The Commandeered Economy

Government spending — federal, State, and local — represents the confiscation of resources from the private sector. Any reasonable measure of government spending includes transfer payments (mainly Social Security, Medicare, and Medicaid), which represent income that is taken from persons who earn it and given to persons who do not earn it.

Here is an overview of the patterns of government spending from 1929 through the third quarter of 2011:

Derived from Bureau of Economic Analysis, National Income and Product Accounts, Tables 1.1.5 (lines 1, 21-25), 3.1 (line 17), and 3.2 (line 22).

Total captures all outlays by the federal government and State and local governments for all purposes, including transfer payments. Total non-defense is simply total spending less defense spending. Federal covers all outlays by the federal government, including transfer payments. State & local represents just that. Transfer payments by all governments are driven mainly by outlays for Social Security, Medicare, and Medicaid, which in 2010 accounted for 71 percent of all government spending on “social benefits.” Next is defense, which has been driven mainly by war and the prospect of war. Finally, there is federal non-defense, which is exclusive of transfer payments. This spending enables the federal bureaucracy to perform its non-defense, micromanagement functions: from controlling interest rates and the money supply to regulating the processes and products of America’s businesses to enforcing various forms of discrimination to rewarding well-connected interest groups, and so on into the dark night of fascism.

The rise of government spending began with the onset of the Depression, which saw the federal government supplant State and local governments as the main source of outlays. World War II interrupted but did not break the rising trend in non-defense spending, which has been driven by increases in transfer payments — especially since the inception of Medicare and Medicaid in 1965.

In 1929, on the eve of the Great Depression, government spending of all kinds amounted to 10 percent of GDP, and less than 1 percent of GDP was absorbed by transfer payments. In 1947, following demobilization from World War II, government spending of all kinds was 20 percent of GDP, including 5 percent for transfer payments. Now, total spending consumes about 36 percent of GDP, and transfer payments about 16 percent. All in all, post-World War II spending reflects the dominance of government in the everyday lives of Americans. About 31 percent of GDP goes to non-defense spending by the federal government and State and local governments.

Defense spending — a favored target of “liberals” and pseudo-libertarians — is not where the money is. The stability of total government spending as a percentage of GDP from the end of the Vietnam War until 9/11 was bought by short-changing defense, except during the 1980s. Despite 9/11 and the shallow display of unity that followed it, too many Americans have forgotten the main lessons of World War II and the Cold War: Victory and deterrence do not come cheaply. And yet, since 1950, when defense spending reached its post-war nadir, it has lagged far behind the growth of government spending and transfer payments (which, illogically, have soared despite significant real growth in GDP):

Derived from sources cited above, by applying the implicit GDP deflator used to compute GDP in chained 2005 dollars (here).

In addition to the burden of non-defense spending,* there is the large and growing burden of regulatory compliance: about $1.1 trillion in 2004, or 10 percent of GDP. In other words, government now absorbs or controls almost one-half of the nation’s economic output.

Additionally, however, there is the hidden cost of output forgone because taxes and regulations have discouraged those behaviors that cause economic growth (e.g., hard work, capital formation, innovation, and entrepreneurship). I have estimated that were it not for those disincentives GDP would have grown to more than three times its present level.

The iceberg, once again, proves to be vastly larger than its visible tip. In Bastiat‘s words,

a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

The unseen effects — the theft of Americans’ liberty and prosperity — had been foreseen by some (e.g., Tocqueville and Hayek), but ignorance and power-lust prevailed over their prescience.

America’s economy has not been commandeered by the military-industrial complex; it has been commandeered by a far more insidious complex of economically illiterate voters, interest groups, social-engineering “intellectuals,” and power-lusting politicians.

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* Defense is a valuable and legitimate “social service,” as I discuss in this post and the posts listed at the end of it. Justice also is a valuable and legitimate “social service,” but spending on police, courts, etc., accounts for only a small fraction of non-defense spending in the U.S.

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On other subjects, see the list at the bottom of “Economic Growth Since World War II.”

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