On the growth of government spending: who benefits, the rich or poor?

UPDATE: Reader Stephen Dawson has kindly shown where I made a very stupid error. This error caused me to label the y-axis incorrectly in the third picture below. It also causes the fifth picture to change dramatically. I will leave my original analysis untouched, except to indicate in bold where it is wrong. See the post from 23 November 2008 for an update on these two important figures, where I will give the proper interpretation. Thanks again to Dawson.

It’s obvious that, as time has gone on, the Federal Government has spent more and more and more money. Since a reasonable proxy of government control over the lives of its citizens is the outlay of funds from its treasury, a sane observer might wonder about this increasing trend.

A raw plot of the Federal outlay by year will not do as a measure, however. At least two adjustments have to be made.

A government ruling over 1000 people will obviously have to spend more than one ruling over 10 people, so we have to adjust by population size, which has also been increasing. We can be reasonably sure we are measuring population to, say, the nearest million, which is close enough. The budget is also reasonably well measured.

Then there is inflation, the phenomenon whereby a loaf of bread costs $1.00 ten years ago becomes $1.89 this year. But inflation is difficult to measure because of many reasons. For one, that loaf of bread probably isn’t the same as the loaf now: it has different ingredients, uses changed baking technology, improved packaging—who knows what has changed in that ten years. The population, too, which has increased over this period also tends to drive prices higher because it makes certain commodities scarcer. Plus, nobody knows which are the ideal items to track to measure cost increase: bread? cars? Eliot Spitzer’s hobbies? We’ll use inflation adjusted dollars in some of the plots, but we have to remember that these pictures are a lot more uncertain.

The first picture is the Outlay per Capita: that is, the dollars spent per citizen since 1901 (data from the US Budget Office and the US Census).
Outlay per capita
I have also colored the years red for Republican presidents, and blue for Democrat presidents. The years from 2009-2012 are obviously projections, so should not be taken too seriously. Not too much can be noticed, except for the obvious exponential increase in government control, plus the two blips for World Wars I and II.

Since the rate of increase is exponential, we can see things clearer by showing the picture on a logarithmic scale:
Outlay per capita
The two war-time era increases now pop out, with WW I showing the biggest increase. The after-war decreases are also more obvious. And we can see the small blip for the Korean war and a smaller build-up for Vietnam (all these increases are in the blue areas). The steady increase after Vietnam is also clear: where you can see a higher rate of increase in George W. Bush’s years because of the Iraq/Afghan wars, but certainly not a giant surge. Of course, I do not parse how much of any spending is due to military and civilian funding.

The big, but maybe not so obvious. point is that 2008 spending is about $10,000 per person. That means the government is spending $10-grand per head. That also means, in some loose sense, that if you pay more than this in taxes—if your personal bill is more than $10k—then you are paying more than your equal share. This implies, then, that if you are paying less than $10k you are not paying your equal share. You are requiring those that are better off to support the bulk of the government.

Now, if you are a Lefty, then you probably like this idea. “Let the rich pay their ‘fair’ share!” But to say this ignores Briggs’s Doctrine of Unintended Consequences. To see what I mean, let’s look at the same picture adjusted for inflation. The inflation adjustment index is from Oregon State University.
Inflation-adjusted Outlay per capita in 2008 $
This is adjusted to 2008 dollars. Suppose I were to declare that every citizen had to pay $10 to the treasury. If you, for example, were Dad and the only worker in a family of four, your bill would be $40. The last time this happened was in the 1940s (remember: this is 2008 dollars, not 1940 dollars, so $40 was affordable).

This analysis is broadly correct, but the y-axis was off. You can see that the cost in 1940 was about $700 per head, or $2800 per family of 4 (all in estimated 2008 dollars). Still affordable, but to as many families as $40.

Everybody can afford this (with the trivial exception of a handful of people). Everybody would contribute an identical amount and would, morally at least, be entitled to an equal say in government. “But, wait! The rich will still have more money, and with money comes influence!” Yes, true. It is a tautology to say the rich will have more money, and it is obvious that with more money comes more influence. But this is not a good argument, my Lefty friend. Because look at 2008, where the bill is $10k per head. Only a small percentage of the population (about 5%) can afford this. Those 5% of course have more money. They further are aware of where that money is going. They will therefore have plenty of motivation to control the outflow, which means controlling the laws, rules, and regulations—controlling the government—which say where the money is to go. This small minority will use their money to align the government to their views.

Now, the rich certainly would have done this to some extent had everybody had to pay the same share, but they will have orders of magnitude more motivation to do it when they are paying nearly all the bill. And—here’s the kicker, so pay attention—they will still have plenty of money left over to have the same influence over other non-governmental matters, influence they already had before this tax structure started asking more of them.

About the only thing this confiscatory tax policy will do is to take enough money from the just-rich, to make them no longer rich. Thus, more control will flow into the hands of fewer and fewer people. This is inevitable. And it’s happening at an exponential pace. The noble idea of having those with more pay for those with less guarantees that those with more will have even more, and those with less will have even less, plus they will suffer a corresponding loss of influence and control over government.

Disproportionately taxing the rich to grow government, and doing so at an increasing, exponential pace, thus guarantees the creation of a oligarchic ruling class. Supporting these tax laws, then, will have the exact opposite effect of your intent.

I use the term “Lefty” not to indicate “Democrat”, as will be clear in the next two pictures:
Change in Outlay per capita in 2008 $
These are the year-to-year change in outlay per captia. The first is unadjusted, the second is adjusted to inflation.

The unadjusted shows the blips due to the wars, plus the accompanying decreases in the budgets after the wars ended. Most of the wars, WW I, WW II, Korea, and Vietnam happened under Democrat administrations. But there was only moderate growth until Nixon was president in 1969, then the increases began with real vigor, and it has rarely abated since (only one year in Reagan’s presidency did the budget not increase significantly).

The scarier picture is this one, adjusted by inflation:
Inflation-adjusted change in Outlay per capita in 2008 $
This shows the contest between R and D more clearly. Nixon (R) had a modest rate of increase, but Carter (D) really showed how it was done with a stellar increase. Reagan (R) did his best, but could never match Carter. Clinton (D) was also just an average player. Bush (R) beat them all. No taxpayer left behind. Again, Obama’s (D) tenure is just a wild guess by the budget office; however he has often boasted of increasing taxes on “the rich”, so we can guess that his rate will be Carter-like.

My comment below about my not being an economist is right on: I am not and made a fundamental error here. The new figure shows the changes more clearly—they bounce around 0 a lot more than I originally thought. Be sure to see the 23 November 2008 post for more on this Figure.

I am not historian or economist enough to say why the rapid increase in government control really got going with Nixon, but we have some hints in his social spending policies. The funny thing is the opposite of common wisdom appears to be true. Most, but not all, of the increases in spending for the military have come from Democrats (the wars just mentioned); and most, but not all, of the increase in spending on social causes have come from Republicans. Each side, as we all know, is continuously accusing the other of the opposite! It might be a case of projected guilt all politicians feel (at some level; I cannot really guess why this is so).

Even if you don’t agree with me on anything, it must be clear that this rate of increase cannot continue indefinitely. It cannot even continue for very much longer. Roughly, every 20 years brings an order of magnitude increase in government control. So in 40 years, in the trend continues, the bill will be about $1 million per head, an impossibly high number. Power would be coalesced into the hands of a very, very few.

I don’t know about you, but I plan a two-pronged strategy: (1) to never vote for anybody, D or R, who I think will raise taxes, and (2) to be one of those who can afford the tax, because I’d rather have the control than not.

34 Comments

  1. Very useful post.

    One comment is to say that the “flatline” figures before the Depression are probably not very helpful as government is expected to do all sorts of things now by general default that it was not before the 30s. For example – it maintains roads, runs a public education system, maintains a huge military, runs a central bank, etc. Some of its functions – like welfare state programs, foreign aid, the space program – are still in some sense “optional.” But I don’t think there is serious debate these days about whether the government should maintain highways and schools. (For the record, I’m one of the fossils who would like to see it out of these areas too, I’m just saying I’m aware of how small a minority I’m in.) It would be interesting to see what percentage of the increases in spending year-by-year are accounted for by rising costs of programs that the government can’t get out of, and what percentage is actually accounted for by new programs.

  2. I picked up some of those Zimbabwe million dollar bills to give the kids as gifts for the holiday that dare not speak its name, as an object lesson. I have one of the 100 billion ones as well, but the millions are more comprehensible. With the 100 billion one I also got a 1 cent (!) which blows my mind totally. The millions would literally be worth more if they hadn’t been printed on; you could at least use them as notepaper. Last I checked the 100 billion was pretty close to less than worthless.

  3. Matt,

    One thing you miss in your post is how much of the spending is coming directly from taxation, and how much of it is coming from public debt. You mention that the rich will have a greater influence over the government, but you fail to mention who the “rich” actually are going to be.

    Will it be Buffett and Gates, or that sovereign wealth fund in Kuwait?

    By the way, if you’re interested in this, James Hamilton at UCSD does a blog called econbrowser. He deals with these kinds of issues in a manner similar to this post.

  4. John,

    Maybe so, maybe so. But how and in what respects? Perhaps, if you are able, you could point out one or two flaws which you find especially glaring. Else your complaint is juvenile.

    Ari,

    I have no idea who the rich will be. It’s an important question, sure. But not of primary interest. The main idea still holds: it will be a certain class, that class will be small, and in control.

    You’re right, too, that I left off debt versus borrowing. As interesting as those are, the bill still exists, and the outlays do include a substantial portion of debt service.

  5. These are useful charts.

    I suppose we should expect a somewhat increasing trendline as a more complex society requires more spending, but the degree is the concern and the debate.

    I think it would be more helpful to see these are % of GDP rather than as per-capita. I don’t think that trendline would be as alarming. As wealth per capital has incresed, spending does as well.

    On the other hand, I think that showing spending as a % of GDP including the present value of the accrued liabilities of entitlements would be alarming in extreme.

    That chart would be the one most appropriately entitled “Our completely dysfunctional political class.”

  6. The rich may have the motivation, but will they have the numbers? I am with John Adams on this and the pending tyranny of a majority over a minority, followed shortly thereafter by the tyranny of a minority of the previous majority over everyone else. Examples? French and Russian Revolutions. The French Revolution was relatively brief, a mere 26 years in total, the Russian Revolution is still working its way out a mere 90 years later. On the latter I recommend White King, Red Queen – the first three chapters include particularly nasty examples of tyranny at and beyond the chess board.

  7. Matt,

    I think my point is that at the very least if it’s debt held by American nationals, then they have some ostensible interest in the US beyond just a positive discounted return. Possibly. I mean, at least the robber barons gave us railroads, and Standard Oil gave us oil rigs. What will some sovereign wealth fund give us besides a bill?

    Also, my concern with the debt issue is that those outlays can increase even without any sort of “real world” return on the spending because we’ll be servicing the debt rather than even building roads or schools or whatnot. It’s no longer “guns or butter” but “debt or guns or butter.”

    Unfortunately, I think it will end up being guns AND butter that suffer as we spend more and more on servicing the debt.

  8. The big question that you didn’t ask and didn’t answer was how much of this was due to growth of existing programs, and how much was new spending? How much was deficit spending? How much was “extraordinary expenditure,” such as Iraq / Afghanistan?

  9. Erik, Ari,

    All your questions are interesting ones; economists out there no doubt answer them.

    But isn’t the (inflation-adjusted) increase in per capita spending extraordinary? Where will it stop? It is impossible—not just unlikely, but strictly impossible—for the trend to continue as it has been. At some point, the system breaks.

    When will that happen? Or can we fix things before that point?

  10. Your conundrum is solved when you recall that Nixon ended the Bretton Woods agreement thence allowing the free printing of money unbacked by anything actually tangible. However that extra monetary inflation would have increased price inflation, except that these extra dollars were soaked up by foreigners. So since all this spending has been financed by foreigners, basically giving America “a free lunch”, you guys needn’t worry too much about it. Apparently they thought it was worth it to have America as the leader of the free, capitalist world and nobody seemed to complain – well up to now anyway. Sarkozy wants a return to Bretton Woods.

    There are a couple of highly interesting commentaries related to US government funding and spending on the counterpunch site – one by “righty” Paul Craig Roberts
    http://www.counterpunch.org/roberts11172008.html

    and one by Michael Hudson ex Wall Street economist:
    http://www.counterpunch.org/hudson11172008.html

    Would Bretton Woods have stopped all this profligacy? Would a return to the gold standard solve it – A la Ron Paul?

    On what is it all spent anyway? Well we know about the military-industrial complex but where do those social charges go? What I recommend people do is count up all their outlay for private health insurance, pensions and schooling. Ok maybe it doesn’t look like an extra tax or social charge but it sure feels like it since it’s either pay now or be sorry later. Neither is health care free when your employer gives you to you – he simply reduces your wages to pay for it. Yet the USA spends more per person to not have universal health care than other countries who do provide it. Where the heck does all that money go?

    I’m ambivalent about taxes. Whatever works best I say. Margaret Thatcher seemed to get more overall tax revenue by cutting the UK top rate to 40%. Apparently it made a lot of rich people return to Britain. Everyone appreciates a fair shake. However a flat fee, as you suggest, is a very long way from fair. A flat percentage is a good deal fairer as it takes into account the ability to pay; a somewhat essential feature in a tax system unless you want a civil uprising on your hands.

  11. Bush spent and is spending like a drunken sailor. In part this was the indirect price of a largely unpopular and understood war and the not so subtle re-igniting of the cold war, courtesy of Putin and rising oil prices.

    How to equitably and efficiently pay for all this spending – both necessary and unnecesary – is a somewhat separate question and one where I fear “emotions” will overwhelm a more objective assessment of human nature, i.e., economics. What amounts to Poll taxes can easily be turned into a very nasty political situation – our friends from the UK can comment on this. A standard % may be more palatable and less politically fraught. A return to Reagan tax rates, whatever those actually were, may be the best we can hope for.

    The reality is that if the majority of those in higher income tax brackets actually don’t mind being taxed (I do not know why – but empirically a large percentage seemed to have voted assuming higher taxes) then in a democracy we can protest but we must pay. That such a policy is counterproductive will need to be proved yet again with slower growth rates, less capital accumulation and additional income transfers from those who produce to those who do not.

    A more interesting topic is how we will actually pay for the promises made for those on defined benefit pensions if the stock market is in a prolonged slump. There lie the seeds of a massive tax increase and a potential tax revolt.

  12. Curious that the ‘New Deal’ didn’t make an appreciable bump.

    I would check out that section for a sanity check.

    Would it also be possible to map the number of immigrants and the number of people below the poverty line against the graph?

  13. Allan, you contend the new deal made no “appreciable bump”.

    We haven’t even hit the top of the new deal ‘bump’ yet. You need to reexamine the third graph.

    Note the flat line from end of WWI to the beginning of FDR. Then draw a line from there to present day. The data correlates well. Non-stop up, at a rather predictable rate.

    The bump you search for is still in the future. Indeed a sanity check is warranted.

  14. This is very very far out of my areas of expertise, but I won’t let that stop me.

    It seems to me that a potentially really nasty situation has arisen with the drop in oil prices. If the oil-producing nations are among those that hold financial instruments that say we owe them money, they might ask for payment as their income is dropping.

    Right now I think we might have a little problem coming up with the money to make payments. We’re already on the hook for about 5 Trillion dollars just due to the recent troubles.

    How much is a trillion of anything. Calculate the time required to count to a trillion at one number per second. And by the time you get to 789,769,435,998 you can’t even count one per second.

  15. This post is a good example of this original, often fascinating, blog.

    The data are yet another indication that we are headed for some kind of singularity, whose form we cannot perceive. “Hope” will not get us through it. The data speak for itself, but the interpretation in terms of its conjectured unintended consequences is novel. However, Matt… I think a nod to Karl Popper is in order.

  16. Re taxing the the rich and the poor. Our tax systems (Fed and state) are based on three types of taxes: income taxes (based on annual income), expenditure taxes (aka sales taxes), and wealth taxes (property taxes, inheritance taxes).

    Technically, only the last type truly dings the “rich.” Rich is defined as having wealth (poverty is the absence of wealth). Hence only wealth taxes hit the rich and not the poor, mostly.

    All the other taxes (and including property taxes on businesses) are based on the flow of capital, not accumulated capital; that is, transfers of wealth, not the body of equity.

    All wealth transfer taxes end up being paid by consumers, and poor people consume, too. Everybody has to eat, and everybody that buys food pays transfer taxes (and the property taxes of farms and grocery stores) because the taxes are built into the cost (price) of the food. That’s true for all commodities. The consumers pay the freight, and taxes are built into the freight.

    And that is true for national debt as well, which is also paid by rich and poor alike in the form of inflation (which is a devaluation of the money, the currency of wealth transfers).

    So-called “taxing the rich” is really taxing everybody, except in the case of property taxes on non-business property. Raising income taxes on large incomes does not affect accumulated wealth, only income (wealth transfer). And those taxes are a burden on income, and are in truth placed on the source of the income, which is the consumer when you get far enough down the chain.

    Many wealthy people (large equity by definition) pay little or no income taxes. And that will certainly be true next April 15th, when the “rich” declare losses and show negative income for 2008. No taxes on them, even though they still own accumulated equity in vast excess of what the poor own (next to nothing, by definition).

    You are rich (or poor) based on what you own, not how much you make. This is difficult concept to grasp due to general confusion about it, but them are the facts.

  17. Bernie’s law of taxation

    Those who can avoid taxes, avoid them.

    Corollary 1:
    The rich who have ways to avoid taxes avoid them.

    Corollary 2:
    The poor who have ways to avoid taxes avoid them.

    Corollary 3:
    People who believe they can lie on their tax form without getting caught and thereby avoid taxes, lie.

    Corollary 4:
    Liberals who say they do not mind paying taxes and can avoid taxes, both lie and avoid taxes.
    Corollary 4b:
    Conservatives who say they do not mind paying taxes and can avoid taxes, lie, avoid taxes and are self-delusional.

    Corollary 5:
    Those who avoid taxes believe they pay their fair share.

    Corollary 6:
    People who do not mind paying taxes believe that they pay their fair share.

    Corollary 7:
    People who do not mind paying taxes believe that others do not pay their fair share.

    Proof point:
    Hands up all those in Massachusetts who have bought items in New Hampshire that are taxable in Massachusetts. Hands down all those who paid use taxes on their Mass. State Income Tax form for these items. (See http://en.wikipedia.org/wiki/Use_tax)

  18. I am quite confident that I am about to be severely embarrassed, but I just don’t get the inflation adjustment process. According to the second graph, in 1917 the US Federal Government spent about $20 (in 1917 dollars) per person. According to the third graph, in 1917 it spent about $1 (in 2008 dollars) per person.

    That would suggest that a very severe deflation has been taking place over the past 91 years.

    Since no-one else appears to have pointed this out, it’s probably just a brain freeze on my part. But any guidance would be helpful, thanks.

  19. Stephen,

    Like we said, any measure of inflation is an approximation and so we should not be too certain of any results based on adjusting for it. But we can look at the raw data plots, unadjusted for inflation, and we’d see about the same thing.

    I’m sure economists have looked at per capita spending before. I haven’t seen them do it, but it’s such an obvious thing to do that somebody must have done it.

  20. Matt:
    Good source. The Historical Tables (Table 17.5) has a population series but only from 1962. That table makes for an interesting trend – I guess transfer payments explain the difference since it cannot be service delivery.

  21. Bernie,

    What you do is to go to earlier year’s budgets and they have more historical data. I think from 2000 they have spreadsheets.

  22. Mike D., what you state in your closing paragraph, and what you intimate in the paragraph just before, is partially true — which is to say, it’s true only insofar as a given society (such as ours right now) adopts the disastrous policy of fiat money. As a matter of fact, from an economic standpoint, the definition of wealth is “material goods made by man.” And that is why property is the precise link between economics and politics; it is also why the abolition of private property, to any degree, paves the way for statism — “control the property, control the person” — and it is why the United States, in its singular recognition of the fact that property is an extension of person, grew wealthier by far, per capita, and in a shorter span of time, than any other civilization in the history of the world. Ultimately, the application of more labor is the only fundamental requirement for increasing true wealth.

    There is, however, a very deep (if imperfect) connection between wealth and quantity of money if, and to the extent, that a given society adopts gold and silver (or its equivalent standard) as its system of currency, because these items are wealth — they don’t just symbolize it, as paper currency does. For this very reason, the gold standard is the diametric opposite of the fiat monetary system you imply in your reasonable critique above, but do not explicitly name.

    There is a further connection between wealth and money insofar as under a real-wealth standard, the supply of money increases as the by-product of the ability to produce — or, as the Nobel Prize winning economist Ludwig von Mises put it, “When a larger supply of gold or silver is the result of improvements in machinery, transportation, and so forth, having wider application than merely to the mining of the precious metals themselves.”

    I realize, of course, that all this may seem too hypothetical to matter here, and perhaps it is — especially as things stand now in this once-great nation, and even more so two months down the road under the leadership of a so-called President whose knowledge of economics is an absolute embarrassment. I bring it up, however, because in your glaring omission of the inherent connection between wealth and actual money (as opposed to fiat), you potentially leave readers with a dangerously partial misunderstanding of where money derives its ultimate value. In fact, as it turns out, it’s only a revivification of the gold standard that can ever fully stabilize a complex economy, since the root of money is production, and production is wealth. Finally, it is crucial to recall in this discussion an obvious but all-too-often forgotten fact:

    Governments cannot make or spend or redistribute a single penny unless they either borrow, print, or tax.

  23. Thin King Man (Sic!?)

    You say “the root of money is production, and production is wealth.” I would take a slightly more Keynesian view and say that “the root of money is the production of things by some people that other people want and that they are willing and able to acquire with the “different” things that they produce.” Without this elaboration you get Soviet-style economics. Money (a standard measure of price per widget) emerges from and enables the nexus of supply and demand. It is pretty magical and it does not take much for it all to go “poof”!! Gold-backed currency may or may not resolve a break-down in the nexus.

  24. Thin king man — Bernie is right. Real property produces wealth. Real property is like a machine, a lathe for instance, that turns out more wealth over time. Gold does not. Gold just sits there. As such, gold is just another form of money, because it is symbolic of wealth. You can’t eat gold, as King Midas found out.

    Some wealth is transitory, such as food. Food has a shelf life. So do cars and other forms of wealth that wear out (depreciate). Real estate is permanent wealth. The right of individuals to own real property and to pass that property on to their heirs is the source of America’s rise to become the richest country in the world.

    The trend in this country, however, is to limit individual rights of property ownership and to accumulate more and more property into government ownership. Government-owned property is inherently less productive because individual initiative and rewards for stewardship are lacking. Examples abound, such as the mass starvation episodes in the USSR and Red China when private property was commandeered by the State.

    Worse than that, our government is engaged in incinerating public forests and rangelands to the tune of 10 million acres a year, destroying natural resources and the capacity of the land to produce natural resources. Our government has taken some 600 million acres of productive land and declared it wilderness or roadless or “wildland” and halted all productive uses of that land. Megafires (100,000+ acres) ravage federal land every summer. It costs taxpayers $billions every year to destroy property worth $trillions. As a direct consequence, the economies in Western states (where most of that land is) have plunged into recession and depression over the last 20 years.

    Private property owners have incentives to care for their land and to keep it productive. The government does not. The government is incompetent and dis-incentivized when it comes to land stewardship. That is the true source of this country’s current economic decline, and as side effects, our social and cultural decline as well.

Leave a Comment

Your email address will not be published. Required fields are marked *