Structure of the U.S. Economy: Government

I have been working in economic policy most of my adult life. Even as a college professor, I taught classes that emphasized how economics can be used – and not used – to inform policy decisions. If there is one thing I have learned throughout these years, it is that people who do what I do tend to be ill informed and shallow in their analytical work.

The consequences of bad analysis are formidable. Our economy is in the shape it is – struggling to grow and staggering under an unsustainable government debt burden – in large part because economists have derelicted on their duties to provide clear, concise and well-researched information to policy makers. That, of course, is not to say politicians are innocent: there is a widespread tendency among our political leaders to let the interests of their constituents be overrun by the interests of their benefactors.

While we economists can’t do anything about the intellectual honesty (such as it is) of our politicians, we can do something about the integrity of our own discipline and profession. Sadly, in the past 30 years economics has descended into a dungeon of econometric masturbation, where increasingly technical analysis produces increasingly irrelevant outcomes. The standard for good research among academic economists today is to crank out eclectic flea-killing standardized under the template “The influence of X on Y given Z”.

The art of political economy has been almost completely wiped from the collective conscience of the economics profession. Thanks to this, about 80 percent of all economics research today is useless in public policy. The remaining 20 percent have varying degrees of usefulness, most of it being applicable in isolated policy fields like education reform or health care.

Those applications are not to be under-estimated, but they tend to focus on efficiency gains and other forms of deck-chair rearrangement schemes for a slowly sinking welfare state.

What is truly missing in the economics profession is the ability to analyze the economy as a system. I find practically no trace of it among my academic peers, and the reason is – again – their universal lack of training in political economy.

I have devoted my career to the latter, to the point where I make sure to always introduce myself not as an economist, but a political economist. It is my job and my career – my mission – to explain the real-world economy and how it works under the influence of various political theories and ideologies. This blog is one small effort of mine along that line, which is why I prefer to write about the economy as a system, and always bring in a political perspective. I do this, of course, again with “political” being understood not as the daily jib-jab of party politics – far from it – but the interaction between the economy and political theory.

There are many systemic aspects of the economy that econometricians ignore, and therefore fail to bring to the table whenever they do get a chance to inform our legislative class on good economic policy. The central systemic aspect, of course, is the welfare state, but beyond the immediacy of that structure itself lies the need to understand the composition of our economy. There is a body of knowledge that economists should have, and that our politicians need, that does not inform them directly of what policy decisions are best at any given moment; instead, this body of knowledge builds a set of reference points, a system of intuitive signals that give the economist and, ideally, the politician a gut feeling in critical policy-making situations.

The gut feeling is important. It is a shortcut for anyone who wants to make informed decisions. If you know what the woods behind your house sound like on a normal day, you will not need instrumented evidence to know when to get out; you will hear the Sasquatch coming.

One of the most important pieces of intuitive knowledge is to have a good idea of how our economy is composed: the size of government relative the private sector; the composition of private industries; long-term trends in productivity, jobs growth and absorption. To give some examples of this type of knowledge, I will write a couple of articles giving an overview of the structure of the American economy.

We start today with a look at government. This over-bloated, resource-sucking, productivity-stifling behemoth is centered around the welfare state, which I have already written plenty about (and will continue to do). Today, however, we will take a step back and look at some hard data that tell us a bit more about how our government is actually structured. This, in turn, helps us understand where to concentrate reform efforts, and what types of reforms to go for, should we as a country ever be inclined to downsize government.

Following the current public-policy debate, you can easily get the impression that reforms to limit government should be done by Congress. This is true to some degree, but you can also miss important needs for reform by spending too much resources on rocking Capitol Hill out of its inherent inertia.

To see this point in numbers, let’s start with Figure 1, which reports the distribution of government employment across the federal, state and local levels. Local governments dominate, and their share has grown over time:

Figure 1

Source of raw data: Bureau of Labor Statistics

The fact that almost two thirds of all government employees work in municipalities is easily explained by our public school system. However, Figure 1 also raises another question: does this distribution of the government workforce also mean that local governments spend most of our tax money?

No, it doesn’t. Figure 2 compares the federal share of the government workforce with the federal share of total government spending:

Figure 2

Sources of raw data:
Bureau of Labor Statistics (Employment); Bureau of Economic Analysis (Spending)

The federal government and its 12.5 percent of the government workforce spends two thirds of all government money.

There is an important piece of information to extract from this: the primary purpose of the federal government is to spend money on cash entitlements. In 2019, the average federal employee administered outlays of $1,679,000. This, of course, is in good part due to Social Security, which means that most federal employees were responsible for a lot less spending. That said, the average number gives us a good indication of the purpose of government – in this case, again, to spend money on cash entitlements.

Each state and local government employee administered only $149,000 worth of spending. The contrast is stark visavi the federal government, and it gives us an important piece of information regarding the nature of states and municipal governments: their primary purpose is to produce services. The per-employee spending at these levels of government is reasonably close to what employee compensation, facilities and administrative overhead would add up to (in a non-competitive setting).

Since the federal government is predominantly preoccupied with doling out cash to people, the way to bring down its costs is to reform those cash-benefit programs. If we want to reduce the cost of state and local governments, we have to reform the services they produce. Emphasis, of course, will be on school choice reform.

Next up will be a review of the private sector and its industrial composition. Stay tuned, and do click the Follow button to be informed as soon as new articles are published!

One comment

  1. Pingback: Structure of the US Economy: Industries | The Liberty Bullhorn