Politicians across the spectrum are intent on cutting government spending. It is true that Democrats may not search for cuts with as much enthusiasm as Republicans, nor liberals look for savings in the same areas as conservatives. But few question the overall goal: reducing the federal government's share of the economy.
Some advocates of a smaller government sector obviously base their views on political and social considerations. Conservatives may argue that it is simply wrong for working taxpayers to have to subsidize nonworkers who claim welfare, or for the government to provide health care, food or cheap shelter for people who have larger families than they can afford, or for businesses that cannot make a profit to be bailed out by the public.
But many people looking for ways to cut federal programs are not convinced that welfare claimants are basically lazy and unworthy, or that the federal government has no business trying to redistribute income, or that the jobless should suffer as an inducement to find work.
Rather, they have become convinced that government spending is bad for the economy. Many economists would question that.
James Tobin of Yale University recently described as "heresy" the view that the economy will be stronger and faster growing if the government spends and taxes less. Contrary to the impression given by administration officials, there is no magic number for the federal government share in the economy that will produce the best possible economic performance.
A comparison across countries shows that there is no obvious relation between economic performance and the government share in the economy. A recent study of the performance of seven major industrial economies since World War II confirmed that government has grown rapidly in the United States in the last decade. But it has grown even faster elsewhere.
"In view of current concern in this country about the economic effects of rising government expenditures, it is of interest to note that the United States had by far the slowest rise of government expenditures" relative to gross national product of the seven countries studied, wrote Herbert Stein, chairman of the Council of Economic Advisers under President Nixon. "By 1979 the ratios of expenditures to GNP for the United States and Japan were approximately equal and significantly below the ratios in the four other countries."
President Reagan, however, has blamed the growth in federal government for many of the economic ills of recent years. Administration officials argue that shaving a few percentage points off the federal government's share in GNP will give a tremendous fillip to the economy.
Their descriptions of government spending explain a lot about their arguments against it. Murray Weidenbaum, chairman of the Council of Economic Advisers said recently, for example, that "it is in the private sector that products are created, markets are developed, factories are built, productive jobs are generated, and economic progress truly advanced."
Treasury Secretary Donald Regan described the growth of government since 1975 thus: "From 1975 onward, the government took up more and more of the nation's real economic resources. In 1974 the federal government's share of the gross national product was 19 1/2 percent. But in 1981 it was almost 24 percent--almost one of every four dollars generated by the U.S. economy."
Both of these comments suggest the same thing: The private sector produces goods that the public sector then uses up. But that is grossly misleading.
First, the public sector itself also produces things. Some of these are material goods, such as bridges or highways or bombs. Others are services, such as education. The resources that go into this production of goods and services have a recognizable and valuable output, albeit one that is determined by the public political process rather than by private decisions by firms and individuals.
Second, much of what is called government "spending" is government "transferring." When the unemployed or retired receive cash benefits from the government, they spend them in the private sector. The government has interfered in the economy by altering the distribution of income--taking money from taxpayers and giving it to beneficiaries of spending programs--but it has not commandeered privately produced resources for public consumption.
Third, the major economic problem facing the nation today is not that there are too few "real resources" because the government is swallowing them up, but that there are too many resources--people, factories and machinery--that are unemployed.