Measuring Spending

(With a post title like that, I know this will draw a crowd)

A while back Andrew Coyne wrote the following:

"The chart above (click to enlarge) traces the history of federal program spending over the last four-and-a-half decades. The numbers shown have been adjusted to take account of inflation (ie they are in constant 2006 dollars) and population growth (ie these are per capita figures). In other words, they show the number of real dollars the government spent on each citizen, the best comparative indicator of the size of government over the years."

and then in the comments he elaborated:

"I reject utterly the notion that, unless government spending grows as fast as the economy, it has somehow fallen: ie measuring spending as a proportion of GDP (or income). The implication, as I've said many times before, is that spending should always increase, not because it needs to, but just because it can."

I think it is pretty easy to agree that in order to 'stay steady', government spending should keep pace with inflation. That's just basic finance.

As for keeping pace with population, the answer is that government spending pretty much keeps pace, but not quite. There are certain economies of scale. For example, if the population of Canada doubles, we don't have to build a second House of Commons. That's why, as I mentioned in this old post, all else being equal, smaller countries will have slightly larger government sectors.

Finally, the question of income. As incomes rise, should government spending keep pace or, should there be a trend of government spending as a percent of GDP always shrinking over time (since incomes usually grow faster than inflation + population growth outside of recessions).

This is where Coyne and I differ. He says, "I reject utterly the notion that, unless government spending grows as fast as the economy, it has somehow fallen: ie measuring spending as a proportion of GDP (or income)."

But does this make any sense? Consider your own personal budget. Say this year you had a budget like this:

Income: $50,000
Taxes (Health, Education, Roads, Transit, Other Infrastructure, Police, Fire, Military, Garbage Pickup, Foreign Embassies, Legal System, Jails, Management of Official Documents, Interest on Accumulated Debt, Research, Public Pensions, Welfare, Employment Insurance, Accessibility for the Disabled, etc.): $15,000
Rent $10,000
Food $5,000
Car Related (Insurance, Gas, Parking, Repairs, Depreciation) $5,000
Travel $3,000
Electronics $3,000
Clothing/Household Stuff $3,000
Miscellaneous/Leftover Stuff $6,000

And then say that next year your (inflation adjusted) after-tax income went up to $60,000. Well first of all, if you work for the government, this won't happen. In Coyne's world, government workers never see their incomes rise as incomes rise in the rest of the economy. Public sector workers just fall further and further behind because their wages are a government expense and these only go up with inflation, not with incomes in general.

But say you aren't a government worker, so you can get a raise to $60,000. What would happen? In Coyne's world, your additional $10,000 income would be spent only on the items that government doesn't account for. You wouldn't spend any of that extra amount on better health care, or better education, or better roads, a better legal system, a better military, more public parks, more care for the old or the young, or the disabled or any of that. No matter how high your income went, your spending on those items that government covers would stay exactly the same, while you spent more and more on everything else.

You can imagine where this would lead if it were implemented in practice: parks which don't keep up with increasing standards for maintenance and facilities, a health care system that can't keep up with new technological developments and expanding demands for new treatments and procedures, roads that are overcrowded with private vehicles, overcrowded schools with students stuck in 'portables', and so on. Odds are, like me you've lived through the last couple of decades and you know the drill of what happens when people fall for the idiotic logic of folks like Coyne, who draw some magical distinction between the type of spending government is involved in, which supposedly doesn't go up with incomes, and spending on every other thing in the economy, which does.

John Kenneth Galbraith wrote 'The Affluent Society' back in 1958. In some ways not much has changed since then.