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.

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.

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

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.

Spending since 1900 by Function

How has government spending increased, by function?

Chart 2.22: 20th Century Spending by Function

Back in 1900 government spending was a modest affair. Government pensions were almost non-existent, health care was 0.26 percent of GDP, education was 1.1 percent of GDP, defense was 1.6 percent of GDP and welfare was 0.11 percent of GDP.

Over a century laterin 2018 the five major functions dominate government spending in the United States. Government pensions: 6.70% GDP; health care: 7.77% GDP; education 5.32% GDP; defense: 4.20% GDP; welfare (other than health care): 2.16% GDP. That is 26 percent of GDP out of the total government spending of 34.9 percent GDP.

Back in 1900 all government programs other than pensions, health care, education, defense, and welfare amounted to 4.6 percent of GDP. Today, police, fire, infrastructure, and all the rest take 9.1 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 2.23: 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 4.5 percent of GDP by 2015 and 3.8 percent GDP by 2020.

The Growth of Government Pensions

Government did not start funding pensions (except for veterans) until well into the 20th century. Since then government health care has increased to around 7 percent of GDP.

Chart 2.24: 20th Century Pensions Spending

At the beginning of the 20th century, government spent little on pensions (except for veterans of the Civil War). Although the principal pension program of the federal government started in 1935 federal pensions spending did not really take off until 1950, ramping up to 2 percent of GDP by 1960.

Another pensions ramp-up started in 1970, so that by 1980, federal pension spending was 4.6 percent GDP and state and local pensions (principally for government employees) amounted to nearly 0.5 percent GDP.

Since 1980 federal pension spending has stabilized at 4.5 to 5 percent of GDP, but state pension spending has steadily increased to 1.3 percent GDP and local government pensions have increased to 0.3 percent GDP.

The Growth of Government Education

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

Chart 2.25: 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. Education spending is declining as a percent of GDP in the 2010s.

Throughout the history of government education, most education has been 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 8 percent of GDP.

Chart 2.26: 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).

After a peak of 7.6 percent GDP in 2011, health care spending receded for a year, but resumed its growth, and hit 8 percent GDP in 2016.