product since 1947.



This view presents some very interesting information for trendwatchers, in part because it doesn’t show government spending spiraling out of control. In fact, it shows that most government spending is growing more or less in line with the economy as a whole. The most volatile part of current government spending is the defense budget. The FRED data shows that non-defense federal spending has been fairly steady at 2%-3% of GDP. Defense spending registers as larger (often substantially larger) than non-defense spending, and state-and-local-governments are responsible for almost 2/3 of total government spending.

Both federal non-defense and state-and-local spending have been relatively steady proportions of total GDP, not growing markedly over time as one might think from the electoral debates. The main driver of changes in terms of expenditures has been federal defense spending, which has basically trended downwards except for the defense buildup under Ronald Reagan and another for the Global War on Terror, Afghan, and Iraq wars.

There are two things that are not covered on this chart, however. The first is the present value of Medicare and Social Security liabilities that the US Government is currently committed to pay as the baby boom (and later) generations retire. Ideally one would want to make an estimate of those liabilities and then pay them out as an annuity discounted at a rate that reflects the uncertainties in life expectancy, morbidity, inflation, and costs. We shall save that for another post.

The key point here is that normal federal government activities are not a particularly large share of the economy, despite what Tea Partiers say. The largest share of total government spending is done by state and local governments, who are precisely the governments that are strapped for cash and cutting services right now. Remember that these figures include the current fiscal stimulus spending to 2010.

Comparison to other Countries?

How does United States government spending compare to other countries in the world, as a percentage of GDP? If we look to World Bank Public Data available and look at government expenditure as a percent of GDP comparatively, we get the following histogram (prepared in the R statistical environment). The data is for 2007, which is the last year for which this dataset has reasonably complete figures for most countries.



The dotted red line in the middle represents the US, which the World Bank records as having consumption expenditures of 15.8%, making the US just slightly higher than the average country in the dataset.

If we compare spending to only the advanced industrial countries, the US is actually one of the lowest spending countries in the dataset, topped out only by the financial centers of Switzerland and Luxembourg.



What this shows is that our spending is not particularly excessive either on a historical basis or on a comparative, cross-sectional basis.

The main concern, then, is how to plan for retirement and health care coverage for the retiring baby-boom generation. But as much as the Tea Partiers want to slash government spending, few seem to venture out and suggest cutting grandma off from her social security payments or denying her medicare. Yet these are the plans that will eventually explode the budget, and no amount of cutting unemployment benefits or reigning in public education expenses or police forces will solve that issue. I will take up the question of how “entitlements” are likely to expand in a future discussion.

Spending Under Congresses and Presidents, Part II

In my last post on Spending under Congresses and Presidents, I mentioned that the data on budget spending would be more revealing if done in real (i.e. inflation-adjusted) terms. Below I have done just that, looking at the total increase in spending per 2-year Congress in constant 2005 dollars. Each years’ spending has been adjusted using the GDP deflator (GDPDEF) series available from the St. Louis Federal Reserve’s FRED database. As before, the lines represent total spending under each president, indexed to 100 at the spending level in the final of the preceding administration.

For comparison, I show both the original and the inflation adjusted chart:

The original (nominal spending increases) first:



And now inflation adjusted budget increases:



When budgets are shown in inflation-adjusted terms, there really does not seem to be clear differences between Republicans and Democrats, either in Congress or the White House. The 1960s appear to be the times of massive federal budget expansion, starting in the late 1950s and tapering off in the early 1970s. The early Reagan years controlled expansion the best, and the Clinton administration was also relatively modest under both Democrat and Republican Congresses.

The statistical geek in me couldn’t resist seeing if there was any statistical evidence for the claims that Democrats or Republicans keep federal spending under control in any office, given this data. Coding variables for House, Senate and President as 0=Republican and 1=Democrat, and regressing Real_%_increase on these variables, one would expect - if the Republicans as budget cutters hypothesis holds - positive coefficients for House, Senate and President, indicating higher real budget increases under Democrats.

Basically, none of the statistical tests I ran offer any statistically significant support suggesting that Republcans or Democrats are any different from each other in terms of controlling federal spending. All F tests had p-values suggesting that none of the variables in the model explained any statistically significant differences in the rate of budget increases. There may be differences in budget deficit numbers under one group or the other, but that would require different data to test.

Because percentage increases jumped around substantially in the early part of this data series (causing substantial heteroskedasticity), I ran the main regression analysis starting in 1965 (fist year of Johnson’s elected term). I also ran the regression on the full data set, correcting for heteroskedasticity using weighted least squares, and came up with substantively similar results. The F-statistic of 1.64 (p-value = 0.20) suggests that which party controls of the House, Senate, or Presidency has no statistically significant effect on the real rate of federal spending increases over the long term.

Estimate Std. Error t value Pr(>|t|)
(Intercept) 3.143 1.093 2.875 0.00633 **
Pres -0.971 1.020 -0.952 0.34677
House -2.111 1.425 -1.482 0.14589
Senate 2.738 1.302 2.103 0.04153 *
---
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

Residual standard error: 3.318 on 42 degrees of freedom
Multiple R-squared: 0.1046,        Adjusted R-squared: 0.04061
F-statistic: 1.635 on 3 and 42 DF, p-value: 0.1957


However, the T-statistic on the Senate is barely significant at the 0.95 level. In general, if a t-statistic is significant, the F-statistic should be significant too, but the two tests can occasionally lead to different if the t-statistic is on the border of statistical significance and there is multicollinearity (House and Senate scores are moderately correlated here).

If we relax our statistical standards from “beyond a reasonable doubt” and simply look at what the regression suggests as “the preponderance of evidence,” this suggests that Republican control of all three bodies has resulted in an average real increase in 3.1%. Democratic control of the Senate tends to add about 2.7% to federal spending. However, Democratic control of the House would arguably take away 2.1% so that democratic control of the entire Congress only adds about 0.6% to federal nondefense spending. Technically, this number is not statistically significant (p=0.15), but it is arguably “close,” particularly for a small-n, somewhat collinear model. Less statistically defensible but still more likely than not, Democratic presidents have overseen budgets that grow by about 1.0% less than their Republican counterparts.

The main conclusion should be that there is no statistical difference between the two parties in terms of who keeps federal spending under control, which is substantively significant, given that Republicans are claiming budget-cutting expertise in this election. But to the extent that one does consider the evidence, nondefense federal budgets have tended to grow slower under Democratic Presidents and Houses, though this is offset by the fact that the largest budget increases have taken place under Democratically controlled Senates.

Spending Under Congresses and Presidents

I have been following Invictus’ posts (Hey, Big Spender, and Big Spender, Part II)on Barry Ritholtz’s The Big Picture blog, one of my favorite blogs, both for its macro perspective and for its conscientious commitment to the idea that one can work in markets and still value being a good citizen in favor of honesty, transparency, and for being paid for the value that one adds to the economy rather than the value one can extract from it.

The “Big Spender” posts written by Invictus (a pen name) looked at (among other things) the increases in non-defense federal spending under different Presidents to see if Republican administrations live up to their projected commitment to keep deficits under control. Democratic administrations were shown for comparison purposes, but held to a lower standard because the Democrats don’t claim to be master budget cutters, whereas the Republicans do.

The obvious issue with looking at this by President is that Congress is the body that controls spending and taxation policy, even if part of the President’s job is to propose measures to Congress and develop support for his or her policies. Thus, in addition to looking at spending in Presidential administrations, it makes sense to look at budget increases and spending for each Congress, broken down by 2-year Congressional Terms.




The above chart does just this, from the last congress of the Truman Administration (1951-1952) to the mt recent Congress in the Obama administration. The lines represent cumulative spending by each administration indexed to the final spending level of the previous administration. The bars represent the percentage increase in spending for each Congress (with scale on the right hand side).

We see that Truman and Eisenhower were the last Presidents ever to see a reduction in overall non-defense spending. After that, Congress has increased total spending every year, although the rates of increases have - on the whole - trended downwards for most of the last half-century. The Clinton years appear to have had the slowest average increases of any administration, although much of this was when the Republicans controlled the Congress. Spending during the Obama administration is similar to the spending under Bush II, although one should remember that defense spending for the wars in Afghanistan and Iraq (as well as the Vietnam War earlier) is excluded in these figures.

Ideally, one would color the bars by which party controlled Congress and whether it both houses were under the same party or not. To be honest, my day job keeps me from getting to that level of detail and fiddling with the chart, but perhaps I’ll get to it later. Ideally, I’d also get the bar scale to the left side of the graph, so the gridlines will line up better. Again, time constraints prohibit this, but maybe I’ll come back to it.

Since the data for 2010 only goes to the end of Q2, the chart estimates 2010 spending simply by doubling the spending recorded for the first half of the year. Data come from the Federal Reserve Economic Data database (FRED), and use the series FNDEFX. It uses the entirety of the data available, but excludes the Truman years because we do not have data on the full administration and using it would bias the Truman spending downwards. The last Congress of the Truman years is included to establish a baseline. Note that Congressional periods start with odd numbered years, because Congress is seated in January of a year following an election. It can be debated whether one should shift these figures one year further into the future, because current spending in the first year of a Congress is often determined by the last year of a previous Congress. Again, a topic for another day.

Articles on Brazil and Mongolia out

A new piece of mine on Brazil came out in The Finance Professional’s Post. The link is below:

Update on Brazil: More Than a One-Note Samba, But Changing Key

In September, two pieces on Mongolia also came out in the newsletter. Links below:
Mongolia: BRIC-ing Up is Hard to Do
Mongolia, Part II: Should One Tempt the Wrath of Khan?

Articles on Brazil and Mongolia out

A new piece of mine on Brazil came out in The Finance Professional’s Post. The link is below:

Update on Brazil: More Than a One-Note Samba, But Changing Key

In September, two pieces on Mongolia also came out in the newsletter. Links below:
Mongolia: BRIC-ing Up is Hard to Do
Mongolia, Part II: Should One Tempt the Wrath of Khan?