THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Monday, October 21, 1996 TAG: 9610190157
SECTION: BUSINESS WEEKLY PAGE: 11 EDITION: FINAL
SOURCE: BY JOHN M. BERRY, THE WASHINGTON POST
LENGTH: 72 lines
No matter how you slice it, federal government spending is falling relative to the size of the U.S. economy.
Over the past 3 1/2 years, the decline has been large enough that this year American households and businesses probably will be able to consume and invest about $110 billion more than they would had federal government purchases of goods and services not declined as a share of the gross domestic product.
That's primarily a sort of ``peace dividend'' from the end of the Cold War, which opened the door to reduced defense spending. For the most part, that dividend has been passed on to the private sector rather than used to fund increased spending by government.
Federal spending for direct purchases of goods and services - that's everything from government salaries and paper clips to military aircraft and new roads in national parks - dipped to 7 percent of GDP in the second quarter of this year. That's down from an average of more than 12 percent in the 1950s and '60s, 9.4 percent in the '70s and '80s and 8.4 percent at the end of 1992. In fact, the figure is the lowest it's been since 1950.
That spending includes only such direct purchases. It doesn't include the transfer payments such as Social Security, Medicare and grants to state governments for highway construction that together make up an even larger share of the federal budget.
However, total federal spending is also down from 23.6 percent of GDP at the end of 1992 to 22.5 percent in the second quarter, a slightly smaller 1.1 percentage point decline.
``Government purchases and government transfers are fundamentally different in that purchases absorb national resources directly, whereas transfers redistribute resources,'' said Mickey Levy, chief financial economist for NationsBank Corp. in New York.
Dollars spent on schools, highways or weapons systems consume items that are then not available for private use. In the case of transfers, ``you are redistributing the wealth, taking it from one taxpayer - or a future taxpayer if you have to borrow to pay for it - and redistributing it to the beneficiary who may spend it or save it as he wishes.''
There is a gray area, which includes programs such as Medicare and Medicaid, that experts have decided to treat as transfers, even though the money is available to recipients only if it is spent on certain things, such as health care. In a sense, the spending is private, but the existence of the programs channels those expenditures in a particular direction.
Economist Charles L. Schultze of the Brookings Institution, who has been wrestling with federal budget issues ever since he was director of the Bureau of the Budget 30 years ago, said that such figures show clearly that ``we have shifted some part of national output from defense to some combination of consumption and private investment.''
The good news, Schultze added, is that the nation ``didn't lose much'' in the spending shift because the need for the previously higher level of defense spending disappeared as threats to national security diminished. Meanwhile, ``we gained something, some combination of more consumption and investment.''
Many economists regard the allocation of national resources between public and private use as the key purpose of the federal budget, and recently, that allocation has shifted in favor of the private side.
Levy said the fact that total federal spending has gone down less, relative to the size of the economy, than direct purchases is an indication that future allocation debates are going to center on transfers, especially entitlement programs such as Social Security.
When spending is financed by deficits, the use of resources can be distorted because the bulk of government spending supports consumption at the expense of private-sector investment, Levy argued.
Over the past 3 1/2 years, government purchases have dropped not just as a share of GDP, but absolutely. At the end of 1992, federal government spending was running at an annual rate of $535 billion, with $375.3 billion of that going for defense. In the second quarter of this year, federal spending was at a $529.6 billion rate and defense was at a $353.7 billion rate.
KEYWORDS: FEDERAL SPENDING by CNB