The Growth of Government in America; S. Moore

which meant preserving public safety. Es pecially in the realm of domestic affairs the founders foresaw very limited government interference in the daily lives of its citizens. The founders did not create a Department of Commerce, a Department of Education, or a Department of Housing and Urban Devel opment. This was not an oversight: They simply never imagined that the national government would take an active role in such activities. The minimal government involvement in the domestic economy would be funded and delivered at the state and local levels. Even that involvement was to be restricted by Congress' authority over interstate comStephen Moore is Director of Fiscal Policy Studies at the Cato Institute. This article is adapted from a study prepared by the Institute for Policy Innovation. merce, an authority granted to Congress by the founders for the purpose of preventing the state governments from interfering with commerce.

Recognizing the propensity of govern ments to grow, the people added the Bill of Rights to the Constitution as an additional layer of protection for the rights of individ uals against the state. The Billof Rights was to ensure that government would never grow so large that it could trample on the individual and economic liberties of Amer ican citizens. These liberties are eroding. The United States has been gradually trans formed from a nation with almost no gov ernment presence in the marketplace to one in which the government is now the pre dominant actor in the domestic economy. Consider the following: • There are now more Americans em ployed by government than by the entire manufacturing sector in America. • In the.past 25 years the federal govern ment has spent $2.5 trillion on welfare and aid to cities. This is enough money to purchase all of the assets of the Fortune 500 companies plus all of the farmland in the United States.

• In 1987 U.S. farmers received more money in government subsidies than they did in selling their crops in the marketplace. 124 Figure 1 Real Federal Outlays, 1800-1992 125 $1,600 $1,400 $1,200 ; d $1,000 0 ~ $800 ~ J $600 r= J:Q $400 $200 $0 In short, farmers now produce for the gov ernment, not U.S. consumers. • In three states today-California, Maine, and New York-almost half of all middle-income family wages are captured by government through income, payroll, property, and sales taxes, and other levies. Why is the American public not rising up in protest? The answer seems to be that the growth of government has been sufficiently gradual over the past 50 to 100 years that most Americans today probably believe that this is the way government in America ought to act and has always acted. Both of these contentions are' wrong. Government has not always, and ought not, act as it>does now. The following sections demonstrate with the aid of graphs and figures how government has grown over our nation's history. We examine federal, state, and local government growth in five areas: expenditures, taxes, debt, welfare and transfer payments, and employment.

We standardize the measurement of each of these government growth indices in three ways: in real 1990 dollars, in real per capita 1990 dollars, and as a share of total output or income. Unless otherwise indicated, all figures are presented in 1990 dollars. Except in a few specified instances, all of the data are from standard government sources. Federal Outlays Perhaps the best measure of the impact of government activity is how much it spends each year. Figure 1 shows the expansion of the federal budget from 1800 to 1992. As the steep ascent shows, federal spending has exploded more than ten thousandfold since 1800 with almost all of the increase in the past 40 years. Real federal outlays have climbed from $0.1 billion in 1800 to $0.6 billion in 1850, to $8.3 billion in 1900, to $235.1 billion in 1950, to $1,450.0 billion in 1992. Of course, the nation is much larger today than in earlier periods, so one would expect government also to be bigger. Figure 2 shows the per capita level of federal spend ing over time. Even when adjusting for the growth in population size (and inflation), federal expenditures have mushroomed: • The federal government spent $16 per 126 THE FREEMAN • APRIL 1993 Figure 2 Real Per Capita Federal Outlays, 1800-1990 $5,000 $4,500 $4,000 $3,500 fI:l $3,000li"0 $2,500Cl ~ $2,000 $1,500 $1,000 $500 $27 $0 1800 1850 1900 1950 1990 person in 1800, $27 per person in 1850, $109 per person in 1900, $1,544 per person in 1950, and $4,760 per person in 1990.

Bear in mind, this does not include the cost of back door spending, such as man dates and regulations. If they were included here, the cost of the federal government per person today would easily exceed $10,000. One of the most meaningful ways of measuring the burden of government is how much it spends relative to total economic output. One might argue that government spends more money today because the American economy has grown so much larger than in earlier periods. If government is consuming the same proportion of total output in two periods, then the economic burden of paying for its activities is roughly the same, even if expenditures are much larger in the later period. Unfortunately, federal spending is not keeping pace with economic growth-it is far outpacing eco nomic growth: • In 1900 the federal government con sumed less than 5 percent of total output. • In 1950 the federal government con sumed roughly 15 percent of total output.

• In 1992 the federal government con sumed almost 25 percent of total output. The Composition of Federal Outlays The single most important activity of the federal government is to provide for the national defense. A free nation spends as much as necessary to protect its borders and its citizens. Is the modern-day growth of government on the federal level a result of the national defense buildup in the Cold War era? The answer is clearly no. National defense spending as a share of the total federal budget has been continually shrink ing, with the exception of brief periods of war: • Defense spending constituted more than half of total federal outlays in 1800. • Defense spending constituted more than one-third of federal outlays in 1900. • Defense spending now constitutes little more than one-fifth of federal outlays. The flip-side of this steady reduction of defense expenditures as a share of the bud get is an expansion in spending on civilian programs, such as agriculture, health care, housing, and aid to state governments. Until the 1930s, the federal government spent almost nothing in each of these areas. This rise has been most prominent since 1950.

THE GROWTH OF GOVERNMENT IN AMERICA 127 Figure 3 Real Federal Health Care Expenditures, 1900-1990 $180.0 $160.0 $140.0 ~ $120.0 =8 $100.0 ~ 0\ - $80.05 ;.::::l :-= $60.0~ $40.0 $20.0 $0.1 $1.0 $0.0 1900 1930 Figure 3 shows the tremendous growth in federal health care spending, from $100 million in 1900 to $156 billion in 1990. These data on federal domestic spending powerfully refute the common complaint by special interest groups that favored domes tic programs have been substantially cut back in recent years. Although there were modest spending reductions on selected do mestic programs in the Reagan years, in 1992 the outlays for every major domestic area of the budget were at an all-time high with the exception of agriculture. State and Local Spending Some budget analysts claim that federal spending has increased to compensate for budget reductions on the state and local levels. The data show otherwise: • In 1900 states spent $32 per person.

• In 1950 states spent $470 per person. • In 1990 states spent $1,934 per person. On the local level, per capita expenditures have been rising rapidly as well, though not as rapidly as federal and state expenditures. For every dollar that local governments spent per person in 1900, they spent $2.50in 1950 and $8.50 in 1990. 1960 1990 Although the 1980s are commonly re ported to have been a decade of government neglect, this assertion is contrary to fact. State expenditures, for example, rose at twice the inflation rate in the 1980s. Local expenditures grew nearly as fast as state expenditures. Moreover, celebrated cut backs in federal aid to localities were almost entirely replaced by increases in state aid to local governments. In sum, the past decade was one of the most expansive for state and city budgets in U.S. history. Total Federal, State, and Local Expenditures In 1900 government in America was still, by today's standards, comparatively lean and efficient. At that time, total federal, state, and local expenditures were $26 bil lion. Americans now support a nearly $2.5 trillion government, almost a tOO-fold in crease in real outlays. (See Figure 4.) Both as a share of total output and on a per-person basis, this is a substantial amount of government to have to pay for.

• Government consumed almost 10 per cent of GNP in 1900 and now consumes more than 35 percent.

128 THE FREEMAN • APRIL 1993 Figure 4 Real Federal, State, and Local Government Expenditures, 1900·1990 $2,500.0 $2,000.0 ; ~ $1,500.0 ~-§ $1,000.0 S ~ $500.0 $26 $0.0 1900 1930 1960 1990 • Government spent $1,650 for every household in 1900 and today spends $23,140. (See FigureS.) In sum, whatever social and economic problems confront America today, they are clearly not a result of a neglectful or under funded public sector. Figure 5 Total Taxes The American Revolution has been called the greatest tax revolt in world history. Yet as a result of the growth of government expenditures described above, taxes are now at levels that would have been inconReal Total Government Expenditures per Household, 1900·1990 $25,000 $20,000 ; $15,000 :aQ ~ $10,000 $5,000 $0 1900 1930 1960 1990 THE GROWTH OF GOVERNMENT IN AMERICA 129 Figure6 Real Total Government Taxes per Household, 1900-1990 $18,000 $16,000 $14,000 $12,000 en ~ $10,000'0 ~ 0 $8,000~ ....-4 $6,000 $4,000 $2,000 $O~_....I The Federal Tax Burden workers' incentive to work and employers' incentive to hire are impeded by excessive taxes. These figuresdo not even include the cost to American individuals and firms of complying with complicated and time consuming tax laws. By one estimate, Americans spend 5.4 billion hours at an annual cost of $600 billion to the economy just completingthe paperwork requirements of federal taxes.

Reliable federal tax data are available back to 1800. For the first 100 years of the nation, taxes were very low. In colonial times opposition to high taxes was deeply ingrained in the American spirit, and this hostility lasted throughout the nineteenth century. Government revenues predomi nantly came from two sources: revenue tariffsand land sales. The limited sources of revenues for the federal government were a natural restraint on its expenditures. Three events changed that. The first was the im position of the income tax in 1913. The second was the two World Wars, which made the American people accustomed to very high tax rates. And the third was the 1900 ceivable 200, 100, or even 50 years ago. Today, when combining federal, state, and local taxes, many middle-income Ameri cans work a larger share of the day to pay the government's bills than their own. Even the tax revolt of the late 1970s and early 1980s proved to be merely a temporary restraint on the demands of the government tax collector. Consider the percentage of income that is seized by government in taxes: • In 1930workers paid one of every eight dollars of their income in taxes.

• In 1950 workers paid one of every four dollars of their income in taxes. • In 1992workers paid one of every three dollars of their income in taxes. The tax .burden is even more clearly expressed by examining taxes paid per household as shown in Figure 6. • In 1900 the average family paid nearly $1,400in taxes. • In 1950 the average family paid nearly $7,000in taxes. • In 1992 the average family paid over $16,000in taxes. This rising tax burden has meant that workers have less take-home pay for con sumption and savings. It also means that 1950 1990 130 THE FREEMAN • APRIL 1993 creation of the Social Security program with gradually rising payroll taxes. Taxes were relatively stable until 1900. It was not until World War II that the federal tax burden rose about threefold. • In 1800 per capita federal taxes were $20. .• In 1900 per capita federal taxes were $110. • In 1950 per capita federal taxes were $1,460.

• In 1990 per capita federal taxes were $4,000. Income Taxes The most dreaded tax for the vast major ity of Americans is the income tax. Until the ratification of the Sixteenth Amendment, there was no federal income tax-the Su preme Court had consistently ruled the income tax unconstitutional. No law has contributed to the growth of government and the surrender of personal liberties and privacy rights more fully than the creation of the federal income tax. Today, more so than any other federal agency, the Internal Rev enue Service has broad and sweeping pow ers to investigate the personal activities and finances of Americans. Without a search warrant, the IRS has rights to search the property and financial documents of Amer ican citizens. Without a trial, the IRS has the right to seize property from Americans. The income tax burden on the federal level has been continually climbing. During periods of war, income taxes have been substantially raised, and they never are reduced to their pre-war levels. Today, the average American household pays almost $6,000 in federal income taxes, double the 1950 burden.