Government Spending, and the 18% of GDP Myth

Human nature drives people to believe and repeat information they hear as a method of simplification. Social psychologists call these cognitive shortcuts, heuristics. By and large they serve us well in helping to tame a complicated world.

Unfortunately, in circumstance that impact the daily struggle of American citizens, mindlessly spewing out disinformation as though it is fact can be a recipe for disaster. One notable example of a falsehood being perpetuated is the question of appropriate levels of government spending.

With the fiscal battle raging, both sides of the aisle in Washington are debating the size and scope of federal spending.  Notably, no one is saying that the government has an important role and duty to the people it serves. What has become contentious is the question, how much do they need? The answer is found by simply asking how much of the peoples' treasure has the federal government spent in the past to get the job done?

The Democrats and President Obama have increased federal spending as a percentage of gross domestic product (GDP) to 25.3%. Liberals often speak in terms of "historical spending," in the 20 plus percent range. On the other side of the aisle, Rep. Paul Ryan's budget plan looks to cap government spending at 18% of GDP. The claim is that the 18 percent number mirrors historic average levels of government spending. The debate here is not whether the left or the right is correct, it's that they are both wrong and guilty of advancing a myth that has been spoken so often it is blindly accepted as fact.

The truth here is that the U.S. has thrived with far less government spending. Indeed, a look at times when we as a nation were imperiled offers a far different story than what you have been told.

Research shows that from the founding of our nation, 1787-1849 (63 years) federal spending averaged 1.7% of GDP. For the next 51 years, 1850-1900 (including fighting the Civil War) spending averaged only 3.1%. From 1901 till 1930 (including fighting WWI) it never reached 8%, and averaged approximately 3.2%.

At the height of the progressive movement (including FDR's New Deal) federal spending as a percentage of GDP never went above the 1934 level of 10.7%. Even after the historic 1944 (WWII) level of 43.6%, spending had fallen by 1948 to 11.6% of GDP.

In short, for the first 130 years of the U.S.'s 224 year existence, federal spending as a percentage of GDP averaged around 2.5%!

So why is the 18-25% solution offered? At best politicians might be misusing or misrepresenting data, or using only a couple of decades for determining what's "historical" and "average" spending. In all honestly, heuristic ignorance and the need for political capital is probably driving the rhetoric. What's important is to realize the "parroting" we are hearing should be our canary in the mineshaft, warning us of the impending decline of our economy caused by excessive federal spending.

Why should we care? Because government spending is taken directly out of your pocket, or out of the economy.  Spending is today's burden becaue every dollar consumed by our profligate government is one less that could fund productive advancement in the private economy.

Every dime needlessly spent by government comes at the cost of efficiency in moving scarce resources to their most valuable use. As Milton Friedman said, "nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own." So any policy that reduces personal freedom in economic decision making inhibits economic growth which forces people to suffer needlessly.

The just and proper fiscal balance is to give the state what it needs to protect you and your property while at the same time protecting you and your property from the state. Looking at the low historical trends that allowed this great nation to lead the world into prosperity would be a good place to start an honest debate in determining federal spending. A good rule of thumb would be to give half of what the politicians ask for. Of course, as economist Walter Williams has often said regarding the federal spending question, "If 10 percent is good enough for the church, it ought to be good enough for Congress."