The Boundary of Government Spending is a Political Decision

I commented earlier on ‘a thoughtful piece on the modern issue of the size of government in modern society’ by Jody W. Lipford and Jerry Slice, professors of economics at Presbyterian College in Clinton, S.C., and posted (from the Washington Examiner) in The Independent Institute (December 10, 2007) (here): subtitled “The Role of Government in Modern U.S. Society: What Would Adam Smith Say?”

Here are some additional paragraphs for comment:

“Many believe it is unrealistic for government in the twenty-first century to adhere to the limited roles envisioned by Smith. We have our doubts about these arguments. However, we raise a different but related question: if Smith is right that national defense, administration of justice, and public goods are essential to a free and prosperous society, might government’s expanded roles one day crowd out its traditional and essential functions to that society’s detriment?

When we examine evidence on this question, the findings are striking. We first categorize national government expenditures according to whether or not Smith would support them. Under the category Smith would support, we include expenditures on national defense, administration of justice, transportation, and education. We consider social expenditures on Social Security, Medicare, health, income security, and labor and social services beyond the bounds that Smith would support. Next, we examine trends in these expenditures.

Here are some of our findings:

• In 1962, expenditures that Smith advocated accounted for 54.4 percent of the U.S. budget. Yet, by 2005, this percentage had fallen to 27.6 percent, with the Congressional Budget Office projecting this percentage to fall to 22.0 percent by 2011.
• The trend for the social expenditure category runs in the opposite direction. In 1962, social expenditures accounted for only 23.4 percent of the U.S. budget, but by 2005, they accounted for 58.1 percent, and they are expected to account for 63.3 percent of the budget by 2011.
• When we examine state and local government expenditures, we find the same trends, though they are less pronounced than their federal counterparts. The trends show no sign of reversal for either level of government.”

They conclude:

“The consequences are clear. Continued higher rates of social spending will require higher taxes, larger deficits, or dramatic cuts in other government programs, such as those deemed essential by Smith. These, in turn, may cause “slow private capital formation, lower economic growth, and in the extreme...a sustained economic contraction,” according to the CBO. These outcomes are the opposite of Smith’s model for economic prosperity.”

Comment
Defence and Justice were regarded by Adam Smith as keystone programmes because the survival of society depended upon them. This did not mean that anything under the heading of defence was sacrosanct. He had a fairly robust view on defence and war-fighting; the former was supposed to deter the necessity for the second.

In fact, Adam Smith was extremely critical for the proclivity for war in the mercantile countries of Europe, largely located in the sad exercise of ‘jealousy of trade’, in which mercantile political economy saw trading partners as engaged in zero-sum transactions – any gain they made was at the expense of their partners.

Goods crossing frontiers in trade were seen by mercantile governments as threatening, not peaceful, substitutes for armies crossing frontiers. Britain’s wars with the Dutch and the French, at root, were caused by such thinking. The massive increase in defence spending in the 18th century from 5 per cent of ‘GDP’ at its opening to 15 per cent at its close were one consequence. The defence of the colonies led to four wars with France; the 7-years war at a cost of £175 million (billions at today’s money). All for what? A monopoly of American colonial trade and an untold cost in diverted scarce capital in the UK, massive spending on unproductive labour and thereby a slower growth towards opulence.

What didn’t happened was the funding of the public works and public institutions that Adam Smith advocated until well into the 19th century, which by then Britain had embarked on a second empire that diverted millions of public spending, and in two world wars, much blood a treasure.

The industrial ‘revolution’ and the spread of capitalism did deliver on continuous growth in per capita income, and the spread of and deepening of democracy. It was not a simple case of the increase in the agenda for public spending on education ‘squeezing’ investment; the amounts could grow in growing GDPs for richer economies. The 60-70 per cent of GDP that was not in the government sector in the 20th century is discretionary spending in the private sector. Taxation levels are set by democratic franchise through elected legislatures. Where the boundary is drawn is not a matter of principle; it is politics, that’s why Smith and others called it political economy.

So, the answer to “The Role of Government in Modern U.S. Society: What Would Adam Smith Say?” is not to be found in Wealth Of Nations, published in 1776. He did not write about the future; he wrote about the historical past and up to the 1780s. I suspect he would have lots to say about the familiar propensity for government waste; about many of the additional roles taken on by governments; and he would probably be surprised why governments continue to do work that the economy is not longer too poor to leave the private sector (including, in the USA: why dredging services are supplied by Army Engineers and not the excellent US private sector firms that operate around the world!).

Jody W. Lipford and Jerry Slice consider the boundary has gone too far towards government funding and I am sure that we would draw up similar lists (though we might differ over some items, given I share Adam Smith’s scepticism about some of the roles undertaken in the name of defence; perhaps space too; and externalities like pollution). But, my agenda for government spending would be centred on Scotland in the United Kingdom, where I vote, and not the internal affairs of the US, where I don’t vote.

One piece of Smithian advice I would pass on: “don’t let ‘men of system’, who are ‘wise in their conceit’, come up with absolute plans to dismantle the government agenda without full attention to the personal costs of rapid change, especially in programmes that affect the poorer communities. Allow for a long transition period. Just a suggestion.