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Monday, May 11, 2009

It doesn't matter if you are left or right

Take a look at this plot of total government spending as a percentage of GDP in the United States:



Notice the general upward trend that has not been noticeably affected by Republican or Democrat Presidents, Republican or Democrat Congresses, or Liberal or Conservative Supreme Courts.

There are (at least) three potential explanations.

1. The American people generally want more government services as it becomes apparent that the wealth of the country makes it practical for government to offer those services. Thus, the demand for government spending is not a function of political ideology but rather reflects demand-side effects that government officials, of whatever political stripe, are all-to-willing to provide. This suggests that there might be an bound to government spending as a percentage of GDP as individuals recognize that, on the margin, government is not necessarily as good at offering certain goods and services as the private sector. However, to determine that we have "gone too far" in demanding goods and services from the government we might have to "go too far." This brings up the question of whether rolling back entitlement programs is politically practical.

2. The politicians have discovered that they can buy their way to power by showering a large base of constituents with goodies. The large base is required to ensure that those in power stay in power - the power to dictate the policy agenda is only a marginal increase in power for the individual politician. This suggests that there might not be a limit to the percentage of GDP spent by the government if the population of the United States continues to grow or, on the margin, it becomes more expensive to purchase votes. Generally, the government comprised of the politicians represents a single buyer of votes that acts like a monopsonist. A monopsonist might pay a lower per-capita pay off to their political supporters, but the marginal support becomes ever more expensive as whatever goodies are offered to the marginal supporters must be offered to all supporters (think of Medicare Part D trying to purchase fence-sitting seniors to the incumbents (both Republican and Democrat) but the Medicare Part D must be offered to all seniors, regardless of their support for incumbents or even their propensity to vote.

3. A third possibility is that the United States is as successful as it has been despite the increase in the percentage of the GDP which is spent (and expropriated) by the government. The equilibrium of spending by the government might not have been reached yet, but that equilibrium might not be as high as feared. Perhaps the politicians and the electorate continue to trade information (as suppliers and demanders of government services) until they reach an equilibrium level of spending, say 50%, that maximizes some combination of economic growth, personal utility and well being, and incumbent job security.

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