Thursday April 24, 2014

US Government Spending History from 1900

Nobody, in 1900, speculating on the future of government, could have imagined the astonishing growth and scope of government in the 20th century. Nor would they have imagined that, for many people, this gigantic government would seem the very essence of efficiency, compassion, and modernity. But the reason that government has got so big is not, as many claim, the weight of armaments and wars. Instead the money goes for health care, education, pensions, and welfare programs. You can see how it all happened in the United States in the charts below.

A Century of Government Spending

Government spending in the United States has steadily increased from seven percent of GDP in 1902 to almost 40 percent today.

Chart 2.21: 20th Century Government Spending

Government Spending started out at the beginning of the 20th century at 6.9 percent of Gross Domestic Product (GDP). As you can see from Chart 2.21, the federal share of that spending was modest. But spending got a big kick in World War I and ended up at about 12 percent of GDP in the 1920s.

Chart Key:
- Local direct spending
- State direct spending
- Federal direct spending
- Transfer to state and local

Then came the Great Depression, in which President Roosevelt and the New Deal cranked up federal spending, and total government spending rose up to 20 percent of GDP. World War II really showed how the United States could commandeer its national resources for all out war. Government spending peaked at just under 52 percent of GDP in 1945.

President Clinton said, in 1995, that the era of big government was over. But he was wrong. The post World War II era has been a golden age of government spending, and it shows no sign of ending. Although spending dropped back to 21 percent of GDP immediately after WWII, it steadily climbed thereafter until it hit a peak of 35 percent of GDP in the bottom of the recession of 1980-82. Thereafter government spending chugged along in the mid 30s until the mortgage meltdown of 2008. In the aftermath of bank and auto bailouts, government spending surged to wartime levels at 41 percent of GDP. The mortgage emergency seems to have ratcheted out-year spending up a notch. Near term government spending in the future is pegging at 36 percent of GDP.

Defense Spending since 1900

Defense spending in the United States has fluctuated in the last century, rising from one percent of GDP, peaking at 41 percent in World War II, declining from 10 percent in the Cold War to five percent today.

Chart 2.22: 20th Century Defense Spending

The defense establishment that sent the White Fleet around the world before World War I was tiny, compared to the defense establishment of mid century. It was about 1.25 percent of GDP. Yet this tiny establishment was expanded into an expeditionary army in World War I that consumed over 20 percent of GDP and turned the tide of the war in France. After the war the armed forces were rapidly demobilized and defense spending returned to about 1.25 percent of GDP.

Then in World War II the United States achieved an unprecedented mobilization of resources, and defense spending rose to 41 percent of GDP in 1945. But after the war it never returned to previous levels. From a low of 7.2 percent of GDP in 1948 it doubled to 15 percent at the height of the Korean War in 1953, and was maintained at about 10 percent during the peak of the Cold War through the height of the Vietnam War. Against this the defense buildup during the Reagan era, from 5.5 percent of GDP in 1979 to 6.9 percent of GDP in 1986 was modest, and the Bush buildup from 3.5 percent in 1999 to 5.7 percent in 2010 to fight the first battles against Islamist extremism equally restrained. The plans of the Obama administration show a reduction in spending back to 4.6 percent of GDP by 2015.

The Growth of Government Education

Government spending on education has expanded from about one percent of GDP in 1900 to 6 percent in the second decade of the 21st century.

Chart 2.23: 20th Century Education Spending

Education in North America began as local and individual. But the common schools movement initiated in Massachusetts in the 1840s began a process of centralization and bureaucratization that came into its full flowering in the 20th century.

Education spending began the century at one percent of GDP, primarily at the local level. In the early decades, from 1910 to 1940, spending increased to accommodate the build out of high schools.

After World War II, spending increased due to an expansion in higher education and the increases in teacher pay. Allowing for a dip during World War II and a bulge in the 1970s, government spending for education has steadily increased year on year, reaching 6 percent of GDP in 2008.

Under President Obama, education spending is set to stabilize to 5.7 percent of GDP by 2015. The chart shows that most education is provided by local governments. However since World War II the federal government has increased its role, starting with the GI Bill and continuing with periodic enactment and expansion of educational grant programs to local K-12 schools and state colleges. (Note: the blue sector in the chart is intergovernmental transfer from the federal government to state and local governments, i.e., grants.)

The Growth of Government Healthcare

Government did not intervene significantly in the provision of health care until the passage of Medicare and Medicaid in the mid 1960s. Since then government health care has increased to around 7 percent of GDP.

Chart 2.24: 20th Century Health Care Spending

At the beginning of the 20th century, government spent little on health care. The platform of the Progressive Party in 1912 called merely for a reorganization of public health services into a single national health service. As the chart shows, government health care did not exceed one percent of GDP until the 1960s. It was about 0.25 percent of GDP in the early decades, 0.5 percent in the 1920s, and peaked at about one percent of GDP in the depression year of 1932.

Then, in 1965, Congress passed the Great Society legislation at the behest of President Johnson, featuring Medicare, a health subsidy program for older Americans, and Medicaid, a health care provision for the poor. Ever since, government health care expenditures have trended steadily higher. Government health spending breached two percent of GDP in 1970, three percent of GDP in 1980, and four percent of GDP in 1991. Spending breached five percent of GDP in 1995, six percent in 2007, and seven percent of GDP in 2009. (Note: the blue sector in the chart is intergovernmental transfer from the federal government to state and local governments, i.e., grants to pay for Medicaid).