Small Growth And Big Government

J.T. Young Former Treasury Department and OMB Official
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In the last decade, America’s economy has stumbled and cannot regain its footing.  Simultaneously, in the last decade the federal government has been larger than in any decade of the previous 60 years. America appears to have entered not just a new norm of smaller growth, but also one of bigger government.

America’s outstanding post-WWII economic performance is well known. However, its consistency in this can be missed. From 1947 through 2006, the nation’s average annual real GDP growth was 3.4 percent. None of these six decades ever fell below 3 percent. Then came the last ten years.

From 2007 through 2016 (inserting the Congressional Budget Office’s optimistic 2.7 percent 2016 growth assumption), U.S. GDP will have averaged just 1.4 percent annual real growth. Even dropping 2008 and 2009’s contractions, average growth is just 2.1 percent.

By comparison, the nation’s best average annual growth decade was 1957-1966’s 4.3-26 percent above the 1947-2006 average. The current decade’s 1.4 percent average is almost 60 percent below that 60-year average.

Attributing the last ten years’ slow growth to a recession six years past, means ignoring the dramatic that the last decade has made with the strong and prolonged record preceding it. It also fails to follow the path America itself follows on the economy: to Washington.

When the economy fares poorly, all eyes turn to Washington. When the economy fares well, Washington turns to take a bow. So what has Washington been doing over the last decade of lost growth? Doing what the economy has not been: Growing.

There is no better gauge of government’s impact on the economy than the size of government relative to the economy. And the most straightforward measure of that size is how much government spends. This is the true measure of the diversion of resources from the more productive private sector.  Certainly the ratio of taxes to the economy is important, but remains secondary to the size of the government it finances.

From 1947 through 2006, the federal government’s annual outlays averaged 18.9 percent. From 2007 through 2016, they will average 21.6 percent. None of the previous six decades’ averages were so high – even as the nation retrenched from WWII, fought the Korean and Vietnam wars and won the Cold War by spending the Soviet Union into oblivion.

Although government spending is a convenient and quantifiable measure of government’s economic impact, it is only a partial one. It does not include state and local government spending, or all these governments’ regulatory impact – all undoubtedly larger in the last decade than in the preceding 60 years.

Did big government cause the recession? Not directly, but its growth has served to stunt the economy’s potential by diverting ever more resources away from the private sector engine that does create real growth. And more clearly, big government – despite the variety of means it has used – has not restored the level of GDP growth prevailing during the previous six decades. It has not even come close.

In fact, big government’s comparatively poor economic record is even longer than the last decade. If pre-recession government actions – through overly encouraging investment in the U.S. housing market, lax oversight of the financial and lending practices supporting it, or both – are included then the U.S. economy was already being artificially bolstered prior to the recession.

That pre-recession economic performance was far from robust. Looking back, real annual GDP growth has not reached the 1947-2006 average since 2004 (3.8 percent) and before that, it had not done so since 2000. That makes an additional five of the previous six pre-recession years being mediocre at best.

What does the future hold for America’s new norm of low growth and big government? While we cannot see the economic future, the Congressional Budget Office projects fiscal performance for the next decade. The verdict: Today’s big government will become tomorrow’s even bigger one.

Assuming no changes in current law, federal government spending will average 22 percent of GDP from 2017-2026. At the same time, federal government debt (held by the public) will average 80 percent of GDP (up from 2007-2016’s 62 percent average) and federal taxes will average 18.1 percent of GDP (up from 2007-2016’s 16.5 percent).

All recognize something dramatic has happened to America’s economic performance. Yet, it is both worse and longer than most realize.

Simultaneously, something far less noticeable – but no less important – has been happening to America’s size of government. Measured by its spending, relative to the economy it affects, it hit its highest decade average of the last 70 years, just when the economy was registering its worst decade of performance in the last seven. Further, without fundamental changes, it will grow appreciably larger still.

America is closing in on a decade of lost economic growth. It is also beginning another decade of growing an already big government. If the two are indeed connected, then America’s former economic excellence will recede even further into the past.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.