by Ray Keating
The Keating Files – August 4, 2020
It’s hard to find anyone these days not on board with the federal government shoveling big bucks out the door, given that government, reacting to the COVID-19 pandemic, has shut down large swathes of the economy. But that doesn’t mean the consequences of such actions will magically fail to materialize.
Make no mistake, whether or not you’re okay with staggering levels of federal spending, aid and loan programs, the bill will come due. And it will be huge. Actually, we’re already paying through lost output, lost businesses, lost investment, lost entrepreneurship and lost jobs. That’s what happens anytime government sucks massive amounts of resources out of the private sector – whether via taxes or borrowing – and then reallocates those dollars according to politics. Again, whether the current federal spending binge is justified or not, the costs are unavoidable.
Unfortunately, the ills could linger long into the future if politicians do what they usually do after major emergencies.
Consider some key examples from the past century-plus.
Before World War I, from 1901 to 1916, for example, federal government outlays ran, on average, at just less than 2 percent of the economy. During U.S. participation in World War I and its immediate aftermath, federal outlays jumped to 3.2 percent of the economy in 1917, 16.6 percent in 1918, and 23.4 percent in 1919.
The economic growth – largely driven by major tax relief – and spending restraint that came in the 1920s during the administrations of Presidents Warren G. Harding and Calvin Coolidge, resulted in a reduction of the federal government’s take. Federal government outlays had declined to about 3 percent of the economy in the late 1920s. While that was an impressive reduction in the size of government, federal outlays as a share of the economy still stood at a third higher than prior to World War I.
Government failing to return to its pre-emergency levels would be the rule, rather than the exception, for the coming century.
Consider the Great Depression and World War II. Presidents Herbert Hoover and Franklin D. Roosevelt sought to fight economic woes with more government, that is, with unprecedented levels of taxes, regulation and spending (along with Hoover and Congress’ protectionism on trade). By doing so, these two presidents and Members of Congress created the Great Depression. They all failed to grasp that it was government causing the pain. And then came fighting the scourges of the Nazis and Japanese imperialism.
Consider a couple of moments during and after this period. After the Depression had dragged on for about a decade, federal outlays stood at 10.1 percent of GDP in 1939. That was more than three times the pre-Depression level.
During World War II, spending naturally skyrocketed, with outlays climbing to a peak of 42.7 percent of GDP in 1944, and then declining to 14 percent at the end of the forties. That 14 percent level was markedly higher than where it was just before the war.
By the end of the Korean War in 1953, outlays once again had climbed, hitting 19.9 percent of GDP. Subsequently, federal spending backed off some, running around 18 percent of the economy at the end of the 1950s and into the mid-1960s. Again, that was down from the Korean War peak, but still notably above the pre-war level.
The Sixties eventually saw the War on Poverty and the Vietnam War. Federal outlays were pushed up to the 19 percent range, and then there was no effort to pare things back. Instead, federal outlays topped 20 percent of GDP, and staying around the 21 percent to 22 percent range (once more, give or take in years here and there) into the mid-1990s.
Economic growth and reductions in defense outlays actually brought federal spending down for a few years, coming in below 18 percent in 2000 and 2001. That was noteworthy given where spending had been for more than three decades.
After the attacks on 9-11, however, federal outlays again grew as a share of the economy, exceeding 19 percent of GDP.
The 2008-09 mortgage and economic mess saw federal spending spike to 24.4 percent of GDP in 2009. The subsequent, gradual decline brought outlays as a share of GDP down to 20.2 percent in 2018 and 21 percent in 2019. So, outlays persisted above that 20 percent mark – again, federal spending seemed to reach a new, higher level.
And now we have the enormous increase in federal spending tied to the pandemic. For example, the Congressional Budget Office reported last month that through the first nine months of fiscal year 2020 (covering October 2019 to June 2020), federal outlays increased by breathtaking 49 percent compared to same period last year.
Through the first nine months of FY2020, outlays came in at more than $5 trillion. For all of FY2019, federal outlays registered $4.4 trillion. Considering that further large increases in federal spending no doubt will be registered during the final three months of the 2020 budget year, and given the shrinking of the economy, it’s within reason that federal spending as a share of GDP could top 30 percent this year.
As vaccines and therapeutics make it to the market and the economy starts to seriously recover, what will happen to the size of government in this country? Initially, we can expect spending to fall from unprecedented heights. But where will it settle?
Do politicians stay true to form, with spending persisting at levels higher than where it was prior to the pandemic? Cynical advocates of big government might ask, “Why waste an emergency by failing to expand the size of government?” If such sentiments prevail, the economy will suffer from slower economic, income and job growth.
Or, will some economic sanity take hold, with government spending retreating to levels perhaps experienced prior to 9-11, and thereby, leaving more resources in the private sector where they will be used more productively, with the economy then growing more robustly? Of course, for such sanity to prevail, it will require that politicians, and many voters, actually learn from history and economics. That sounds like a tall order, but there’s always hope.
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Ray Keating is a columnist, economist, podcaster and entrepreneur. You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?
Keating also is a novelist. His latest novel is The Traitor: A Pastor Stephen Grant Novel, which is the 12th book in the series. The Kindle price has been cut to $2.99 for each book. Big sale on signed books and sets at https://raykeatingonline.com/t/book-of-the-month.
Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcast and the Free Enterprise in Three Minutes Podcast
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