How many times have you come across someone who complains about taxes being too high, but then in the next breath says roads are too congested, the police are overworked, or the parks aren’t open long enough? Sounds inconsistent, right? Not necessarily. To many people it does seem as if government is taking more in taxes but doing less with the revenues.
I call this the “government spending puzzle.” Although I’m not generally good solving puzzles, this one does have a logical solution that says much about how government has evolved in our country over the past 50-plus years.
Now I know what many of you are thinking — the answer is a five-letter word (no, not that one) — waste. Isn’t it that government is simply “wasting” more of our tax revenues, and that’s why we’re paying more in taxes but getting less back?
There are two problems with this explanation. First, although most would concede there is waste in government, there’s no necessary reason why the percentage of waste would have increased in the last 50 years.
Second, identifying waste in government spending is easier said than done. There is no line-item in any government budget termed “waste.” Also, waste in government spending is very much in the eye of the beholder. I can identify some wasteful government spending, and I’m sure you can also.
The problem is getting agreement. One person’s wasteful government program is another person’s necessary and vital program. Every government program has a constituency that backs it. Also, it’s difficult to apply business efficiency concepts to government because government doesn’t follow a simple objective — such as the profit motive — like business.
The puzzle’s solution lies in realizing all government spending is not the same. Economists divide government spending into two broad categories: spending on providing products and services, and spending on transfers.
Spending on the provision of products and services encompasses the traditional roles of government, and includes such things as police protection, the military, the court system, building and maintaining roads, building and maintaining parks, and building schools and teaching students. Although everyone doesn’t agree on all these functions, they are functions government in the United States has essentially provided since the nation’s founding.
Spending on transfers is different. Transfer spending is taking tax revenues and using them to directly increase the purchasing power of targeted groups of individuals. The transfer can be in the form of cash, or it can be in the form of reimbursement of designated expenditures. Major government transfer programs are Social Security, Medicare, Medicaid, and the host of programs called “welfare.”
Government transfer spending is relatively recent, not starting in full until the 1930s. There’s also much, much more controversy about whether government transfer spending is a legitimate function of government.
We’re now in a position to solve the puzzle. First, let me note the total tax burden has edged upward in the past 50 years. Total local, state, and federal taxes have increased from 25 percent of citizen income in the 1950s to 30 percent today. The upward trend is even sharper if the starting year is earlier.
Now let’s look at what’s happened to traditional government spending on providing products and services and to government transfer spending. Between 1959 and 2002, government spending on providing products and services fell from 16 percent of national income to 15 percent, while government spending on transfers increased from 5 percent to 12 percent of national income. And while the decrease in spending on products and services may seem trivial, it translates to more than $100 billion less spending in today’s dollars.
How does this solve the apparent puzzle expressed in the first sentence? It solves the puzzle in this way. Government spending on providing products and services is largely government spending that all citizens can see: police on the beat, schools and teachers, park space, and soldiers and military hardware. If we see fewer of these products and services, we conclude government is doing less.
In contrast, government spending on transfers is largely invisible unless you’re the one receiving a check or bill marked “paid by the government.” Although some may observe the elderly or the poor are better off, the improvement isn’t necessarily associated with government transfers.
What does all this mean? To me it ultimately suggests a big problem for government. As the tax burden rises to support more government transfers, more and more people will see government doing less with more. Support for government taxes and transfers will wane, and government eventually may be reduced to its traditional functions of providing products and services.
Indeed, some might say, this would be a good thing.
Michael L. Walden is a William Neal Reynolds distinguished professor of the Department of Agricultural and Resource Economics at North Carolina State University and an adjunct scholar of the Locke Foundation.