Full text of Economic Commentary (Federal Reserve Bank of Cleveland) : Does the Federal Government Spend Too Much?, February 9, 1981

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal
more
rather
than
less spending.
Many
economists
assert that
financing
government spending through
deficits also biases
outlays
upward,
because
part
of the
burden of paying for current expenditures
is shifted
forward
to future
generations
that
The

would redeem or service the debt.
abil ity of firms
or individuals
to

borrow
current

in this manner is limited by their
and prospective
net-worth
posi-

tions, but such constraints
do not apply to
the U.S.
government
in any
practical
sense. While the total amount
of funds
available in credit markets at any particular time
is limited,
the market
views
Treasury debt as virtually risk-free. Consequently,
the
Treasury
is a preferred
borrower,
and always first in the credit
queue. If the Federal Reserve is unwilling
to accommodate
Treasury
borrowing,
private borrowers
may be squeezed
when
funds are scarce.
Prior to the 1960s, deficit finance was
usually associated
with periods of war or
business recession. Since the late 1950s, however, Treasury borrowing to finance deficits
has become increasingly
common.
In fact,
since FY 1960, the budget has been in surplus only twice. Over this period, deficits
often have shown no tendency to narrow as
the economy
approached
full employment.
Consequently,
new Treasury borrowing from
the public has increased from an average of
1.3 percent between 1955 and 1959 to 19.0
percent between 1975 and 1979. In addition,
total
government-related
borrowing
rose
from 3.2 percent
to 26.7 percent
of all
credit-market
funds over the same period,
and there appears to be an increasing use of
loan guarantees.
The increasing reliance on deficit finance
since the late 1950s has been explained
in
terms of a simultaneously
growing acceptance
of Keynesian economics,
which legitimized
the use of deficit spending
for countercyclical management
of the economy.
In
addition,
beginning
in the mid-1960s,
the
focus of fiscal policy shifted to maintaining
GNP at its potential,
or full-employment,
level instead of balancing the budget over the
business cycle. In a dynamic economy, po-

tential output and full employment
are complex and somewhat ambiguous concepts that
are not easily quantified.
Unfortunately,
the
numerical
measurements
of capacity
often
ignored the ambiguities and usually indicated
that the economy was operating below capacity. Fiscal policies, attuned to forcing the
economy

to capacity

and removing

vestiges of unemployment,
tinuous chain of deficits
state of the business cycle.

produced
regardless

Chart 2 Select Measures
of Purchasing Power

of the

the last
a conof the

Growth

(1978:IQ = 100)
Index number
115

Real transfer payments
Real compensation
less taxes
Real wages and salaries less taxes

-

110

Trimming

the Budget

Concern for the expanding size and scope
of the federal governmem
is not a new phenomenon; in fact, it is practically part of the
national
heritage.
about the growth

Nevertheless,
criticisms
of federal spending have

been unusually vehement in recent years.
By the late 1970s, the economic malaise
of high inflation, lagging productivity
growth,
and large wealth transfers to foreign oil producers brought real income growth to a halt.
Tax burdens, however, continued
to rise as
inflation pushed individuals into higher tax
brackets.
Personal
income
taxes equaled
15.5 percent of personal income in 1979,
a sharp increase from 15.0 percent in 1978
and 13.4 percent
in 1975. Moreover, the
federal government's
tax and transfer-payment systems
were rapidly
shifting
real
purchasing
power from wage and salary
earners
to transfer
recipients.
After-tax
wages and salaries, adjusted
for inflation,
began declining
in the second quarter
of
1979,
whi Ie transfer
income,
which
is
automatically
adjusted
for inflation,
grew
rapidly (see chart 2). The divergence intensified through the election year.
The public-rightly
or wrongly-seems
to
link inflation,
lagging productivity
growth,

and the recent declines in the real purchasing
power of wages and salaries to high levels of
government
spending, taxing, and persistent
federal budget deficits. To the extent the
general public associates
federal spending
with the current economic malaise, the perceived costs (measured in terms of disposable
income) of not opposing federal spending
programs rise. The average wage and salary
worker is likely to become more vocal in his
opposition
to spending and taxing policies.
Moreover,
the perceived
costs to political
interest groups and Congressmen
of trading
support on various programs will rise. Deficits, which may shift the costs of current
federal spending to future generations,
become less attractive
when the public associates deficits with current economic problems. Moreover, the public will be more willing to reduce those federal programs that are
luxury goods when its purchasing power is
bei ng strained.
The perception
that spiraling government
spending and persistent budget deficits have
contributed
to the current economic malaise
provides a strong constraint
against the inherent bias in government
toward bigness.
Today's climate bodes well for a significant
reduction in federal budget growth.

Federal Reserve Bank of Cleveland
Research Department

105

BULK RATE
U_S_ Postage Paid

P.O. Box 6387
Cleveland,OH
44101
Address correction

Cleveland,OH
Permit No. 385

requested

100

Reserve Bank of Cleveland

February

~f.QI1omicCommentary
Does the Federal Government Spend Too Much?
by Owen F. H umpage

The Reagan administration
has set itself
to the herculean task of reducing the growth
of federal spending. The administration
plans
to trim approximately
$5 billion from the
current budget (FY 1981) and approximately
$41 billion from the FY 1982 budget. At
the same time, the administration
proposes
to increase military spending and maintain
basic services to the poor. Although the task
of slowing federal spending is not insurmountable, skepticism is a natural reaction. In addition, the Reagan administration
is proposing
budget cuts, while weak economic activity is
automatically
increasing expenditures
in such
areas as unemployment
compensation.
This Economic Commentary discusses the
seemingly uncontrollable
growth of federal
spending. It asserts, however, that no budget
expenditure
is uncontrollable in any but the
very narrowest, and misleading, sense of the
word. Instead, this Economic Commentary
argues that governments inherently are biased
toward "more" rather than "less" spending.
This bias stems from a large number of factors that are institutional,
political, and economic in character. At root, however, is the
need to provide public services th rough a
non-price, political system. The process focuses attention

on benefits

that

usually

are

Address Change

D Correct as shown
D Remove from mailing list

95
I II III IV I
1978
SOURCE:
Economic

Department
Analysis.

II III IV I II
1979
1980
of Commerce,

Bureau

of

Please send mailing label to the Research
Federal

Reserve Bank of Cleveland,

Department,

P.O. Box 6387, Cleveland,

OH 44101.

9, 1981

Owen F. Humpage is an economist, Federal Reserve
Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.

delivered

to specific

groups

of individuals,

but the process cannot adequately
account
for the total costs that are widely diffused or
shifted to future generations.
The inherent
government
bias toward large budgets has
been augmented
in recent years by macropolicies, designed to hone the economy
to
full employment,
and inflation, which automatically transfers income from the private
to the public sector.

The Federal Sector
Despite repeated attempts to curb federal
spending, it has grown as if propelled by its
own momentum.
Between FY 1970 and FY
1980, for example, federal expenditures,
as
measured in the budget, grew 11.5 percent
per year on average, and the ratio of federal
expenditures
to gross national product (GNP)
rose from 20.3 percent in FY 1970 to 22.6
percent in FY 1980. Federal expenditures
will top 23 percent of GNP in the current
fiscal year.
Almost two-thirds of the growth in total
federal spending between FY 1970 and FY
1980 is attributable
to expenditures
for human resources. Aid to state and local governments, interest payments on federal debt, and
expenditures
for natural resources, environment, and energy also have grown rapidly
both in absolute terms and relative to total
budget spending since FY 1970. Many of the
fastest-growing
federal
programs
are also
entitlement
programs. Entitlement
programs

automatically
provide benefits to any person
or state or local government
that meets requirements
set by U.S. law. Unless Congress
is willing to change these laws-a highly visible, politically difficult, and time-consuming
process-entitlement
outlays in any given fiscal year are determined
largely by the number of eligible recipients in that year. Entitlement programs grew at a rapid 14.6 percent
average annual rate between FY 1971 and
FY 1980, and rose from 47 percent to 56
percent of total outlays over this period.
The budget, however, does not tell the
whole story about the growth of the federal
sector, because a significant
portion of the
government's
business is not recorded in the
budget.
Beginning
in 1971, for example,
Congress rather arbitrarily moved some government
agencies
"off-budget."
So-called
"off-budget"
spending has grown enormously
since then and is expected to top $20 billion
in FY 1981. Moreover, the government sponsors many agencies, such as the Federal
National Mortgage Association, and mortgage
pools, such as the Government
National
Mortgage Association's
mortgage pool, which
borrow and relend in the credit market. Government-sponsored
agencies
and mortgage
pools raised $48.7 billion from credit markets during FY 1980, or 11.8 percent of the
total funds raised. Although
such agencies
technically
may not be considered
part of
the government
or part of the budget, they
are similar
to federal
government
agencies in that they divert resources from uses
dictated by private markets to uses dictated
th rough the pol itical process. Federal government loan guarantees have exactly the same
effect. Loan guarantees" however, are only recorded as federal budget expenditures
when
a borrower defaults on a guaranteed loan. In
FY 1980, new loan guarantees
equaled
$32.4 billion, or 7.8 percent, of total creditmarket funds.
Many factors, including recessions, high
unemployment,
persistent
inflation,
and a
growing proportion
of retired persons, have

why federal spending has grown over the past
ten years; why it sometimes grows in excess
of budget projections;
and why it is at times
very difficult to reduce expenditures.
Nevertheless, no spending program is uncontrollable, and no budget has a life of its own.
Congress, as stipulated
in the Constitution,
maintains the power of the purse. If federal
spending is controllable,
then what explains
its relatively rapid growth, and what explains
the recent dissatisfaction

"Luxury

with this growth?

Goods"

One reason why federal spending has been
expanding
relative to GNP may simply be
that our society wants more government services. Many government
services are similar
in some respects to "luxury goods"; as standards of living rise, voters are willing to devote a larger share of thei r incomes to such
publ ic services. Developed countries, for example, devote more resources than less-developed countries to such publ ic goods and services as parks, space exploration,
consumer
information,
environmental
improvement,
and advanced highway networks.
In many
respects the rapid growth of U.S. humanresources spending fits the luxury-goods
interpretation.
It is much easier to redistribute
income when the average level of real disposable income is high and rising than when
it is low or falling. When incomes are rising,
transfers can be made without a reduction in
the net worth of middle- and upper-income
groups; this is not true when incomes are failing. According to this Iuxury-goods
view of
government
services, one should not be surprised to see the share of GNP devoted to
human-resources
spending (or to government
in general) rise as GNP grows. Although there
naturally may be a limit to the share of GNP
that Americans will devote to the government
sector, many European nations have significantly larger government
sectors than the
United States.

been identified as contributing
to the rapid,
seemingly uncontrollable
growth of the fed-

Private Sector

eral sector in general and entitlement
programs in particular.
These factors explain

Even if one accepts the luxury-goods view
as a partial explanation
for the growth in

vs. Public Sector

government
spending,
there are reasons to
believe that
the amount
of goods and
services that
the public
sector
provides
would always exceed the amount that the
private sector would provide if the private
sector
produced
these
same goods and
services.
In government,
there is an inherent bias toward large budgets.
In competing
for profit, private-sector
firms offer goods and services at a per-unit
price that reflects the cost of production.
Individuals only purchase goods and services
if the price does not exceed their subjective
evaluation of the item's worth. Those who
do not buy an item generally cannot benefit
from its consumption.
In addition, the desire
for profits, together with the fact that consumers buy less at higher prices, provides a
strong incentive for firms to minimize production costs.
In contrast,
most services provided
by
governments are potentially available for consumption
by all citizens, and the costs also

to determine

the amount

of public

services

and to allocate their costs. In the United
States this function is performed
at the national level through elected representatives
in the legislative and executive branches.

Lobbying for Public Services
Most of the services provided by the government
benefit specific groups of citizens
appreciably
more than the public at large.
Social-Security
payments
benefit
retirees,
food stamps benefit the poor, and trade restrictions
benefit
specific
industries.
The
costs of such government
services, however,
are not borne by the benefiting groups alone,
but are more widely diffused through the

are borne by all taxpayers, but not in relationship to the amounts that each person consumes or the benefits that each derives."
Some services, such as national defense or
disease control,
benefit all citizens in relatively equal amounts. No individual can be
excluded from participating
in the benefits.
Other government
services, such as elementary and secondary education,
do not necessarily benefit all individuals, but the government excludes no one from participating
in
the benefits. Because governments
cannot,
or do not, charge a unit price for the goods
and services they provide, consumption
does
not gauge whether the costs of programs ex-

tax system.
Often individuals
who stand to benefit
most
directly
from
government
actions
form pol itical interest
groups to promote
their
causes.
They
lobby
Congress,
extolling the importance
of their programs
and promising
political
support
in return
for congressional
backing. Pol itical interest
groups
are useful
because they provide
Congress with a measure of the intensity
of the public's
preference
for specific
issues. This measure of public preference
will be incomplete,
however,
if an adequate forum for opposing views does not
exist.
Because
the costs of government
programs
are widely diffused,
many programs are unopposed.
The costs to individuals of mounting
an effective
opposition often greatly exceed the cost of not
opposing an issue.

ceed the benefits derived by society. Moreover, while governments
may attempt
to
minimize the costs of providing public goods
and services, the absence of a profit motive
eliminates the ultimate incentive to do so.

Moreover, even if all groups generally agree
on the need to cut government spending, each
group naturally seeks to protect its own programs. Besides reaping individual benefits far
in excess of individual costs, interest groups

In the absence of a market mechanism,
governments
rely on a political mechanism

may view their specific programs as an inconsequential
part of total spending.
Food

1. The government
requirements,
all

individuals

share some probability

those requirements.
participation

may establish certain

such as being unemployed;
The government

via a price mechansim.

el igibil itv
however,
of meeting

does not limit

stamps, for example, amount to only 1.6 percent of the total federal budget; in some
years, budget errors have been larger.
Political interest groups and Congressmen
have a strong incentive to trade their support
for various and unrelated programs to secure

passage of measures that benefit their specific
constituencies.
Such compromises
are a necessary part of a democratic pol itical process.
Again, however, because the costs of government programs are spread widely across the
voting public, members of one interest group,
for example,
incur only a small additional
cost for supporting
another interest group's

Chart 1

Profits and Losses

Profi ts

-

Maximum

programs. At the same time, they benefit
much more if, through trading votes, they
secure passage of their own programs. Congressmen or interest groups can increase the
size of a political coalition until the additional costs of trading support exceed the
benefits of doing so. These characteristics
of
the pol itical process seem to bias federal
spending upward. Th is bias does not exist in
a competitive
private market where costs and
benefits are equated through prices and are
internalized
to those consuming
the goods
and where restraint of trade does not exist.
The incentive structure of government also
adds to the bias.2 In contrast to the private
sector, there is less incentive for bureaucrats
to seek routinely the most efficient level or
means of production.
None of the many
government
agencies responsible for producing public services attempts to generate profits; the salaries earned by agency heads or
management
are not related to profits. Instead, salaries, prestige, and political power
of agencies' heads are more closely tied to
the size and scope of programs.
If public
goods and services could be produced in the
private
market,
a profit-maximizing
firm
would produce at point A on chart 1. In contrast,
a budget-maximizing
government
agency would produce up to point B. In the
shaded area of chart 1, the additional costs
to society of expanding
a program exceed
the additional benefits. A private fi rm would
go out of business if it produced
beyond
point B. Similarly, government agencies probably would not provide services beyond
point B, because the waste at this level would
be evident

2.

See, for

market

to voters.

example,

William

Decis ion Making:

of Bureaucracy,"
58 (May 1968),

Consequently,

while

A. Niskanen,

The Peculiar

"Non-

Economics

American Economic Review,
pp. 293-305.

vol.

~

0,
J

Losses
Amount

produced

government
agencies do not conspicuously
waste budget funds, the incentive structure
in the public sector nevertheless biases agencies toward inefficiently
large programs.

Expenditures, Revenues, and Deficits
Also contributing
to the growth in federal
spending in recent years is the congressional
treatment
of expenditure
and tax legislation.
Various appropriation
committees
consider
spending proposals, while the House Ways and
Means Committee
and the Senate Finance
Committee consider tax proposals separately.
Until the Congressional
Budget Reform and
Impoundment
Control Act of 1974, appropriation committees
did not need to consider
various spending initiatives in light of total
spending and available receipts. The Congressional Budget
Reform
and Impoundment
Control Act established procedures to place
a ceiling on total outlays and a floor on total
receipts. It also established two budget committees to oversee and coordinate the budget
process.
Unfortunately,
when
spending
threatened
to breach the limits set by the new
process, the limit rather than spending was
adjusted. The deficit was still the residual in
the budget process.
Understanding
the
Treasury's
unique
ability to borrow and the changing
attitudes about
deficit
finance
is important
for appreciating
the congressional
budget
procedure
and the bias in government
for

automatically
provide benefits to any person
or state or local government
that meets requirements
set by U.S. law. Unless Congress
is willing to change these laws-a highly visible, politically difficult, and time-consuming
process-entitlement
outlays in any given fiscal year are determined
largely by the number of eligible recipients in that year. Entitlement programs grew at a rapid 14.6 percent
average annual rate between FY 1971 and
FY 1980, and rose from 47 percent to 56
percent of total outlays over this period.
The budget, however, does not tell the
whole story about the growth of the federal
sector, because a significant
portion of the
government's
business is not recorded in the
budget.
Beginning
in 1971, for example,
Congress rather arbitrarily moved some government
agencies
"off-budget."
So-called
"off-budget"
spending has grown enormously
since then and is expected to top $20 billion
in FY 1981. Moreover, the government sponsors many agencies, such as the Federal
National Mortgage Association, and mortgage
pools, such as the Government
National
Mortgage Association's
mortgage pool, which
borrow and relend in the credit market. Government-sponsored
agencies
and mortgage
pools raised $48.7 billion from credit markets during FY 1980, or 11.8 percent of the
total funds raised. Although
such agencies
technically
may not be considered
part of
the government
or part of the budget, they
are similar
to federal
government
agencies in that they divert resources from uses
dictated by private markets to uses dictated
th rough the pol itical process. Federal government loan guarantees have exactly the same
effect. Loan guarantees" however, are only recorded as federal budget expenditures
when
a borrower defaults on a guaranteed loan. In
FY 1980, new loan guarantees
equaled
$32.4 billion, or 7.8 percent, of total creditmarket funds.
Many factors, including recessions, high
unemployment,
persistent
inflation,
and a
growing proportion
of retired persons, have

why federal spending has grown over the past
ten years; why it sometimes grows in excess
of budget projections;
and why it is at times
very difficult to reduce expenditures.
Nevertheless, no spending program is uncontrollable, and no budget has a life of its own.
Congress, as stipulated
in the Constitution,
maintains the power of the purse. If federal
spending is controllable,
then what explains
its relatively rapid growth, and what explains
the recent dissatisfaction

"Luxury

with this growth?

Goods"

One reason why federal spending has been
expanding
relative to GNP may simply be
that our society wants more government services. Many government
services are similar
in some respects to "luxury goods"; as standards of living rise, voters are willing to devote a larger share of thei r incomes to such
publ ic services. Developed countries, for example, devote more resources than less-developed countries to such publ ic goods and services as parks, space exploration,
consumer
information,
environmental
improvement,
and advanced highway networks.
In many
respects the rapid growth of U.S. humanresources spending fits the luxury-goods
interpretation.
It is much easier to redistribute
income when the average level of real disposable income is high and rising than when
it is low or falling. When incomes are rising,
transfers can be made without a reduction in
the net worth of middle- and upper-income
groups; this is not true when incomes are failing. According to this Iuxury-goods
view of
government
services, one should not be surprised to see the share of GNP devoted to
human-resources
spending (or to government
in general) rise as GNP grows. Although there
naturally may be a limit to the share of GNP
that Americans will devote to the government
sector, many European nations have significantly larger government
sectors than the
United States.

been identified as contributing
to the rapid,
seemingly uncontrollable
growth of the fed-

Private Sector

eral sector in general and entitlement
programs in particular.
These factors explain

Even if one accepts the luxury-goods view
as a partial explanation
for the growth in

vs. Public Sector

government
spending,
there are reasons to
believe that
the amount
of goods and
services that
the public
sector
provides
would always exceed the amount that the
private sector would provide if the private
sector
produced
these
same goods and
services.
In government,
there is an inherent bias toward large budgets.
In competing
for profit, private-sector
firms offer goods and services at a per-unit
price that reflects the cost of production.
Individuals only purchase goods and services
if the price does not exceed their subjective
evaluation of the item's worth. Those who
do not buy an item generally cannot benefit
from its consumption.
In addition, the desire
for profits, together with the fact that consumers buy less at higher prices, provides a
strong incentive for firms to minimize production costs.
In contrast,
most services provided
by
governments are potentially available for consumption
by all citizens, and the costs also

to determine

the amount

of public

services

and to allocate their costs. In the United
States this function is performed
at the national level through elected representatives
in the legislative and executive branches.

Lobbying for Public Services
Most of the services provided by the government
benefit specific groups of citizens
appreciably
more than the public at large.
Social-Security
payments
benefit
retirees,
food stamps benefit the poor, and trade restrictions
benefit
specific
industries.
The
costs of such government
services, however,
are not borne by the benefiting groups alone,
but are more widely diffused through the

are borne by all taxpayers, but not in relationship to the amounts that each person consumes or the benefits that each derives."
Some services, such as national defense or
disease control,
benefit all citizens in relatively equal amounts. No individual can be
excluded from participating
in the benefits.
Other government
services, such as elementary and secondary education,
do not necessarily benefit all individuals, but the government excludes no one from participating
in
the benefits. Because governments
cannot,
or do not, charge a unit price for the goods
and services they provide, consumption
does
not gauge whether the costs of programs ex-

tax system.
Often individuals
who stand to benefit
most
directly
from
government
actions
form pol itical interest
groups to promote
their
causes.
They
lobby
Congress,
extolling the importance
of their programs
and promising
political
support
in return
for congressional
backing. Pol itical interest
groups
are useful
because they provide
Congress with a measure of the intensity
of the public's
preference
for specific
issues. This measure of public preference
will be incomplete,
however,
if an adequate forum for opposing views does not
exist.
Because
the costs of government
programs
are widely diffused,
many programs are unopposed.
The costs to individuals of mounting
an effective
opposition often greatly exceed the cost of not
opposing an issue.

ceed the benefits derived by society. Moreover, while governments
may attempt
to
minimize the costs of providing public goods
and services, the absence of a profit motive
eliminates the ultimate incentive to do so.

Moreover, even if all groups generally agree
on the need to cut government spending, each
group naturally seeks to protect its own programs. Besides reaping individual benefits far
in excess of individual costs, interest groups

In the absence of a market mechanism,
governments
rely on a political mechanism

may view their specific programs as an inconsequential
part of total spending.
Food

1. The government
requirements,
all

individuals

share some probability

those requirements.
participation

may establish certain

such as being unemployed;
The government

via a price mechansim.

el igibil itv
however,
of meeting

does not limit

stamps, for example, amount to only 1.6 percent of the total federal budget; in some
years, budget errors have been larger.
Political interest groups and Congressmen
have a strong incentive to trade their support
for various and unrelated programs to secure

passage of measures that benefit their specific
constituencies.
Such compromises
are a necessary part of a democratic pol itical process.
Again, however, because the costs of government programs are spread widely across the
voting public, members of one interest group,
for example,
incur only a small additional
cost for supporting
another interest group's

Chart 1

Profits and Losses

Profi ts

-

Maximum

programs. At the same time, they benefit
much more if, through trading votes, they
secure passage of their own programs. Congressmen or interest groups can increase the
size of a political coalition until the additional costs of trading support exceed the
benefits of doing so. These characteristics
of
the pol itical process seem to bias federal
spending upward. Th is bias does not exist in
a competitive
private market where costs and
benefits are equated through prices and are
internalized
to those consuming
the goods
and where restraint of trade does not exist.
The incentive structure of government also
adds to the bias.2 In contrast to the private
sector, there is less incentive for bureaucrats
to seek routinely the most efficient level or
means of production.
None of the many
government
agencies responsible for producing public services attempts to generate profits; the salaries earned by agency heads or
management
are not related to profits. Instead, salaries, prestige, and political power
of agencies' heads are more closely tied to
the size and scope of programs.
If public
goods and services could be produced in the
private
market,
a profit-maximizing
firm
would produce at point A on chart 1. In contrast,
a budget-maximizing
government
agency would produce up to point B. In the
shaded area of chart 1, the additional costs
to society of expanding
a program exceed
the additional benefits. A private fi rm would
go out of business if it produced
beyond
point B. Similarly, government agencies probably would not provide services beyond
point B, because the waste at this level would
be evident

2.

See, for

market

to voters.

example,

William

Decis ion Making:

of Bureaucracy,"
58 (May 1968),

Consequently,

while

A. Niskanen,

The Peculiar

"Non-

Economics

American Economic Review,
pp. 293-305.

vol.

~

0,
J

Losses
Amount

produced

government
agencies do not conspicuously
waste budget funds, the incentive structure
in the public sector nevertheless biases agencies toward inefficiently
large programs.

Expenditures, Revenues, and Deficits
Also contributing
to the growth in federal
spending in recent years is the congressional
treatment
of expenditure
and tax legislation.
Various appropriation
committees
consider
spending proposals, while the House Ways and
Means Committee
and the Senate Finance
Committee consider tax proposals separately.
Until the Congressional
Budget Reform and
Impoundment
Control Act of 1974, appropriation committees
did not need to consider
various spending initiatives in light of total
spending and available receipts. The Congressional Budget
Reform
and Impoundment
Control Act established procedures to place
a ceiling on total outlays and a floor on total
receipts. It also established two budget committees to oversee and coordinate the budget
process.
Unfortunately,
when
spending
threatened
to breach the limits set by the new
process, the limit rather than spending was
adjusted. The deficit was still the residual in
the budget process.
Understanding
the
Treasury's
unique
ability to borrow and the changing
attitudes about
deficit
finance
is important
for appreciating
the congressional
budget
procedure
and the bias in government
for

automatically
provide benefits to any person
or state or local government
that meets requirements
set by U.S. law. Unless Congress
is willing to change these laws-a highly visible, politically difficult, and time-consuming
process-entitlement
outlays in any given fiscal year are determined
largely by the number of eligible recipients in that year. Entitlement programs grew at a rapid 14.6 percent
average annual rate between FY 1971 and
FY 1980, and rose from 47 percent to 56
percent of total outlays over this period.
The budget, however, does not tell the
whole story about the growth of the federal
sector, because a significant
portion of the
government's
business is not recorded in the
budget.
Beginning
in 1971, for example,
Congress rather arbitrarily moved some government
agencies
"off-budget."
So-called
"off-budget"
spending has grown enormously
since then and is expected to top $20 billion
in FY 1981. Moreover, the government sponsors many agencies, such as the Federal
National Mortgage Association, and mortgage
pools, such as the Government
National
Mortgage Association's
mortgage pool, which
borrow and relend in the credit market. Government-sponsored
agencies
and mortgage
pools raised $48.7 billion from credit markets during FY 1980, or 11.8 percent of the
total funds raised. Although
such agencies
technically
may not be considered
part of
the government
or part of the budget, they
are similar
to federal
government
agencies in that they divert resources from uses
dictated by private markets to uses dictated
th rough the pol itical process. Federal government loan guarantees have exactly the same
effect. Loan guarantees" however, are only recorded as federal budget expenditures
when
a borrower defaults on a guaranteed loan. In
FY 1980, new loan guarantees
equaled
$32.4 billion, or 7.8 percent, of total creditmarket funds.
Many factors, including recessions, high
unemployment,
persistent
inflation,
and a
growing proportion
of retired persons, have

why federal spending has grown over the past
ten years; why it sometimes grows in excess
of budget projections;
and why it is at times
very difficult to reduce expenditures.
Nevertheless, no spending program is uncontrollable, and no budget has a life of its own.
Congress, as stipulated
in the Constitution,
maintains the power of the purse. If federal
spending is controllable,
then what explains
its relatively rapid growth, and what explains
the recent dissatisfaction

"Luxury

with this growth?

Goods"

One reason why federal spending has been
expanding
relative to GNP may simply be
that our society wants more government services. Many government
services are similar
in some respects to "luxury goods"; as standards of living rise, voters are willing to devote a larger share of thei r incomes to such
publ ic services. Developed countries, for example, devote more resources than less-developed countries to such publ ic goods and services as parks, space exploration,
consumer
information,
environmental
improvement,
and advanced highway networks.
In many
respects the rapid growth of U.S. humanresources spending fits the luxury-goods
interpretation.
It is much easier to redistribute
income when the average level of real disposable income is high and rising than when
it is low or falling. When incomes are rising,
transfers can be made without a reduction in
the net worth of middle- and upper-income
groups; this is not true when incomes are failing. According to this Iuxury-goods
view of
government
services, one should not be surprised to see the share of GNP devoted to
human-resources
spending (or to government
in general) rise as GNP grows. Although there
naturally may be a limit to the share of GNP
that Americans will devote to the government
sector, many European nations have significantly larger government
sectors than the
United States.

been identified as contributing
to the rapid,
seemingly uncontrollable
growth of the fed-

Private Sector

eral sector in general and entitlement
programs in particular.
These factors explain

Even if one accepts the luxury-goods view
as a partial explanation
for the growth in

vs. Public Sector

government
spending,
there are reasons to
believe that
the amount
of goods and
services that
the public
sector
provides
would always exceed the amount that the
private sector would provide if the private
sector
produced
these
same goods and
services.
In government,
there is an inherent bias toward large budgets.
In competing
for profit, private-sector
firms offer goods and services at a per-unit
price that reflects the cost of production.
Individuals only purchase goods and services
if the price does not exceed their subjective
evaluation of the item's worth. Those who
do not buy an item generally cannot benefit
from its consumption.
In addition, the desire
for profits, together with the fact that consumers buy less at higher prices, provides a
strong incentive for firms to minimize production costs.
In contrast,
most services provided
by
governments are potentially available for consumption
by all citizens, and the costs also

to determine

the amount

of public

services

and to allocate their costs. In the United
States this function is performed
at the national level through elected representatives
in the legislative and executive branches.

Lobbying for Public Services
Most of the services provided by the government
benefit specific groups of citizens
appreciably
more than the public at large.
Social-Security
payments
benefit
retirees,
food stamps benefit the poor, and trade restrictions
benefit
specific
industries.
The
costs of such government
services, however,
are not borne by the benefiting groups alone,
but are more widely diffused through the

are borne by all taxpayers, but not in relationship to the amounts that each person consumes or the benefits that each derives."
Some services, such as national defense or
disease control,
benefit all citizens in relatively equal amounts. No individual can be
excluded from participating
in the benefits.
Other government
services, such as elementary and secondary education,
do not necessarily benefit all individuals, but the government excludes no one from participating
in
the benefits. Because governments
cannot,
or do not, charge a unit price for the goods
and services they provide, consumption
does
not gauge whether the costs of programs ex-

tax system.
Often individuals
who stand to benefit
most
directly
from
government
actions
form pol itical interest
groups to promote
their
causes.
They
lobby
Congress,
extolling the importance
of their programs
and promising
political
support
in return
for congressional
backing. Pol itical interest
groups
are useful
because they provide
Congress with a measure of the intensity
of the public's
preference
for specific
issues. This measure of public preference
will be incomplete,
however,
if an adequate forum for opposing views does not
exist.
Because
the costs of government
programs
are widely diffused,
many programs are unopposed.
The costs to individuals of mounting
an effective
opposition often greatly exceed the cost of not
opposing an issue.

ceed the benefits derived by society. Moreover, while governments
may attempt
to
minimize the costs of providing public goods
and services, the absence of a profit motive
eliminates the ultimate incentive to do so.

Moreover, even if all groups generally agree
on the need to cut government spending, each
group naturally seeks to protect its own programs. Besides reaping individual benefits far
in excess of individual costs, interest groups

In the absence of a market mechanism,
governments
rely on a political mechanism

may view their specific programs as an inconsequential
part of total spending.
Food

1. The government
requirements,
all

individuals

share some probability

those requirements.
participation

may establish certain

such as being unemployed;
The government

via a price mechansim.

el igibil itv
however,
of meeting

does not limit

stamps, for example, amount to only 1.6 percent of the total federal budget; in some
years, budget errors have been larger.
Political interest groups and Congressmen
have a strong incentive to trade their support
for various and unrelated programs to secure

passage of measures that benefit their specific
constituencies.
Such compromises
are a necessary part of a democratic pol itical process.
Again, however, because the costs of government programs are spread widely across the
voting public, members of one interest group,
for example,
incur only a small additional
cost for supporting
another interest group's

Chart 1

Profits and Losses

Profi ts

-

Maximum

programs. At the same time, they benefit
much more if, through trading votes, they
secure passage of their own programs. Congressmen or interest groups can increase the
size of a political coalition until the additional costs of trading support exceed the
benefits of doing so. These characteristics
of
the pol itical process seem to bias federal
spending upward. Th is bias does not exist in
a competitive
private market where costs and
benefits are equated through prices and are
internalized
to those consuming
the goods
and where restraint of trade does not exist.
The incentive structure of government also
adds to the bias.2 In contrast to the private
sector, there is less incentive for bureaucrats
to seek routinely the most efficient level or
means of production.
None of the many
government
agencies responsible for producing public services attempts to generate profits; the salaries earned by agency heads or
management
are not related to profits. Instead, salaries, prestige, and political power
of agencies' heads are more closely tied to
the size and scope of programs.
If public
goods and services could be produced in the
private
market,
a profit-maximizing
firm
would produce at point A on chart 1. In contrast,
a budget-maximizing
government
agency would produce up to point B. In the
shaded area of chart 1, the additional costs
to society of expanding
a program exceed
the additional benefits. A private fi rm would
go out of business if it produced
beyond
point B. Similarly, government agencies probably would not provide services beyond
point B, because the waste at this level would
be evident

2.

See, for

market

to voters.

example,

William

Decis ion Making:

of Bureaucracy,"
58 (May 1968),

Consequently,

while

A. Niskanen,

The Peculiar

"Non-

Economics

American Economic Review,
pp. 293-305.

vol.

~

0,
J

Losses
Amount

produced

government
agencies do not conspicuously
waste budget funds, the incentive structure
in the public sector nevertheless biases agencies toward inefficiently
large programs.

Expenditures, Revenues, and Deficits
Also contributing
to the growth in federal
spending in recent years is the congressional
treatment
of expenditure
and tax legislation.
Various appropriation
committees
consider
spending proposals, while the House Ways and
Means Committee
and the Senate Finance
Committee consider tax proposals separately.
Until the Congressional
Budget Reform and
Impoundment
Control Act of 1974, appropriation committees
did not need to consider
various spending initiatives in light of total
spending and available receipts. The Congressional Budget
Reform
and Impoundment
Control Act established procedures to place
a ceiling on total outlays and a floor on total
receipts. It also established two budget committees to oversee and coordinate the budget
process.
Unfortunately,
when
spending
threatened
to breach the limits set by the new
process, the limit rather than spending was
adjusted. The deficit was still the residual in
the budget process.
Understanding
the
Treasury's
unique
ability to borrow and the changing
attitudes about
deficit
finance
is important
for appreciating
the congressional
budget
procedure
and the bias in government
for

Federal
more
rather
than
less spending.
Many
economists
assert that
financing
government spending through
deficits also biases
outlays
upward,
because
part
of the
burden of paying for current expenditures
is shifted
forward
to future
generations
that
The

would redeem or service the debt.
abil ity of firms
or individuals
to

borrow
current

in this manner is limited by their
and prospective
net-worth
posi-

tions, but such constraints
do not apply to
the U.S.
government
in any
practical
sense. While the total amount
of funds
available in credit markets at any particular time
is limited,
the market
views
Treasury debt as virtually risk-free. Consequently,
the
Treasury
is a preferred
borrower,
and always first in the credit
queue. If the Federal Reserve is unwilling
to accommodate
Treasury
borrowing,
private borrowers
may be squeezed
when
funds are scarce.
Prior to the 1960s, deficit finance was
usually associated
with periods of war or
business recession. Since the late 1950s, however, Treasury borrowing to finance deficits
has become increasingly
common.
In fact,
since FY 1960, the budget has been in surplus only twice. Over this period, deficits
often have shown no tendency to narrow as
the economy
approached
full employment.
Consequently,
new Treasury borrowing from
the public has increased from an average of
1.3 percent between 1955 and 1959 to 19.0
percent between 1975 and 1979. In addition,
total
government-related
borrowing
rose
from 3.2 percent
to 26.7 percent
of all
credit-market
funds over the same period,
and there appears to be an increasing use of
loan guarantees.
The increasing reliance on deficit finance
since the late 1950s has been explained
in
terms of a simultaneously
growing acceptance
of Keynesian economics,
which legitimized
the use of deficit spending
for countercyclical management
of the economy.
In
addition,
beginning
in the mid-1960s,
the
focus of fiscal policy shifted to maintaining
GNP at its potential,
or full-employment,
level instead of balancing the budget over the
business cycle. In a dynamic economy, po-

tential output and full employment
are complex and somewhat ambiguous concepts that
are not easily quantified.
Unfortunately,
the
numerical
measurements
of capacity
often
ignored the ambiguities and usually indicated
that the economy was operating below capacity. Fiscal policies, attuned to forcing the
economy

to capacity

and removing

vestiges of unemployment,
tinuous chain of deficits
state of the business cycle.

produced
regardless

Chart 2 Select Measures
of Purchasing Power

of the

the last
a conof the

Growth

(1978:IQ = 100)
Index number
115

Real transfer payments
Real compensation
less taxes
Real wages and salaries less taxes

-

110

Trimming

the Budget

Concern for the expanding size and scope
of the federal governmem
is not a new phenomenon; in fact, it is practically part of the
national
heritage.
about the growth

Nevertheless,
criticisms
of federal spending have

been unusually vehement in recent years.
By the late 1970s, the economic malaise
of high inflation, lagging productivity
growth,
and large wealth transfers to foreign oil producers brought real income growth to a halt.
Tax burdens, however, continued
to rise as
inflation pushed individuals into higher tax
brackets.
Personal
income
taxes equaled
15.5 percent of personal income in 1979,
a sharp increase from 15.0 percent in 1978
and 13.4 percent
in 1975. Moreover, the
federal government's
tax and transfer-payment systems
were rapidly
shifting
real
purchasing
power from wage and salary
earners
to transfer
recipients.
After-tax
wages and salaries, adjusted
for inflation,
began declining
in the second quarter
of
1979,
whi Ie transfer
income,
which
is
automatically
adjusted
for inflation,
grew
rapidly (see chart 2). The divergence intensified through the election year.
The public-rightly
or wrongly-seems
to
link inflation,
lagging productivity
growth,

and the recent declines in the real purchasing
power of wages and salaries to high levels of
government
spending, taxing, and persistent
federal budget deficits. To the extent the
general public associates
federal spending
with the current economic malaise, the perceived costs (measured in terms of disposable
income) of not opposing federal spending
programs rise. The average wage and salary
worker is likely to become more vocal in his
opposition
to spending and taxing policies.
Moreover,
the perceived
costs to political
interest groups and Congressmen
of trading
support on various programs will rise. Deficits, which may shift the costs of current
federal spending to future generations,
become less attractive
when the public associates deficits with current economic problems. Moreover, the public will be more willing to reduce those federal programs that are
luxury goods when its purchasing power is
bei ng strained.
The perception
that spiraling government
spending and persistent budget deficits have
contributed
to the current economic malaise
provides a strong constraint
against the inherent bias in government
toward bigness.
Today's climate bodes well for a significant
reduction in federal budget growth.

Federal Reserve Bank of Cleveland
Research Department

105

BULK RATE
U_S_ Postage Paid

P.O. Box 6387
Cleveland,OH
44101
Address correction

Cleveland,OH
Permit No. 385

requested

100

Reserve Bank of Cleveland

February

~f.QI1omicCommentary
Does the Federal Government Spend Too Much?
by Owen F. H umpage

The Reagan administration
has set itself
to the herculean task of reducing the growth
of federal spending. The administration
plans
to trim approximately
$5 billion from the
current budget (FY 1981) and approximately
$41 billion from the FY 1982 budget. At
the same time, the administration
proposes
to increase military spending and maintain
basic services to the poor. Although the task
of slowing federal spending is not insurmountable, skepticism is a natural reaction. In addition, the Reagan administration
is proposing
budget cuts, while weak economic activity is
automatically
increasing expenditures
in such
areas as unemployment
compensation.
This Economic Commentary discusses the
seemingly uncontrollable
growth of federal
spending. It asserts, however, that no budget
expenditure
is uncontrollable in any but the
very narrowest, and misleading, sense of the
word. Instead, this Economic Commentary
argues that governments inherently are biased
toward "more" rather than "less" spending.
This bias stems from a large number of factors that are institutional,
political, and economic in character. At root, however, is the
need to provide public services th rough a
non-price, political system. The process focuses attention

on benefits

that

usually

are

Address Change

D Correct as shown
D Remove from mailing list

95
I II III IV I
1978
SOURCE:
Economic

Department
Analysis.

II III IV I II
1979
1980
of Commerce,

Bureau

of

Please send mailing label to the Research
Federal

Reserve Bank of Cleveland,

Department,

P.O. Box 6387, Cleveland,

OH 44101.

9, 1981

Owen F. Humpage is an economist, Federal Reserve
Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.

delivered

to specific

groups

of individuals,

but the process cannot adequately
account
for the total costs that are widely diffused or
shifted to future generations.
The inherent
government
bias toward large budgets has
been augmented
in recent years by macropolicies, designed to hone the economy
to
full employment,
and inflation, which automatically transfers income from the private
to the public sector.

The Federal Sector
Despite repeated attempts to curb federal
spending, it has grown as if propelled by its
own momentum.
Between FY 1970 and FY
1980, for example, federal expenditures,
as
measured in the budget, grew 11.5 percent
per year on average, and the ratio of federal
expenditures
to gross national product (GNP)
rose from 20.3 percent in FY 1970 to 22.6
percent in FY 1980. Federal expenditures
will top 23 percent of GNP in the current
fiscal year.
Almost two-thirds of the growth in total
federal spending between FY 1970 and FY
1980 is attributable
to expenditures
for human resources. Aid to state and local governments, interest payments on federal debt, and
expenditures
for natural resources, environment, and energy also have grown rapidly
both in absolute terms and relative to total
budget spending since FY 1970. Many of the
fastest-growing
federal
programs
are also
entitlement
programs. Entitlement
programs

Federal
more
rather
than
less spending.
Many
economists
assert that
financing
government spending through
deficits also biases
outlays
upward,
because
part
of the
burden of paying for current expenditures
is shifted
forward
to future
generations
that
The

would redeem or service the debt.
abil ity of firms
or individuals
to

borrow
current

in this manner is limited by their
and prospective
net-worth
posi-

tions, but such constraints
do not apply to
the U.S.
government
in any
practical
sense. While the total amount
of funds
available in credit markets at any particular time
is limited,
the market
views
Treasury debt as virtually risk-free. Consequently,
the
Treasury
is a preferred
borrower,
and always first in the credit
queue. If the Federal Reserve is unwilling
to accommodate
Treasury
borrowing,
private borrowers
may be squeezed
when
funds are scarce.
Prior to the 1960s, deficit finance was
usually associated
with periods of war or
business recession. Since the late 1950s, however, Treasury borrowing to finance deficits
has become increasingly
common.
In fact,
since FY 1960, the budget has been in surplus only twice. Over this period, deficits
often have shown no tendency to narrow as
the economy
approached
full employment.
Consequently,
new Treasury borrowing from
the public has increased from an average of
1.3 percent between 1955 and 1959 to 19.0
percent between 1975 and 1979. In addition,
total
government-related
borrowing
rose
from 3.2 percent
to 26.7 percent
of all
credit-market
funds over the same period,
and there appears to be an increasing use of
loan guarantees.
The increasing reliance on deficit finance
since the late 1950s has been explained
in
terms of a simultaneously
growing acceptance
of Keynesian economics,
which legitimized
the use of deficit spending
for countercyclical management
of the economy.
In
addition,
beginning
in the mid-1960s,
the
focus of fiscal policy shifted to maintaining
GNP at its potential,
or full-employment,
level instead of balancing the budget over the
business cycle. In a dynamic economy, po-

tential output and full employment
are complex and somewhat ambiguous concepts that
are not easily quantified.
Unfortunately,
the
numerical
measurements
of capacity
often
ignored the ambiguities and usually indicated
that the economy was operating below capacity. Fiscal policies, attuned to forcing the
economy

to capacity

and removing

vestiges of unemployment,
tinuous chain of deficits
state of the business cycle.

produced
regardless

Chart 2 Select Measures
of Purchasing Power

of the

the last
a conof the

Growth

(1978:IQ = 100)
Index number
115

Real transfer payments
Real compensation
less taxes
Real wages and salaries less taxes

-

110

Trimming

the Budget

Concern for the expanding size and scope
of the federal governmem
is not a new phenomenon; in fact, it is practically part of the
national
heritage.
about the growth

Nevertheless,
criticisms
of federal spending have

been unusually vehement in recent years.
By the late 1970s, the economic malaise
of high inflation, lagging productivity
growth,
and large wealth transfers to foreign oil producers brought real income growth to a halt.
Tax burdens, however, continued
to rise as
inflation pushed individuals into higher tax
brackets.
Personal
income
taxes equaled
15.5 percent of personal income in 1979,
a sharp increase from 15.0 percent in 1978
and 13.4 percent
in 1975. Moreover, the
federal government's
tax and transfer-payment systems
were rapidly
shifting
real
purchasing
power from wage and salary
earners
to transfer
recipients.
After-tax
wages and salaries, adjusted
for inflation,
began declining
in the second quarter
of
1979,
whi Ie transfer
income,
which
is
automatically
adjusted
for inflation,
grew
rapidly (see chart 2). The divergence intensified through the election year.
The public-rightly
or wrongly-seems
to
link inflation,
lagging productivity
growth,

and the recent declines in the real purchasing
power of wages and salaries to high levels of
government
spending, taxing, and persistent
federal budget deficits. To the extent the
general public associates
federal spending
with the current economic malaise, the perceived costs (measured in terms of disposable
income) of not opposing federal spending
programs rise. The average wage and salary
worker is likely to become more vocal in his
opposition
to spending and taxing policies.
Moreover,
the perceived
costs to political
interest groups and Congressmen
of trading
support on various programs will rise. Deficits, which may shift the costs of current
federal spending to future generations,
become less attractive
when the public associates deficits with current economic problems. Moreover, the public will be more willing to reduce those federal programs that are
luxury goods when its purchasing power is
bei ng strained.
The perception
that spiraling government
spending and persistent budget deficits have
contributed
to the current economic malaise
provides a strong constraint
against the inherent bias in government
toward bigness.
Today's climate bodes well for a significant
reduction in federal budget growth.

Federal Reserve Bank of Cleveland
Research Department

105

BULK RATE
U_S_ Postage Paid

P.O. Box 6387
Cleveland,OH
44101
Address correction

Cleveland,OH
Permit No. 385

requested

100

Reserve Bank of Cleveland

February

~f.QI1omicCommentary
Does the Federal Government Spend Too Much?
by Owen F. H umpage

The Reagan administration
has set itself
to the herculean task of reducing the growth
of federal spending. The administration
plans
to trim approximately
$5 billion from the
current budget (FY 1981) and approximately
$41 billion from the FY 1982 budget. At
the same time, the administration
proposes
to increase military spending and maintain
basic services to the poor. Although the task
of slowing federal spending is not insurmountable, skepticism is a natural reaction. In addition, the Reagan administration
is proposing
budget cuts, while weak economic activity is
automatically
increasing expenditures
in such
areas as unemployment
compensation.
This Economic Commentary discusses the
seemingly uncontrollable
growth of federal
spending. It asserts, however, that no budget
expenditure
is uncontrollable in any but the
very narrowest, and misleading, sense of the
word. Instead, this Economic Commentary
argues that governments inherently are biased
toward "more" rather than "less" spending.
This bias stems from a large number of factors that are institutional,
political, and economic in character. At root, however, is the
need to provide public services th rough a
non-price, political system. The process focuses attention

on benefits

that

usually

are

Address Change

D Correct as shown
D Remove from mailing list

95
I II III IV I
1978
SOURCE:
Economic

Department
Analysis.

II III IV I II
1979
1980
of Commerce,

Bureau

of

Please send mailing label to the Research
Federal

Reserve Bank of Cleveland,

Department,

P.O. Box 6387, Cleveland,

OH 44101.

9, 1981

Owen F. Humpage is an economist, Federal Reserve
Bank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.

delivered

to specific

groups

of individuals,

but the process cannot adequately
account
for the total costs that are widely diffused or
shifted to future generations.
The inherent
government
bias toward large budgets has
been augmented
in recent years by macropolicies, designed to hone the economy
to
full employment,
and inflation, which automatically transfers income from the private
to the public sector.

The Federal Sector
Despite repeated attempts to curb federal
spending, it has grown as if propelled by its
own momentum.
Between FY 1970 and FY
1980, for example, federal expenditures,
as
measured in the budget, grew 11.5 percent
per year on average, and the ratio of federal
expenditures
to gross national product (GNP)
rose from 20.3 percent in FY 1970 to 22.6
percent in FY 1980. Federal expenditures
will top 23 percent of GNP in the current
fiscal year.
Almost two-thirds of the growth in total
federal spending between FY 1970 and FY
1980 is attributable
to expenditures
for human resources. Aid to state and local governments, interest payments on federal debt, and
expenditures
for natural resources, environment, and energy also have grown rapidly
both in absolute terms and relative to total
budget spending since FY 1970. Many of the
fastest-growing
federal
programs
are also
entitlement
programs. Entitlement
programs