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Posts Tagged ‘Government’

Congressional negotiators are trying to craft a budget deal by mid-December. Fareed Zakaria’s Global Public Square asked twelve experts what they hoped that deal would include. My suggestion: it’s time to fix the budget process:

Odds are slim that the budget conference will deliver anything big on substance. No grand bargain, no sweeping tax reform, no big stimulus paired with long-term budget restraint. At best, conferees might replace the next round of sequester cuts with more selective spending reductions spread over the next decade.

Those dim substantive prospects create a perfect opportunity for conferees to pivot to process. In principle, Congress ought to make prudent, considered decisions about taxes and spending programs. In reality, we’ve lurched from the fiscal cliff to a government shutdown to threats of default. We make policy in the shadow of self-imposed crises without addressing our long-run budget imbalances or near-term economic challenges. Short-term spending bills keep the government open – usually –  but make it difficult for agencies to pursue multiyear goals and do little to distinguish among more and less worthy programs. And every few years, we openly discuss default as part of the political theater surrounding the debt limit.

The budget conferees should thus publicly affirm what everyone already knows: America’s budget process is broken. They should identify the myriad flaws and commit themselves to fixing them. Everything should be on the table, including repealing or replacing the debt limit, redesigning the structure of congressional committees, and rethinking the ban on earmarks.

Conferees won’t be able to resolve those issues by their December 13 deadline. But the first step to recovery is admitting you have a problem. The budget conferees should use their moment in the spotlight to do so.

P.S. Other suggestions include investing in basic research, reforming the tax system, and slashing farm programs. For all twelve, see here.

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My recent post on government size prompted several readers to ask a natural follow-up question: how has the government’s role as employer changed over time?

To answer, the following chart shows federal, state, and local employment as a share of overall U.S. payrolls:

In July, governments accounted for 16.5 percent of U.S. employment. That’s down from the 17.7 percent peak in early 2010, when the weak economy, stimulus efforts, and the decennial census all boosted government’s share of employment. And it’s down from the levels of much of the past forty years.

On the other hand, it’s also up from the sub-16 percent level reached back in the go-go days of the late 1990s and early 2000s.

Employment thus tells a similar story to government spending on goods and services: if we set the late 1990s to one side, federal, state, and local governments aren’t large by historical standards; indeed, they are somewhat smaller than over most of the past few decades. And they’ve clearly shrunk, in relative terms, over the past couple of years. (But, as noted in my earlier post, overall government spending has grown because of the increase in transfer programs.)

P.S. Like my previous chart on government spending, this one focuses on the size of government relative to the rest of the economy (here measured by nonfarm payroll employment). Over at the Brookings Institution’s Hamilton Project, Michael Greenstone and Adam Looney find a more severe drop in government employment than does my chart. The reason is that they focus on government employment as a share of the population, while my chart compares it to overall employment. That’s an important distinction given the dramatic decline in employment, relative to the population, in recent years. 

P.P.S. As Ernie Tedeschi notes, this measure doesn’t capture government contractors. So any change in the mix of private contractors vs. direct employees will affect the ratio. This is another reason why focusing on spending metrics may be better than employment figures.

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Politicians and pundits constantly debate the size of government. Is it big or small? Growing or shrinking?

You might hope these simple questions have simple answers. But they don’t. Measuring government size is not as easy as it sounds. For example, official statistics track two different measures of government spending. And those measures tell different stories:

The blue line shows how much federal, state, and local governments directly contribute to economic activity, measured as a share of overall gross domestic product (GDP). If you’ve ever taken an intro economics class, you know that contribution as G, shorthand for government spending. G represents all the goods and services that governments provide, valued at the cost of producing them. G thus includes everything from buying aircraft carriers to paying teachers to housing our ambassador in Zambia.

At 19.5 percent of GDP, G is down from the 21.5 percent it hit in the worst days of the Great Recession. As Catherine Rampell of the New York Times pointed out last week, it’s also below the 20.3 percent average of the available data back to 1947. For most of the past 65 years, federal, state, and local governments had a larger direct economic role producing goods and services than they do today.

There’s one notable exception: today’s government consumption and investment spending is notably larger than it was during the economic boom and fiscal restraint of the late 1990s and early 2000s. From mid-1996 to mid-2001, government accounted for less than 18 percent of GDP. Relative to that benchmark, government is now noticeably larger.

The orange line shows a broader measure that captures all the spending in government budgets—all of G plus much more. Governments pay interest on their debts. More important, they make transfer payments through programs like Social Security, Medicare, Medicaid, food stamps, unemployment insurance, and housing vouchers. Transfer spending does not directly contribute to GDP and thus is not part of G. Instead, it provides economic resources to people (and some businesses) that then show up in other GDP components such as consumer spending and private investment.

This broader measure of government spending is much larger than G alone. In 2011, for example, government spending totaled $5.6 trillion, about 37 percent of GDP. But only $3.1 trillion (20 percent of GDP) went for goods and services. The other $2.5 trillion (17 percent) covered transfers and interest.

Like G, this broader measure of government has declined since the (official) end of the Great Recession. Since peaking at 39 percent in the second quarter of 2009, it has fallen to 36 percent in the second quarter of 2012.

Also like G, this measure has grown since the boom of the late 1990s and early 2000s. In the middle of 2000, government spending totaled just 30 percent of GDP, a full 6 percentage points less than today.

The two measures thus agree on recent history: government has shrunk over the past three years as the economy has slowly recovered from the Great Recession and government policy responses have faded. But government spending is still notably larger than at the turn of the century.

The story changes, however, if we look further back in time. Although governments spent more on goods and services in the past, total spending was almost always lower. Since 1960, when data on the broader measure begin, total government spending has averaged about 32 percent. It never reached today’s 36 percent until 2008, when the financial crisis began in earnest.

Much of the recent increase in overall spending is due to the severity of the downturn. But that’s not the only factor. Government’s economic role has changed. As recently as the early 1960s, federal, state, and local governments devoted most of their efforts to providing public goods and services. Now they devote large portions of their budgets to helping people through cash and in-kind transfers—programs like Medicare and Medicaid that were created in 1965 and account for much of the growth in the gap between the orange and blue lines.

Government thus has gotten bigger. But it’s also gotten smaller. It all depends on the time period you consider and the measure you use.

P.S. Keep in mind that this discussion focuses on a relative measure of government size—the ratio of government spending to the overall economy—not an absolute one. Government thus expands if government spending grows faster than the economy and contracts if the reverse is true.

P.P.S. Measuring government size poses other challenges. Eric Toder and I discuss several in our paper “How Big is the Federal Government?” Perhaps most important is that governments now do a great deal of spending through the tax code. Traditional spending numbers thus don’t fully reflect the size or trend in government spending. For more, see this earlier post.

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Yes, according to a new report by the Congressional Budget Office. As always in such comparisons, however, there are some caveats.

CBO summarizes its main results in this handy chart:

Report author Justin Faulk summarizes the findings as follows:

Differences in total compensation—the sum of wages and benefits—between federal and private-sector employees also varied according to workers’ education level.

Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.

Federal workers whose education culminated in a bachelor’s degree averaged 15 percent higher total compensation than their private-sector counterparts.

Federal employees with a professional degree or doctorate received 18 percent lower total compensation than their private-sector counterparts, on average.

Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

Of course, a lot is riding on the phrase “certain observable characteristics.” CBO did an extremely careful job of measuring total compensation and of controlling for observable factors such as education, age, and occupation. But many other factors are impossible to measure. CBO’s summary mentions effort and motivation. There are also issues such as job security and developing valuable skills and knowledge.

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