“Get government off our backs!” It’s a chant we’ve heard a lot of over the last few years, usually in the deep, gruff voice of those old enough to remember the heyday of our parents and grandparents. It’s a call to a simpler time when there was less government, less taxation, and more to go around. At least, that’s the story we are told.
But an analysis of the size of our Federal Government as a share of the economy shows that while it is a shade bigger than it used to be, it’s way below its maximum. There are peaks in Federal Government size which fit not to an increase in social benefits or productive spending, but the very expensive line item that has been pricey enough to bring down governments and cultures for centuries – war.
In short, it’s time for the progressive left to embrace “smaller government” of a kind and to show that world that peace is not idealistic but practical.
It all starts with this simple chart below. This is a graph of total Federal Government outlays divided by the Gross Domestic Product (GDP):
Total Federal Outlays as a share of GDP, data from St Louis Federal Reserve
Total outlays includes everything, including off-budget items like the Afghan War and Social Security. It doesn’t take into account deficits or anything else – this is how much the Federal Government is a part of the total economy.
Overall, in the last 65 years, it averages out to 19.1% of the economy. It does seem to be generally climbing, having run 18% through the 1960s, 20% in the 1970s, and up to 22% in the 1980s before falling below 18% in the Clinton years. At the start of the Managed Depression in 2000 it gradually rose to 19% before spiking. Trend or not, it is the peaks within any possible rise which correspond to particular events:
| Year | Event |
| 1952 | Korean War |
| 1968 | Vietnam War |
| 1974 | Recession |
| 1982 | Military Buildup |
| 1991 | Gulf War I |
| 2008 | Two Wars + Recession |
All this stuff is expensive.
Of the six distinct peaks, 4.5 are definitely due to war or military buildup. The “OPEC Recession” of 1974 was a big one, depressing GDP badly. The big spike, to 24% of the economy, was due to the Afghan and Iraq Wars along with a bad downturn.
Since that time it’s come back down to 20%, which it should slip under in 2015. But what would it take to get it back down to the average, or even that fabled golden era when our Grandparents ran the show?
Given that military spending explains 75% of the spikes, it’s worth further analysis. Barataria gave this a good look back in September when the ISIS/ISIL crisis called on us to be the Global Policeman, again. When you look at our defense spending (not counting Homeland Security, military aid, etc) with respect to the rest of the world, it’s horrifying.
Police the world? Maybe. Isn’t the real competition in the global market?
We spent $685B on defense in 2012. While it’s down to $585 in 2015, it’s still quite a bit larger than the share that our GDP would suggest, compared to other nations. It’s hard for us to justify more than $397B, which is to say $188B less than we spend today.
That amounts to 1.1% of GDP. Where we spent about 20.1% in total Federal outlays in 2014, if we only had the defense outlays of an average nation we would have been at 19.0% – just under the 65 year average.
The first question when anyone proposes a decrease in defense spending is always, “Won’t that leave us weak and unable to defend our nation?” You can always say that more is good in any debate, but it would remain true that even with drastic cuts like this our close allies (Europe, Japan) would combine with us for a solid two thirds of all Defense spending around the globe, down from three quarters. We’d still spend twice as much as second-place China.
Now, there are always those who want to spend even more on defense. The latest Republican budget calls for a small increase in defense spending from today’s reduced level. But it’s worth noting that Obama produced a budget for 2016 that would have a deficit of only $380B. A reduction of just under $200B would leave that at a paltry $180B or less than 1% of our total GDP – and well within shouting distance of the last time we balanced our budget, in the Clinton years.
We can expect a lot of shouting first, however, so shouting distance is rather vast.
What keeps the global economy keepin’ on.
No matter what, we can see that the total Federal Outlays as a share of the economy has already fallen a dramatic 4% under President Obama. As the economy improves we might expect that share of the economy to continue to decline – unless Social Security payouts to retiring Baby Boomers accelerate faster than the economy itself after 2017. 2016 may represent the bottom in size of total Federal Government if we’re not careful.
It’s also worth noting that in 2012 the total take of state and local governments excluding what the Feds provided was 13.1% of GDP, 8.8% of that in taxes and 4.2% in fees (such as tuition, hospital bills, etc). The total size of government in the US is about 33% for those of you who keep track of this, but between all levels only 25% is in taxes.
Want a smaller government? We do have a lot to learn from the 1950s and 60s. The answer is a simple one – peace. Armies, ships, and planes are expensive and have always been the single largest reason our Federal budget has grown. Reducing it back to a level simply consistent with the rest of the world would give us a budget that even Eisenhower would recognize.
That may not be what “conservatives” really want, but if the call is for smaller government it is the only answer. Peace is the path to prosperity, which is to say that calling on the bravest young people to solve all our problems with their blood and sweat is a very, very expensive way to go about it. This is true while saying nothing about the morality of our military machine, leaving it up to an entirely pragmatic analysis of historical facts.
Progressives, are you ready to make the call for smaller government?
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Barataria - The work of Erik Hare 
As Eisenhower warned us, “Beware the military-industrial complex”. It totally took over once the chickenhawks came in & had something to “prove”.
Yes, that is a lot of what happened.
Although I agree with defense spending cuts, wouldn’t proponents of a bigger government be able to argue that an increase in defense spending is necessary as a result of threats from militant groups like ISIS and others? I’m more inclined to believe that, as a result of our increase in defense spending and becoming more involved in the affairs of others in the name of democracy, that it is possible that our involvement has given birth to some of the groups we now call our greatest threats to peace and democracy. Is this correct or am I missing a piece of the puzzle?
It is hard to see how ISIS, which does command our attention, really demands an expansion of our military. The number of strikes we are carrying out is not large, and is greatly exceeded by the training needed to keep so many pilots in shape.
We have certainly helped to create many of the groups we now face, usually by accident. Getting out of all of this is only going to promote peace, from what I can tell.
The question now becomes, “Who is powerful (and audacious) enough to bring the US to a diplomatic solutions leading to more peace?”
Yes, although sometimes I would put it as ” who will make the diplomats do the job they were hired to, rather than foist it off on the military?”
Nice! Understood! Thanks as always!
Not sure I am following this. Thinking in terms of government “spending” can ignore the fact that many important segments of the economy have a Federal component–TVA, Bonneville Power Authority, VA, Medicare/Medicaid …. The same people who say they want a smaller government often say they want these same things done as straight capitalist operations, ignoring the fact that the “government” operations are often lower cost and more efficient. (ie, Federally run health care programs don’t spend high proportions of their revenues for “marketing.”) Maybe, Erik, you could clarify your thinking here.
The real question is, I think, one of the balance–what part of the economy is optimally governmental? I would argue that those nations generally seeming better governed seem to have a bigger public sector than the US: Northern Europe, Scandinavia, Korea, Japan….but I haven’t dug out the numbers.
My thinking is that we really need to put our house in order before we can even think about the kind of social programs that other developed nations have. My guess is that when we do, they will be administered by States rather than the Federal government no matter what.
So where are we today? Perhaps the advocates of smaller Federal government are right. If you look at what the Feds do spend money on, so much of it only makes things worse from what I can tell – and at the very least distorts our foreign policy. Let’s cut it all back by taking a real hard look at what we spend our money on. The results are rather surprising, IMHO.
Forgot to say I totally agree with the notion of peace as consistent with a healthy economy. The warmongers, as well as being stupid and unaware, often seems to be fronting for “defense” contractors.
(I figured that. 🙂 )
I’m not sure that “spending” is the big government. I think regulation and intrusion is the REAL big government.
How does that compare?
THAT may well be a huge problem, and I haven’t found a good way to measure it. I’m not against regulation as a concept, but there are good ways and bad ways to do it. A huge book of regulations for every action during the day usually does a lot less good than incentives and support for doing the right thing.
So, yes, I should look at that. I really don’t know how right now, though.
Dude, are you drunk?
…and it stoned me
to my soul…van morrison
No. The size of the Federal Government has been largely a function of the size of the military in the PostWar era. It’s that simple.
Interesting views, here. I’m generally supportive, but my perspective is:
In the UK, the Labour Party are saying that the next set of austerity policies suggested by the Conservative Party will take UK government spending back to the 1930s. Its true, in terms of spending as a proportion of GDP. However, due to the size of the UK economy being larger now than them, its not true in absolute terms.
Also, there is a debate on whether to cap UK defense spending at 2%. I’m a pragmatist when it comes to things like this: 2.1% and 1.9% might not be much, but I have heard of the ‘critical mass of force’ – ie you can do things with 2 soldiers, that you might not be able to do with 1 soldier (a sniper and point), those soldiers also need the equipment to carry out the mission you expect of them and, get home safely. The logistical support. Even jet and drone pilots need training and breaks, so weddings aren’t bombed.
The ideological motive for small government, is that ‘business knows best’ (how allocate resources, using the profit motive). Its the principle reason the cuts have been going so deeply in the UK – that business will take up the slack. Like I say, in an economics textbook its true and, given time, does happen once you’ve allowed people to re-train.
One thing I learnt at University on my ‘Industry and Innovation’ course was that there seemed to be a ‘triple-helix’ of support: Academia, Government and Industry. Its best expressed that blue-sky research leading to practical military devices and that led to civilian spin-offs, like the computer. I think the internet and non-stick frying pans are the only ‘peaceful’ innovations. Take Einstein, the atomic bomb and nuclear power stations as one example. ‘America By Design’ was the course *must read* book (another interesting book, on the course, was ‘War, Economy and Society’). Also, the United States economy took off, although not solely because, after the Civil War due to slave labour being outlawed meaning the slave-intensive industries became mechanized, improving efficiency, and the surplus labour being used elsewhere.
Perhaps this is a two-fold solution, then, rather than a simplistic ‘one policy’ choice. Grow the economy and pursue peace at home and abroad – international trade agreements aid peace between nations (its the founding ideology of the European Union and Keynes wrote that the dislocation of the international trade agreements [helped] create WWI) and peace creates political and economic stability, which allows further economic growth – look at Britain (and its economic ‘rivals’) in the late 18th Century.
Still, I don’t mind a defense policy, I would rather it be based on defense, though, and not on dodgy dossiers. Thomas Hobbes argued that the State is a lesser evil than a life nasty, brutish and short. I tend to agree.
Thank you for that perspective! Yes, here in the US we tend to look at things very differently – and I would say very destructively. Our status as the Global Policeman needs to be challenged in a deep and fundamental way before we can get our own house in order and we can be truly useful for a peaceful, prosperous world. I am presenting here an alternative way of looking at things – one that I feel is supported by data.
I have not heard of “America By Design”. I am fascinated by what you read about us now. 🙂
We do need a defense policy, and we do have actual enemies we must be vigilant about. But to do everything everywhere is utterly unreasonable. More to the point, we don’t even talk about it at all. It’s very destructive.
I point I just realised: military naval vessels are used in less controversial ways, like protecting shipping from piracy.
Yes, there is always a need for a lot of this. But 19 aircraft carries? Honestly …
This makes sense to me. Notice how small government got under Clinton.
We should cut the military dramatically & bring all our troops back from overseas. This is nothing but a way for defense contractors to make money.
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/08/28/defense-spending-in-the-u-s-in-four-charts/
What Erik has conveniently omitted is that defense as a percent of GDP has decreased by over 50% since the post WW II peak in the early 1950s. The reason that conservatives think we can afford our current military spending is that US GDP is $16 trillion.
That is a glaring omission in your analysis and tends to negate your arguments in the eyes of conservatives. For liberals it is an okay analysis since we know liberals always want decreased defense spending. The inquisitive should check the article above.
So unfortunately today’s blog is not persausive enough for those less ideologically driven.
1) Thank you for that link, it’s a good article! I’m only ashamed I missed it before I wrote.
2) Note that inflation adjusted defense spending in the late 1990s is about $350B. That is what I am proposing. While we weren’t at war in that period, the Clinton administration did have a tendency to wang cruise missiles at nearly everyone – to the point where we essentially ran out of them (hit our minimum stockpile). So we can’t say that we were “weaker” at that time. I think this is a good goal.
3) Note the inclusion of the off-budget wars in the first graph – is that carried through in the other graphs? Pushing wars off budget really makes it hard to perform good analysis. Part of the reason I went with total federal outlays is that you can’t hide anything in that number – social security outlays and everything. I think some of the other graphs do not include those wars.
4) In all cases, even mine, a lot of defense-like spending on homeland security, intelligence, and foreign aid is not included in any of this. It’s another $61B for HS alone.
I believe that this makes my point even stronger. The point is that the Federal budget as a share of the economy rises and falls primarily on defense spending, with the economy the secondary effect. That seems to hold true based on these charts. The political points that I want to make from that are:
a) If you want smaller government, you have to support smaller defense spending.
b) Auditing the Pentagon remains a high priority.
c) While there is no “perfect” share of Federal government in the economy, somewhere in the 18-19 percent range is a postwar norm and should be accepted as at least reasonable by all parties. We are nearly in that range now, and a reasonable cut to defense (possibly pending an audit) would get us firmly there.
Since you are a regular reader, you can see that I am putting together a series on how we get our Federal budget under control in a way that guarantees a certain degree of stability and sustainability while maintaining the ability to “pump prime” in downturns.
What I have not said yet is that I think this is essential – a good idea in normal times, but critical as the population ages and the Boomers retire. This is what I think we have to do in the new economy that is coming, and the age of the population is a major feature of that.
Again, thank you for this link. I think it makes my points even stronger. If you disagree (what, you? 🙂 ) please let me know (like you wouldn’t 🙂 ).
A lot of us read you because you are a decent writer. Not everyone can come with with 3 columns per week. You could write about your shoes and if it seems interesting many of us will read it. : )
… on the budget looking at postwar averages is not a bad way to approach it. That would be interesting for each spending area. Same for revenue.
Well, thank you! That’s the nicest thing you’ve ever said!
You’re right, it would be really good to see every broad category for expenditures and receipts in one line graph to see what has changed. I think you’re hinting that the idea that it’s a constant share of GDP except for strange events is a weird one, and I agree that this is surprising.
However, real GDP has gone up a factor of 8 since 1950 (!!) while population has just over doubled. So my hunch is that social payouts have been living off of the increased productivity (back to the robots!) which frankly is what they should be doing, IMHO.
If only I didn’t have to earn a living I could put all this together. Perhaps a kickstarter grant for a few month’s living expenses is in order? 🙂
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