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Controlling Government Spending: The Difficulty and the Hope

If you want things to stay as they are,

then things will have to change.

Giuseppe Tomasi di Lampedusa, The Leopard

1. Introduction

George Will (2017) put it bluntly when he wrote “America is sleepwalking into the most predictable crisis in its history, the demographically driven crisis of the entitlement state struggling to provide health care for an aging population.” And the crisis is not confined to providing health care. It also includes the Social Security payments promised that aging population which is growing faster than the population responsible for making those payments.  Although government Medicare and Social Security obligations are the biggest concerns, other government programs not confined to the aged, such as Medicaid, are also contributing to the problem. Avoiding the crisis Will has warned us about requires looking at many federal spending programs, both large and small.

Why do we need Will’s warning? Most people are aware that fiscal responsibility is not the hallmark of the federal government, and a majority would surely agree that our economic future, and that of coming generations, would be more secure if federal spending and the federal debt were reduced. Indeed, for years we have been hearing from politicians, at least when running for office, that the federal budget needs to be brought into balance and the national debt reduced.[1]  So the public knows what should be done, and most believe balancing the federal budget is important.[2] Yet convincing politicians that it is not a good idea to continue spending more than they raise in taxes is difficult.  In the over 60 years since 1957 when there was a small budget surplus, the federal budget has been in deficit every year except for 5 years.  Since the last surplus in 2001, the gross federal debt held by the public has more than doubled as a percent of GDP, increasing from 31.4 percent in 2001 to 75.3 percent in 2017.[3] In some ways this political indifference to voters is surprising. The growth in government spending is reducing the economic productivity needed to sustain it and the growth in our standard of living. Fiscal changes could be made that would quickly and broadly improve our economic wellbeing. Those changes would require short-run economic and social adjustments that most would like others to make but would prefer not to make themselves.  But the alternative is continuing unsustainable levels of government spending that press down on current prosperity and eventually will necessitate painful economic and social adjustments that can be avoided at far less cost with sensible policy changes today.

Public choice economics provides reasons for believing politicians are ignoring obvious changes needed to put fiscal policy on a sustainable path and why the public is letting them get away with it. Broadly speaking public choice analysis suggests that political decisions tend to concentrate on the short-run benefits of government spending while ignoring its greater long-run costs.[4]  But I shall argue that public choice provides reasons to have moderate hope that a fiscal crisis is not as predictable as George Will indicates.  I begin in Section 2 by considering a brief history of federal government spending, which shows an impressive record of fiscal responsibility and economic growth for the first 140 years U.S. history.  Section 3 considers skeptically the argument that with the right fiscal policies we can depend on economic growth to prevent a fiscal crisis without painful reductions in the growth of, much less cuts in, federal spending.  Section 4 examines the bias in favor of expanding government spending well beyond productive limits and considers the importance of constitutional restrictions in moderating that bias. Once a government program has been established it is well-known that it is difficult to eliminate, or even reduce, even if it is obviously wasteful.  Section 5 points out that it is often the case that the more wasteful a government program is, the more difficult it is to reduce or eliminate.  Section 6 makes use of public choice arguments typically seen as pessimistic regarding controlling government spending to argue that moderate hope for achieving this control is not hopelessly naïve.  Section 7 offers a concluding statement.

2. History of growth in federal government spending

Despite what many believe, the federal government has a long history of impressive fiscal responsibility. From 1790 through the 19th century, peacetime federal spending was consistently less than 3 percent of GDP, with spending little more that this in the 20th century until the 1930s.  Furthermore, during this period the peacetime budget was almost always in surplus.  A few small peacetime budget deficits did occur during recessions but because of declines in revenue, not because of increased federal spending to stimulate the economy.  Of course, large budget deficits from increased spending occurred during wars, but the resulting debt was steadily reduced, sometimes almost entirely, afterwards. After the Civil War, for example, the federal budget was in surplus or balanced from 1866 until 1893. Starting out as a poor country, the United States had the dominant economy in the world by roughly 1900.[5]

Critical to this fiscal responsibility was the prevailing political ideology that the role of the federal government should be largely limited to enforcing private property rights, protecting citizens against domestic predators and foreign invaders, and providing a few public goods unlikely to be provided through markets.  On the other side of this ideological coin was a widespread understanding that some things were simply not the business of the federal government, as reflected in the ninth and tenth amendments to the U.S. Constitution.  This understanding is illustrated by the vetoes of Democratic president Grover Cleveland.  For example, in his first presidential term Cleveland vetoed a bill that called for spending $10,000 to provide seed grain to Texas farmers who were experiencing a serious drought.  He sent the bill back to Congress with the same message by which he explained many of his vetoes; that such spending was not permitted by the Constitution.[6]  It’s difficult to imagine a president routinely vetoing such bills today, as Cleveland did, and being reelected, as Cleveland was.[7]

This record of fiscal restraint shows that the federal government can control peace-time spending at very low levels, run consistent budget surpluses after wars to pay down the debt and do so while experiencing impressive long-term economic growth.  Unfortunately, the prevailing ideology that made this record possible began eroding around the 1890s with the beginning of what is known as the Progressive Era and the growing belief that the wealth being created in the market economy could be increased and allocated more fairly by expanding the economic role of the federal government.[8]  And as the limited-government ideology eroded, slowly at first, the ability of the Constitution to sustain that ideology also eroded.  As Henry Simons (1951, p. 20) warned after the erosion had be noticeable:

Constitutional provisions are no stronger than the consensus

that they articulate. At best, they can only check abuses of

power until moral pressure is mobilized, and their check

must become ineffective if often overtly used.

As late as the early 1930s, however, peace-time federal spending remained less than 5 percent of GDP.  Public opinion still exerted strong restraint on government spending early in Franklin Roosevelt’s Administration in the depths of the Great Depression.  Although FDR soon earned his reputation for greatly expanding federal spending, within one month of becoming president he signed the Economy Act of 1933, which dramatically reduced military pensions. This legislation is described by Cogan (2017, pp. 71) as “the most consequential in pension history.” Unfortunately, it was also the last reduction in an entitlement spending program of any consequence. Before Roosevelt’s first term was over peacetime federal spending had reached 10 percent of GDP and the Social Security Act was enacted, which was to become the largest government entitlement program in U.S. history.[9]

Federal spending as a percentage of GDP during World War II reached over 40 percent, higher than the 24 percent reached during World War I or the 10 percent reached during the Great Depression. See Figure 1. If one wanted to be optimistic about the possibility that government spending can be brought down, one could point to the fact that it was decreased dramatically after World War II and since the mid1950s has oscillated around 20 percent of GDP.  Although this decrease was primarily the result of absolute reductions in federal spending, after the late 1950s until the early 1990s spending increased significantly with only one budget surplus during that time.[10]  Yet, from the early 1990s until very early 2000s, federal spending declined noticeably until it started back up in the early 2000s, with a sharp increase once the Great Recession started in 2008. It has dropped since but is still higher than it was before the Great Recession.

One could argue that although federal spending has greatly increased since the mid-1950s it really hasn’t increased much relative to the size of the economy, oscillating roughly around 20 percent of GDP.  One might see this as evidence that we should be able to avoid the crisis George Will has warned us about without slowing government growth. That is, what we need is not fiscal restraint, but government policies that increase economic growth.  Let’s consider that argument.

3. Can we depend on economic growth to reduce the threat of crisis?

The most obvious problem with depending on economic growth to support growth in federal spending is that the spending growth is about to escalate.  The amount paid to beneficiaries of federal entitlement programs, such as Social Security and Medicare, Medicaid and others, has grown steadily since 1947, from a little less than 4 percent of GDP to 16 percent in 2015.[11] The number of programs has increased, as has the average value of benefits received by beneficiaries and the percentage of the population receiving those benefits, including more nonpoor than poor.  According to Cogan (2017, p. 381), “In 2015, 62 percent of recipient households, encompassing over 100 million U.S. residents had incomes that were above the poverty line prior to the receipt of entitlements.  Thirty-one percent, nearly 60 million persons, were in the upper half of the income distribution.”

Two current demographic trends make it even more unlikely that a fiscal crisis can be avoided. First, baby boomers have already started to retire and are demanding their Social Security retirement payments and Medicare benefits, with many millions more right behind them. Meeting their demands will place unprecedented demands on the federal budget. Second, the population of entitlement demanders is growing faster than the population of workers needed to pay for the entitlements. Without the pain from reducing the growth in federal spending, economic growth is highly unlikely to be enough to prevent the far greater pain of Will’s predicted fiscal collapse. Unfortunately, this requires political foresight today that hasn’t been a notable feature of federal fiscal policy.  If such foresight had guided political decisions since 1960 we wouldn’t be in the sorry fiscal situation we currently find ourselves.

But can’t we avoid painful cuts in federal spending with more effective policies to increase economy growth? There are many things government could do to increase economic growth, but most of them require undoing things that ****** economic growth, such as excessive regulation and overly complicated taxation, which are beyond the concerns of this chapter. The pro-growth that is most likely to generate political enthusiasm is the recommendation to stimulate economic growth by increasing, not decreasing, government spending.

Whether coincidental or not, it was in the 1960s that politicians became convinced that higher rates of economic growth could be achieved with Keynesian fine tuning. Buchanan and Wagner (1977) argued that Keynesian economics was accepted enthusiastically by politicians because it was an excuse to do what they wanted to do—spend more than they raised in taxes.  Yet their enthusiasm was limited to the part about deficit spending when more economic growth is needed. Since politicians always think more economic growth is needed, they largely ignored Keynes recommendation for budget surpluses during periods of economic strength.  Keynesian economists, anxious to remain politically influential quickly learned to downplay the fiscal austerity of spending reductions and budget surpluses.  For example, Paul Krugman (2015) claimed that “all of the economic research that allegedly supported the austerity push has been discredited.” Krugman acknowledges that “it’s true you can’t continue to run big budget deficits forever (although you can do it for a long time).  . . . At some point you do want to reverse stimulus. But you don’t want to do it too soon.”[12] (emphasis added)

Another problem with increasing growth in federal spending relative to GDP to increase economic growth is that it increases government allocation of resources relative to market allocation. Such a shift in allocating resources is sure to further reduce their marginal productivity, thus slowing economic growth.[13] The rapid economic growth of the American economy during the 1800s with low federal spending and no attempt to stimulate the economic with increased spending during recessions without increasing government spending during recessions (some quite serious, though none as long lasting as the Great Depression) suggests that achieving long-run economic growth doesn’t require Keynesian fiscal policy.  Indeed, economic growth is more likely to be hampered than helped by Keynesian policies under the influence of political decisions. The only realistic hope for avoiding a fiscal crisis is to start slowing down, or reversing, the growth in government spending which will 1) reduce future government obligations and 2) increase the economic growth needed to pay for them.

4. The reasons government spending increases

The reason constitutions are important is that they help protect the public against excessive taxing and spending of government.  One might ask, why does the public need this protection?  If the public is harmed by government growth, voters can vote the big spenders out of office and replace them with those who will tax and spend less.  As we saw in Section 2, however, a prevailing ideology in favor of strong constitutional limits on what government can do, often erodes over time as the ideology shifts to reflect a public desire for government to tax and spend more.  Unfortunately, the democratic political process, unless strongly restrained by constitutional limits, gives citizens a stronger voice when they want more government than when they want less, even when they would be better off with less. Consider some reasons for this bias in favor of larger government.

Government spending is commonly concentrated on relatively small groups of people organized around narrow interests such as those in an industry, profession, or government agency who benefit from the spending.  Such groups are strongly motivated to exert political influence to maintain or expand the spending and able to do so by virtue of being organized. Since the cost of spending programs in taxes and reduced productivity is spread over the entire population, few are motivated to oppose them. When people incur the cost to influence political decisions it is usually to support spending and regulations that benefit them, not to oppose those that benefit others. Payne (1991, 13, Table 1.1) watched 14 congressional hearings during the 1980s (when many were hoping, or fearing, that the Reagan administration would make major cuts in federal spending) and recorded the number of witnesses who favored and opposed government spending programs.  Out of 1,060 witnesses, 1,014 supported the program being considered, 7 opposed them, and 39 were neutral.

Of course, politicians are also influenced by large numbers of unorganized voters who can collectively send strong messages to their political representatives without having to travel to Washington or hire K Street lobbyists.  Many believe, however, that when voting, people are more concerned with the public interest than when making private, or market, decisions. For example, in response to James Buchanan being awarded the Nobel Prize in 1986, Kelman (1987, 93) wrote an article critical of the award and public choice in which he argued that

government has become, for many, an appropriate forum to

display their concerns for others. Why? That political decisions

involve the community as a whole—and often future generations

as well—encourages people to think about others when taking a

stand. This is in contrast to personal decisions involving mainly

oneself, which encourages people to think of themselves . . .

Kelman’s claim cannot be casually dismissed. People are commonly more explicitly responsive to the situation of others when voting than when making market purchases.  But that doesn’t mean we are more compassionate when voting to help others than when purchasing to help themselves.

Consider an example.  When making a choice for a product in the market you get what you choose, and you get it only if you choose it—your choice is decisive. When making a choice for a candidate in the voting booth, your favored candidate may or may not be elected, but with only the tiniest probability will your vote be decisive; i.e. determine which it is. This difference in decisiveness explains why voters are commonly seen as more morally motivated than are purchasers in the marketplace. How many people who finally find the perfect garment for an upcoming school reunion at a bargain price would refuse to buy it because they think the purchase might increase income inequality? Probably not many. But many people are concerned about income inequality and vote for political candidates who promise to increase their taxes to reduce that inequality with an expensive government program to help the poor.[14] Many see this as evidence that Kelman is right; that people are more willing to sacrifice for others when making political decisions than when making market decisions.  But public choice assumes that people are basically the same whether making political or market decisions. It is the incentives that are different in the two settings, not the people.  The purchaser has a strong incentive to consider the personal consequences of her purchase because her “vote” is decisive, while the voter has little if any incentive to consider the personal consequences of her vote since it isn’t decisive. Public choice economists see her as voting expressively, not consequentially. The cost of passing up a bargain on the preferred garment to reduce income inequality may not be very high, but it is a lot higher than the cost of voting to pay more in taxes, even a lot more.

Assume the cost of not purchasing the preferred garment is $100 in terms of paying more and receiving less pleasure from the garment purchased. But that cost is 100 percent determined by the decision not to make the purchase. Assume the cost to the individual voting for a federal tax increase is $10,000 in present value if the tax increase is passed. But her expected cost of voting to pay the additional tax equals $10,000 times (x) the probability that her vote is decisive, i.e., determines that the tax will be passed. Assuming her vote is for her representative in the U.S. House of Representatives, then the probability of her vote being decisive is approximately 1 in 12.3 million.[15] This means her expected cost of voting to pay $10,000 to reduce income inequality is $10,000/12.3 million, or a little less than one-tenth of a penny.[16] So, the $100 cost of not purchasing the most desirable outfit to reduce income inequality is 10 million times greater than the expected cost of voting for a $10,000 tax to reduce that inequality. So, how much credit should the voter get for being generous?[17] Not nearly as much as the person who “vote” to reduce income inequality by refuses to make the desirable purchase .

Obviously, voting is an important function in a democratic political process.  But it is also important to recognize that while voting is essential to a properly functioning democracy, nothing is perfect. And understanding voting’s imperfections increases our ability to compensate for them.  For example, the work done by public choice economists explains why voting is incapable of protecting the public against government’s misuse of the power it needs to perform its essential functions. Among other things, this work emphasizes the importance of political constitutions in disciplining government power. This importance was eloquently stated by James Madison when making the case for ratifying the U.S. Constitution in the Federalist papers. In Federalist 51 Madison wrote “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”[18]

Consider an example of how the “generosity” of voters can result in the failure of voters to control government spending. While it costs each voter effectively nothing to vote for more spending to achieve noble objectives, it is expensive for them to follow up one’s vote to see how effective the spending is being used to realize those objectives.  The fact is, each voter has little incentive to make such an effort since each realizes that it will be ineffective unless a lot of other voters make the same effort, and unneeded if they do. But there is an unfortunate exception.  As opposed to those who vote only with their ballots, organized interest groups and their lobbyists can also “vote” with their political influence, which can have a significant effect on what legislation gets passed and how it is written as it travels though the complicated legislative process.  Furthermore, they can use these influential “votes” constantly to affect how the costs and benefits of the legislation are distributed.  And because their “votes” are likely to be decisive, it would cost politically influential groups a lot to use them primarily to achieve such noble objectives as helping the poor, providing healthcare for the sick, protecting American jobs, saving family farms or reducing global warming. Long after noble-sounding legislation has been largely forgotten by those who voted for it, organized groups will still be giving it close attention to keep it consistent with their private interests even when that reduces its ability to promote the noble goals the voters thought they were voting for.[19]

5. The difficulty of reducing government spending

We have been considering political incentives that motivate increases in government spending even when the social benefits are less than the social costs. This wasteful spending would be less of a problem if the waste was readily recognized and pressures were activated to reduce or eliminate it. Wasteful government spending, however, commonly goes unnoticed by taxpayers, and politicians often have little incentive to reduce waste even when aware of it.  Politicians commonly create wasteful outcomes with spending and regulations intentionally designed to benefit politically influential groups.  And these groups will fight harder protect the wasteful programs from which they benefit than they did to get them enacted in the first place, even though the benefits they receive had been largely competed away. Tullock (1975) made the obvious point that people compete for benefits regardless of their source. The result is that government has a difficult time providing lasting benefits to special-interest groups, which implies that the more wasteful government spending is, the more difficult it is to eliminate.  Tullock referred to this as a transitional gains trap.

For example, since the 1930s the federal government has provided farmers with subsidies and price supports for their crops. The initial effect was to increase the returns to existing farmers of targeted crops. But soon competition for the land best suited for growing those crops drove up its price until the return on farming that land declined to the competitive level. Farmers owning the land when the programs started benefited from their land’s higher value.[20] But this was not true for farmers who bought their land after the government programs started.[21] A reasonable measure of the economic waste of the subsidy and price support programs is how much they increase the price of land. That increased price reflects the diversion of investment into producing more of the subsidized crops when it would otherwise have created more value in the production of unsubsidized products. So, the more farm programs artificially increase the price of farm land the more wasteful they are, but the more farmers will lose in the value of their land if those programs are eliminated. This would be viewed as horribly unfair, particularly for those who bought their farm land after the subsidy programs started because they had paid for their government benefits in the higher price of land they bought.

An observation by Adam Smith completes the explanation for why it is easier for politicians to resist creating wasteful programs than to eliminate them after they have been created. According to Smith (1759 [1982], p. 213)) “we suffer more . . . when we fall from a better to a worse situation than we ever enjoy when we rise from a worse to a better.”[22] In other words, the “beneficiaries of an agricultural program may not be any better off because of it, but they will be very much worse off if the program is eliminated, and will resist that elimination more strenuously than they made to get the program passed initially.  Furthermore, expressive voters will oppose what they see as the unfairness of eliminating the benefits from those who have paid for them.

There is also a lot of voter sympathy for those who are poor for reasons over which they have little control.  Few want to deny them enough government aid to have the basics. Unfortunately, many of the poor receiving public aid would improve their situations with their own productive efforts if not discouraged, or punished, for doing so by the aid. Of course, most people can receive temporary aid and move on with normal lives without being trapped into persistent poverty. But too many are enticed into welfare dependency when they otherwise would have taken on the challenges and responsibilities that increase the meaningfulness of life. In such cases, those who become dependent on welfare programs pay a price for their welfare benefits, and it is a very high price indeed. This which means they would be doubly victimized if those programs were suddenly eliminated or scaled back. Instead of this additional harm being recognized as a measure of the programs’ failure, it will be seen by many as evidence of their success at preventing the harm, even though it would never have occurred without them. But the harm is real and makes it difficult politically to eliminate aid programs once they have been created.

The fact that it is difficult to scale back government spending programs when they do more harm than good is a powerful argument for making it more difficult to pass such programs in the first place.  Of course, we have already passed a host of socially harmful programs that cannot be wished away.  It would be nice, however, to believe that such spending could be reversed and reversed widely and sufficiently enough to avoid the fiscal crisis George Will predicted. Let me end with moderate optimism that this is not a completely ludicrous hope.

6. Without hope there is no enterprise

The hope that politicians will exercise some fiscal responsibility before it is too late to avoid a fiscal crisis with widespread disappointments and painful adjustments may be naive.  The most effective thing I can offer is the restoration of an ideological mistrust of centralized government in response to the increasingly irresponsible federal government.  I begin with a statement by a French economist which doesn’t sounds more pessimistic than optimistic. I then consider the possibility that this statement suggests that there is hope that our historical ideology favoring strong constitutional limits on acceptable government activity can be restored. And finally, I see hope in expressive voters even though I argued that they are a force for increasing government spending in Section 4.

Writing in the late 1850s the French economist Bastiat (1995, p. 144) argued that government (or state) had become “the great fictitious entity by which everyone seeks to live at the expense of everyone else.” Bastiat’s statement is an exaggeration because the economy would collapse before we reach such a state.  But what is true is that the U.S. has gone far enough in Bastiat’s direction that an increasing number of people are realizing that they are paying more for the benefits of others than the value of the benefits they are receiving. Some of the resentment toward the political process is surely coming from a growing realization that it has maneuvered us into a destructive prisoner’s dilemma in which each of us are better off grabbing all the government benefits he can, and all of us are worse off when everyone is doing so.  Government spending may be increasingly recognized as analogous to environmental pollution. Just as public attitudes shifted on environment pollution as reflected by a widespread demand for government to restrict everyone’s polluting activity, an ideological shift could generate a widespread demand for general reductions in government spending. The biggest problem with this hope takes us back to the Federalist Papers and Madison 51. To reduce environmental pollution government was called on to control others, but reducing fiscal pollution requires that government control itself.

As with most large-number prisoner’s dilemmas, individuals have no incentive to forsake his own government benefits since there is no reason to expect others to follow. But as the fiscal pollution gets worse, a point may be reached when political entrepreneurs find it reasonable to put forth a proposal for large numbers of groups to accept reductions in their own federal benefits with the understanding that their reductions with be reciprocated by simultaneous reductions in the federal benefits going to others. These would be more easily done at a state level despite the serious limits imposed by the fact that much state funding is subsidized, or mandated, by the federal government. But even with no state able to avoid federal fiscal pollution, some states are able to compete successfully for population and tax bases by keeping taxes and the cost of government services relatively low. For example, some states could form consortiums to cooperate in reducing their own fiscal pollution.[23] I am not willing to bet that such a movement will soon be successfully reducing absolute levels of government spending. But I wouldn’t rule out such a movement on the horizon, especially if federal spending continues its upward trend relative to GDP.  And if such a movement does appear, it could easily activate a lot of people who are now moderately and quietly sympathetic to reducing the size and intrusiveness of the federal government.

There is evidence suggesting people have become less favorable to government growth and spending.  Polling data since the 1950s shows that a majority of Americans have consistently preferred the national government doing less in general, with this majority trending upward from about 52 percent in 1958 to about 67 percent in 2010.  When asked about individual programs, however, the majority favored maintaining or increasing them, but this majority trended downward from about 67 in 1958 to about 53 percent in 2010.[24]  This is what public choice analysis would predict; i.e., the general size of government focuses attention on cost, and specific functions of government focus attention on benefits. This trend in favor of a smaller government provides some hope that an ideological shift favoring reductions in federal spending is not absurd.

Even in Europe, where the public is more sympathetic to large central government than in the U.S., another study suggests that there may be enough skepticism toward government to encourage ideological resistance to expanding it. Alesina, Carloni and Lecce (2011) looked at 19 OECD countries that quickly reduced large budget deficits by more that 1.5 percent of GDP over the period 1975 to 2008. Instead of the common view that incumbent governments that reduce budget deficits primarily with spending cuts are more likely to be punished at the polls than those that reduce deficits primarily with tax increases, they found the opposite was true.  When the next election came within two years of the deficit reductions, electoral defeat is more likely when deficit reduction is based on tax increases than on spending reduction. Furthermore, the deficit reductions were more durable when achieved by spending reductions.

I am reluctant to sound optimistic about controlling, much less reducing, the size of the federal government relative the GDP.  America’s experience since the 1930s doesn’t suggest a return to a prevailing ideology in favor of reversing our continued dependence on the federal spending.  Yet this experience hardly supports the hope that expanding, or further centralizing, government spending and power is an effective way of addressing a wide range of social problems. No one denies that some people have been helped by antipoverty programs, by mandating Social Security, and by increasing access to medical care.  But in each of these cases, and more, the costs have been far higher than necessary to provide help to those who need it most. The dependency that has been created by numerous antipoverty programs has reduced the incentive for many to take the initiative to improve their lives and those of their families by becoming more productive. Social Security has expanded over time to far more people than would have become poor in their old age without it, but by reducing the incentive to save for their retirement it has reduced economic productivity and increased the number who would be poor without it. The huge percent of medical care that is paid for by third-party payments because of Medicare, Medicaid, and the Affordable Health Care Act,[25] have distorted and greatly increased the social cost of medical care by largely destroying the market incentives for cost-effective medical-care decisions by both consumers and suppliers.

According to Cogan (2017, p. 385) “the harsh reality is that entitlement programs, originally established to ‘promote the general welfare,’ have become a clear and present danger to the nation’s future welfare.”  He states that (p. 391) “public dissatisfaction with the entitlement state is mounting. The public is coming to realize that the utopian ideas of the Progressive era tide have not lived up to their promise. Their costs . . . are outweighing their benefits.” He ends with the optimistic statement that (p. 392) “as entitlement costs continue to grow and their harmful consequences become more apparent, public pressure will grow and will ultimately force government to change policies.” Cogan is obviously talking about a significant shift in the prevailing ideology in favor of at least significantly slowing down government spending relation to GDP, and possibly reversing that growth. He sounds even more optimistic that I am that such an ideological shift will occur. But even if it does, we must ask, will it be strong enough to overwhelm the strong reluctance most people have to accept cuts in programs on which they have become dependent?  In considering this question, we need to recognize that expressive voting can be a two-edged sword when it comes to government spending.

As discussed earlier, when voting in federal elections the probability that an individual’s vote will determine the election’s outcome is effectively zero. But it determines one thing with a probability of 100 percent and that is how the voter feels about how he or she votes. If a voter feels good about taking others into consideration by voting for more government spending to help others, the value of that good feeling will overwhelm her miniscule expected personal financial cost of voting yes for more spending. But assume that most voters feel that the most noble thing the federal government can do is to reduce dependence on government by reducing spending and taxing and giving people more freedom and incentive to improve their conditions by engaging in productive cooperation with one another through markets. What if they understand that when people consider the cost of the products they are voting for with their dollars in the marketplace they are taking others into consideration?  The market price they are paying for a product gives them the best information available on how much others value another unit of that product.  Since we buy another unit of a product only if they value it by more than its price, we refrain from buying another unit when it is valued by others by more than it is valued by us. Voters with this understanding will get a sense of moral satisfaction from voting against government spending and regulation that exceeds their cost of doing so even if they incur a significant loss if enough other people vote the same way. Such an ideological understanding coupled with expressive voting can overcome Tullock’s transitional gains trap by allowing the diffused public interest of voters to overpower their more narrowly focused financial interests as beneficiaries of government spending programs.[26]

7. Conclusion

I admit that based on the fiscal trends at the federal level it is difficult to be hopeful that a fiscal crisis will be avoided. While the strength of the American economy is one reason for hope, that strength depends on reversing the fiscal trend since the 1930s. The concern is that the strength of the economy depends on a complicated system of institutional arrangements, incentives, and traditions that can continue to generate economic growth for many years after the elements that make that growth possible have started to erode slowly and without notice.  As Rosenberg and Birdzell (1986, p. 8) have so portentously pointed out:

Such a system could run down so slowly, in response to causes separated by so many years from their effect, that by the time its degeneration became apparent, it might be irreversible. Indeed, social systems can continue to expand long after the events that made their collapse inevitable.

Rosenberg and Birdzell present this statement as “ground for caution,” not despair.  I have attempted to present an unvarnished view of the difficulty we face in avoiding the seemingly inevitable fiscal crisis, and the social and economic disruption it would cause.  But I have tried to do so with hope that the “most predictable crisis in” American history is not as predictable as George Will believes it is. No doubt my cautious optimism will remind many of Samuel Johnson’s comment when describing his friend’s second marriage as “the triumph of hope over experience.” I prefer, however, to think of Alfred Marshall’s (2009: 164n) comment that “without hope there is no enterprise.” There are few, if any, enterprises worthier than protecting our liberty and prosperity against the crushing conformity and uninformed control of an ever more centralized and intrusive government. 

THIS SHOULD BE FIGURE 1

https://www.cato.org/blog/federal-spending-debt-1790-2050

THIS SHOULD BE FIGURE 2

https://www.cato.org/blog/federal-spending-debt-1790-2050

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References

Alesina, Aberto, Dorian Carloni and Giampaolo Lecce. (2011) “The Electoral Consequences of Large Fiscal Adjustments.” NBER Working Paper No. 17655, Harvard: December.

Bastiat, Frederic. Selected Essays on Political Economy. George B. de Huszar, ed. Irvington-on-Hudson, New York: The Foundation for Economic Education, Inc., 1995.

Brennan, Geoffrey and Loren Lomasky. Democracy and Decision: The Pure Theory of Electoral Preference. Cambridge: Cambridge University Press, 1993.

Buchanan and Wagner (1977). Democracy in deficit: The political legacy of Lord Keynes New York: Academic Press.

Clark. J. R. and Dwight R. Lee (2018). “Tax Reform as a Discovery Process,” in (ed.s) Adam Hofer and Todd Nesbit, For Your Own Good: Taxes, Paternalism and Fiscal Discrimination in the Twenty-first Century (Fairfax, VA: Mercatus Center, George Mason University): 289-302.

Cogan, John F. (2017). The high cost of good intentions: A history of U.S. federal entitlement programs (Stanford: Stanford University Press).

Grossman, Matt and David A. Hopkins.(2016) Asymmetric politics: Ideological Republics and group-interest Democrats, Oxford: Oxford University Press.

Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. Oxford: Oxford University Press, 1987.

Holpuch, Amanda. (2016) “Forty millionaires ask New York to raise taxes on wealthy in ‘1% plan for fairness’” The Guardian, US edition, March 16.

https://www.theguardian.com/us-news/2016/mar/21/40-millionaires-ask-new-york-raise-taxes-wealthy-1-percent-plan-fairness

Kelman, Steven. (1987). “‘Public choice’ and public spirit.” The public interest (Spring).

Keynes, John Maynard (1936 [1997]). The general theory of employment, interest and money (Amherst, New York: Prometheus Books).

Krugman, Paul (2015) “The case for austerity was a lie. Why does Britain still believe it? The austerity delusion” The Guardian, (April 29).

https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

Marshall, Alfred (1920 [2009]). Principles of Economics, Eighth Edition (New York: Cosimo, Classics.).

Lee, Dwight R. (2008). “Redistribution” The Concise Encyclopedia of Economics (Indianapolis: Liberty Fund): 437-439.

Payne, James L. The Culture of Spending. San Francisco: Institute for Contemporary Press, 1991.

Rosenberg, Nathan and L. E. Birdzell, Jr. (1986). How the west was won: The economic transformation of the industrial world (New York: Basic Books, Inc.).

Simons, H. C. (1951). Economic Policy for a Free Society. Chicago: University of Chicago Press.

Smith, Adam (1759 [1982]). The Theory of Moral Sentiments (Indianapolis: Liberty Fund).

Somin, Ilya (2016). Democracy and political ignorance: Why smaller government is smarter (Stanford: Stanford University Press).

Tullock, Gordon (1971). “The charity of the uncharitable” Western Economic Journal, Vol. 9 (December): 379-92.

Tullock, Gordon (1975). “The transitional gains trap” Bell Journal of Economics, Vol. 6, No. 2: 671-678.

Wilkinson, Will (2016). “What if we cannot make government smaller?” Defending the Open Society (Niskanan Center):, October 16

https://niskanencenter.org/blog/cant-make-government-smaller/

Will, George F. (2017) “The slovenly institution that is Congress.” The Washington Post (July 25).

http://archive.sltrib.com/article.php?id=5550564&itype=CMSID

Young, Colin A, (2017). “9 States, Including Massachusetts, Agree To Accelerate Emission Reductions In Next Decade”  Massachusetts State House News Service

http://www.wbur.org/news/2017/08/23/9-states-including-mass-agree-to-extend-carbon-reduction-goals-to-2030

[1] The discussion will focus on controlling federal spending. State and local governments are not notable for their fiscal responsibility, but it should be recognized that some of their fiscal inefficiencies are the direct result of federal spending and tax policies.  See Clark and Lee (2018).

[2]  See https://ropercenter.cornell.edu/in-the-balance-the-public-the-budget-and-the-deficit/

[3] See  https://fred.stlouisfed.org/series/FYPUGDA188S

[4] Wilkinson (2016), who is well versed in public choice, has argued that “the only really reliable method to shrink government (and not just the rate of government growth) is to shrink the economy.”

[5] See https://www.quora.com/Economic-History-At-what-point-did-the-US-become-the-biggest-economy-in-the-world

[6] See Higgs (1987: 83-84).

[7] Cleveland failed to be reelected in1888, losing in the electoral college despite receiving more popular votes than his opponent, Benjamin Harrison.  He was reelected in 1892 and continued vetoing spending bills.

[8] For a discussion of the Progressive Era see Higgs (1987, Chapter 6).

[9] The 1930s gave us the first noticeable increase in federal spending during an economic downturn in U.S. history.

[10] See https://www.thebalance.com/us-deficit-by-year-3306306

[11] See Cogan (2017, p. 379).  Entitlements do not include all transfers. Cogan’s definition of a federal entitlement is given on page 10 and can exclude a number of expensive programs commonly thought of as entitlements.  Again, see page 10.

[12] See Krugman (2015).   Krugman, Paul (2015) “The austerity delusion” The Guardian, (April 29).

https://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

[13] The loss in the value of economic output will not be fully reflected in the official GDP.  As opposed to market output, the value of much government output is measured by the amount spent to provide it instead of how much consumers are willing to pay for it.

[14] See Holpuch, Amanda. (2016).

[15] This is a close approximation of the probability that one vote will break a tie in the votes of the other 200,000 voters when one candidate is favored over the other by 51 to 49 percent. See Brennan and Lomasky (1993, Table 4.1, p. 57).  The assumption of 200,001 voters is somewhat less than the number expected to vote in a congressional election in a presidential-election year.

[16] This is assuming that if the congressional representative she votes for is elected, the legislation to increase her taxes to help the poor will be enacted, but not if the other candidate is elected.  Since the legislation is not sure to pass even if her candidate is elected, the probability is less than 1 on 12.2 million that her vote will be decisive in getting the legislation passed. This means that her costs of voting for the candidate is less than stated above.

[17] Tullock (1971) used the logic of the lack of decisiveness in elections to explain the attraction of making charitable contributions by voting for charitable government programs instead of giving to charities directly. The article is aptly titled “The Charity of the Uncharitable”.

[18] Jim Buchanan, who received the 1986 Nobel Prize in economics for his contributions to public choice theory often stated that his work was strongly influenced by James Madison.  Not surprising, much of Buchanan’s work was on the importance of constitutional restrictions on government.

[19] The fact that a vote is so unlikely to have any effect on the outcome of an election not only reduces the voter’s cost of voting for an expensive program, it also reduces her motivation to become informed on the likely effect of the program she feels so sanctimonious about voting for. Many noble sounding government programs would fail to achieve the virtuous results expected even if they were not sabotaged by organized interest groups.  See Somin (2016) for an informative discussion of voter ignorance.

[20] Even these farmers did not receive more than a competitive return on farming once the opportunity cost of using their land instead of selling it is considered.

[21] Of course, if programs got more generous their land would increase in value again, but not their return from continuing to farm the land.

[22] This is now referred to a loss aversion and commonly mistakenly attributed to behavior economists.

[23] Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont have formed a consortium to reduce greenhouse gases. It shouldn’t be difficult to form state consortiums to reduce fiscal pollution that would benefit their citizens more than one to reduce carbon dioxide pollution.  See Young (2017).

[24] See Grossman and Hopkins (2016, Figure 2-13. p.56).

[25] Not to mention the perverse incentives in the federal income tax that has motivated taking more compensation in form of low-deductible medical insurance.

[26] Keynes (1936’ pp. 383-384) gave us cautious hope in this regard when he wrote “I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.  Not, indeed, immediately, but . . . soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” Let’s hope it is the good ideas that prevail in the long-run.

 

Controlling Government Spending

5 thoughts on “Controlling Government Spending

  • John Merrifield
    December 26, 2018 at 5:37 PM
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    The chapter to be makes a good case that a well-designed fiscal rule is politically feasible. Only if it is well-designed does it have a chance of overcoming immense obstacles.

    Reply
    • Avatar
      January 7, 2019 at 5:29 PM
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      This is a very to-the-point statement of what I wanted to communicate through my paper.

      Reply
  • Avatar
    January 5, 2019 at 4:05 PM
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    Whether or not a fiscal crisis is avoidable, at some point the window for reforms will open. If good policy and process options have been adequately developed and marketed, some (perhaps many) stand a reasonably good chance of adoption. Yet if the groundwork isn’t done, the results will be far less positive. Such a window opened a little in 2011, but the Budget Control Act of 2011 is all that came out of it.

    A shift in ideology may not be necessary to change the incentives of policy makers. Changing the institutions–the rules of budget and legislative process–could do so, but of course that requires that the institutional changes themselves need broad support in Congress. Statutory Pay-Go, is a solid idea that relies on a flawed enforcement mechanism, for example.

    A different way to characterize federal spending than “fiscal pollution” may be more effective. Members of Congress understand that different programs and components thereof have different priorities, but they realize that the political cost of going after them is often higher than the benefits. Having an excuse to do so, like a balanced budget or other fiscal target requirement, would give them cover to cut lower priorities in order to preserve–or strengthen–higher priorities.

    Reply
    • Avatar
      January 7, 2019 at 6:01 PM
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      You are correct, I wanted to make clear that if effective action is not taken soon, it will be forced on us eventually and the longer we wait the painful it will be. The incentives are important, but it is clear what has to be done–at a minimum the budget deficit enough that government as a percent of GDP starts to decline. In addition that requires avoiding committing to future entitlements that when result to future budget deficits that cannot be sustained. I disagree that such reforms in incentives take place without a change in political ideology that communicates to politicians that funding with taxes or debt many of the things they are being funding now not tolerated. There is no guarantee that this will happen there is simply no choice, and the best hope of that happening through the power of ideas. I think the comparison of excess spending and debt to fiscal pollution can be useful in convincing people that serious reforms are necessary. Politicians are unlikely to appreciate comparison, but many tax payers will, and the most effective way to get the attention of politicians is through taxpayers.

      Reply
  • Avatar
    January 7, 2019 at 4:40 PM
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    Comments on Controlling Government Spending: The Difficulty and the Hope

    Dwight Lee’s paper is like the CBO Long Term Forecast. The CBO projects that under current law the U.S. will incur deficits and accumulate debt at an unsustainable rate over the next three decades, the outcome of which will be retardation and stagnation in economic growth. The question is how can we change the fiscal rules of the game to avoid a debt crisis?
    Lee provides a brief history of federal spending, contrasting the pre and post progressive periods. He notes that while federal spending as a share of GDP has been relatively stable over the past half century, it is expected to increase in coming decades. He argues that contrary to Keynesian views, the only hope for avoiding a debt crisis is to constrain this growth in federal spending.
    Lee’s key insights are into the disincentives under current laws that lead elected officials to make these fiscal decisions, and why citizens let them get away with it. He utilizes tools of analysis from public choice economics, such as Tullock’s transitional gains trap, to explore these questions.
    Lee is cautiously optimistic that a debt crisis is not inevitable, and that political entrepreneurs and citizens will find a way to escape this prisoner’s dilemma. He suggests that citizens and elected officials may organize state level consortiums that could overcome the biases toward increased government spending and debt. Lee explores the role for fiscal federalism in other work, noting that such questions are beyond the scope of this paper.
    I agree with Lee’s cautiously optimistic view, in part because of precedents at both the state and national level for addressing the debt crisis. Some states have clearly been more successful than others in constraining government and limiting debt. Some OECD countries have introduced new fiscal rules to constrain the growth of government, and have enacted institutional reforms to support the fiscal rules. However, the U.S. is now far behind the learning curve in changing the fiscal rules of the game to avoid a debt crisis, and it is possible that this process is irreversible. Lee’s paper helps us understand how we got into this pickle, and what we need to do to get out of it.

    Reply

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