President Reagan's assertion last week that government expenditures are the source of our current "economic calamity," and his suggestion that growth of U.S. government expenditures put us at a disadvantage in the world marketplace compared with our major competitors, call for sharp factual correction on both counts. From a brief survey of trends in government spending in the United States and abroad over the past 20 years, I conclude that the relative decline in U.S. government spending, not a rise, is the source of some of our troubles abroad.
But first, the broad facts. Contrary to widespread impresson, the fact is that the calls of the U.S. federal government on our national output have fallen over the past 20 years relative to total output, not risen. In 1960, the federal government purchased about 11 percent of the economy's total output; by 1980, this portion had dropped well below 8 percent.
The same point can be made in another way. Whereas the total output of goods and services (in real terms) doubled during this period, the federal government's purchases of goods and services rose only by about two-thirds. Moreover, within that total, the expenditures related to foreign affairs -- mainly national defense and foreign aid -- actually declined slightly.
But how does this decline square with the general impression that government has gotten ever (proportionately) larger over this period? The answer comes in three parts.
First, the regulatory role of government has increased sharply, especially in the past Decade. Environmental protecton, occupational health and safety and affirmative action, to name three of the most important ones, all intruded the federal government into the detailed functioning of business firms and other organizations to a much greater extent than may be appluaded, the degree of intrusion by the regulators has become oppressive. But this regulatory intrusion should not be confused with excessive government spending. Much regulation can take place on relatively little money, and cutting federal spending will not by itself eliminate intrusive regulation.
Second, state and local government spending has risen more rapidly than total output during the past 20 years, roughly compensating for the proportionate decline in federal purchases, so that total government purchases have remained roughly unchanged at around 20 percent og GNP over this period. In 1960, federal purchases exceeded total state and local purcahses; by 1980, state and local purchases were nearly twice federl purchases.
Third, the federal government has increased greatly what are called "transfer payments" over this period of time: transfers to state and local governments (which helped them finance their sharp increases in spending), interest on the public debt (higher interest rates require larger government payments), grants to individuals in the form of such programs as Medicaid and food stamps and, finally but not least, Social Security payments. These transfer payments, taken together, have grown in real terms by a factor of three in the past 20 years. That is 50 percent more rapidly than the economy grew.
Nearly half of this growth alone was Social Security benefits, which (we have been told for years) are financed out of our own contributions and those of our employers on our behalf. Should they be treated on a par with, say, aid to dependent children (a grant program) or the salaries of men and women in the armed forces? These disbursements reflect entitlements previously paid for by a gradually aging population, not government spending gone wild (which is not to deny that some of the specific benefits may be too generous, or to readily given).
Among other major countries, only in Japan and Canada does the central government purchase a lower share of the GNP, and in all other major democracies except Canada the trend is up, rather than down, as in the United States. If state and local purchases are added to federal ones, the United States falls below West Germany, the United Kingdom and Canada (where the provinces spend proportionately more than our state and local governments), and the trend is rising in every country except the United States.
Adding in transfer payments raises all the numbers but does not change the generalizations: every major democratic nation except Japan shows higher total government disbursements than the United States -- over 40 percent of GNP in all the major European countries, compared with around 30 percent here -- and the rising trend over the past 20 years is markedly higher everywhere else than it has been here. I conclude that if government expenditures are an ailment, other economies should be ailing worse than the United States. Certainly the level and recent trends of these expenditures cannot account for a poorer relative performance of the United States in world markets, as President Reagan contended.
But what about the central proposition, whatever the detailed facts, that federal government spending should be cut? I find it remarkable and disturbing that despite a doubling of the national economy over the last two decades, we have recently spend less in real terms than we did 20 years ago on those elements of the budget directly concerned with foreign affairs: national defense, economic and military assistance to foreign countries, dissemination of information abroad on our society and its values, and manning our overseas embassies. Foreign economic assistance has declined by nearly 10 percent since 1960, which as the last year of the Eisenhower administration -- well after Korea, well before Vietnam -- was in no sense an extraordinary year in terms of federal expenditures.
Much about the loss U.S. leadership in the world is exaggerated, and some loss from the 1950s was inevitable as the economic strength and political prowess of our major allies reasserted themselves. But the loss of position has been unnecessarily exacerbated by our unwillingness to spend any of the growth of our still-dominant economy toward maintaining our position in the world. A major, wealthy power, which the United States is, cannot run its foreign affairs on the cheap and retain for long the esteem and ready cooperation of other nations. If we wish to restore our position, and I believe it is esential that we move to do so, we must be willing to spend more on defense and foreign economic aid.