Government Spending Has Shrunk…When You Ignore 44 Percent of Government Spending

by Matt Mitchell on May 11, 2012

in Tax and Budget

Floyd Norris has made an astounding discovery. When you don’t count 44 percent of government spending, it appears that government spending has shrunk in recent years.

Writing in the New York Times, Mr. Norris asserts:

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

In the first quarter of this year, the real gross domestic product for the government — including state and local governments as well as federal — was 2 percent lower than it was three years earlier, when Barack Obama took office in early 2009.

The operative phrase here is “real gross domestic product for the government.” What Mr. Norris neglects to note is that real gross domestic product for the government is only about half of what governments actually spend. And when you look at total spending, it is actually up over the last three years, not down.

Let’s begin with government gross domestic product (GDP). This is the portion of government spending which is counted by the Bureau of Economic Analysis (BEA) when it tabulates national GDP. It consists of government consumption expenditures and gross investments. You can think of it as the tab for all items that the government buys on the open market: salaries of public employees, purchases of weapons for the military, investment in infrastructure, etc.

Among other things, however, government GDP does not include transfer payments such as Medicaid, Medicare, Social Security, Unemployment Insurance, Earned Income Tax Credits, Supplemental Nutritional Assistance, Housing Assistance, Supplemental Security Income, Pell Grants, Temporary Assistance to Needy Families, WIC, LIHEAP…you get the point.

It turns out that real spending on everything other than government consumption and gross investment is up about 19 percent since Obama took office. And this is more than enough to offset what’s going on with consumption and gross investment. Thus, total spending is up 7.7 percent in real terms.

You can see this in this chart*:

There’s nothing wrong with using government GDP figures. They are used all the time to estimate things like the government purchases multiplier. And they are also helpful in understanding whether government is growing faster or slower than the private sector. But Mr. Norris does his readers a disservice to casually conflate government GDP and total government spending. How many people reading his column would know that he left out 44 percent of what government spends? Or that when you include that 44 percent, total spending actually rose over the last three years?


*Technical note: when the BEA calculates real government GDP, it uses chained 2005 dollars. It does not calculate real total spending, offering only the nominal figures in Table 3.1. I have therefore used 2005 inflation conversion factors found here to convert total spending from Table 3.1 and government GDP from Table 1.1.5 into real figures. When you do it this way, real government GDP actually rose slightly (0.41 percent) under Obama. In other words, the 2 percent drop in real government GDP looks like a slight increase if you use a different inflation conversion method.

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  • There is a reason those things are NOT included. Social Security is a trust Fund, FUNDED by your FICA taxes and the matching tax from your Company. The only draw that Social Security has on the Governments budget it what is OWED it, that was borrowed from the trust Fund to pay for several wars..or 2.6 Trillion Dollars to be exact. The Government gave ti an IOU for the funds it borrowed from the fund. Medicare was fine until the Drug Coverage was added..and that is shaking out, but really needs the power to negotiate drug prices like other countries, instead of letting Big Pharm charge whatever it wants and re-patent things by changing the formula or manufacture a micron. Medicaid is state and federal not strictly federal..as states cut it, more falls on Federal to help keep people alive. Unemployment well..you and your employer  pay that out in taxes that is supposed to be  used to help you if you become unemployed. Extended benefits have been the life saver for many families right now as companies ship jobs over seas and cut jobs here. Yes those do come form government coffers..and are temporary. But they come back to you from the Taxes you are paying each April. Also please note we don’t have a permanent budget, what we HAVE is the Spending to pay for that was done during the Bush years. 

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