Government: The Big Picture

To fully understand public policy, one must first understand what the three levels of government – federal, state and local – actually do, the relative magnitude of spending on different government functions and services, and how these are paid for. No one can figure this out just by reading the newspaper or watching the television news. The media discusses each issue, and each public expenditure category, one at a time, generally without reference to the totality of government activity. With the 2008 elections around the corner, I have elected to provide a comprehensive overview of what the government does, who does it, and who pays for it, what is relatively more or less important, and what is a federal, a state or a local responsibility. I will follow with a further discussion of equity and eligibility, since (as you will see) a large share of government expenditures are only available to those who meet eligibility requirements.

As is my custom, spreadsheets will be provided so those with the inclination can make up their own minds. If you have been reading my posts and want to know what I know, and understand why I think the way I do about individual issues, this government primer and subsequent discussion of equity and eligibility will explain it. I always have the big picture, and fundamental principles, in mind. If readers slog through the posts giving the big picture on government activity (this week), and then read all the posts on equity and availability, I guarantee they will never look at individual issues the same way. Nothing I have posted or am likely to post has taken as much work and thought as what is coming.

Classifying government revenues, expenditures and employment into categories in a consistent and meaningful way is difficult. Gathering accurate, comprehensive data is also difficult. And explaining the relationship among governments is more difficult still, since one of the main things that the federal and state governments do is pass off money to other governments in federal and state aid. For example, the State of New York requires the City of New York to pay part of the cost of the Medicaid spending within its borders. This money is tabulated as inter-governmental spending on welfare by the City, and intergovernmental revenue received by the state. The City’s own Health and Hospital Corporation receives state Medicaid payments when it provides services to eligible recipients. This money is tabulated as intergovernmental spending on welfare by the state, and intergovernmental revenue received by the City via the Health and Hospitals Corporation. Finally, the Health and Hospital Corporation spends the money as a “direct” health care expenditure on doctors, nurses, supplies and buildings. As measured by “total expenditures,” the same dollar may thus be spent twice by the City and once by the State. As measured by “direct expenditures,” however, that dollar is spent only once. Only direct expenditures lead to actual public services.

To overcome these obstacles, one needs to place the entirety of federal, state and local revenues and expenditures in a single tabulation, using consistent categories, and separating “direct” expenditures from “intergovernmental” expenditures. The good news is that the U.S. Census Bureau has a Governments Division that has been collecting and tabulating this data in a comprehensive and consistent way since the late 1950s. The bad news is that as a result of the limited publicity this work has received, the Bureau has not been given the funding required able to keep its structure up to date as the structure of government activity has evolved, and has not included the federal government in its data – and thus not been fully comprehensive – since 1995. This 1995 data, received direct from the Bureau in highly detailed, unpublished form, will provide on basis for this overview of government activity; government changes slowly, and I believe based on available data that what is seen here is still broadly representative. Other data for 1998 will be taken from U.S. Census Bureau’s 2001 Statistical Abstract of the United States (cited hereafter as the 2001 Statistical Abstract). That data, as well, is impossible to update, as data in the detailed categories I used is no longer published by the Bureau of Economic Analysis.

Hopefully, even if they haven’t seen this data themselves, readers will find themselves saying “of course” as they look through the tables and read the posts, since the numerical facts will conform to their own impressions. In that case the data and discussion will help to organize and put in context what is already, if hazily, understood. For those who want the bottom line, and the data, it can be summarized this way.

• Specifically federal activities, including national defense and the Post Office, accounted for 14.7 percent of total government spending in 1995. Education accounted for 14.4 percent, infrastructure and public amenities for 10.9 percent, interest for 10.6 percent, public protection for 6.7 percent and public employee pensions for 3.6 percent. Social insurance, welfare, health care and housing assistance accounted for 33.5 percent, but Social Security and Medicare accounted for most of this. “Welfare” as traditionally defined only accounted for just one percent of government expenditures – before welfare reform and the 60 percent decline in the welfare caseload.

• Nearly half of all public spending is on public services and benefit payments that have limited eligibility based, generally speaking, on age, means, and needs. Just as families do, the government transfers resources from working age adults to children and the elderly. In some cases, such as Social Security, assistance is provided to just about all those who qualify. In other cases, such as housing aid and subsidized child care, only a minority of those eligible receive services.

• The federal government actually engages in very few activities directly. Much of its spending is accounted for by Social Security, Medicare, national defense, the Post Office, and aid to other levels of government. Not all taxes collected by a level of government are used for public services provided by the same level of government. The federal government generally provides funding for state and local governments to provide services, rather than providing services itself.

• In some cases, the government engages in the direct provision of public services, as it does for public education. In other cases, it provides funding for privately-provided services, as it does for health care through Medicare, Medicaid, and other programs. The government may already account for 70 percent of all third-party health care expenditures. In still other cases, the government just provides money for people to spend themselves as they see fit, as for Social Security and unemployment insurance. • There are some industries that rely on public purchasing, subsidies or vouchers for such a large share of their revenues that they may be considered, in effect, private sector arms of the government. The level of publicly-supported employment in these industries is substantial, even when compared with the 21 million people employed directly by the three levels of government.

• Government restrictions and inducements (subsidies, tax breaks, regulations, the criminal justice system) can attempt to direct private-sector and personal behavior, sometimes as a substitute for direct government action. The net effect may be no different than if the government collected taxes and spent the money directly, but the cost is disguised.

• Since some public spending is used to purchase goods and services from the private sector, the government’s share of total employment is much lower than its share of total spending. Most public employees work for the federal defense department and Post Office, state colleges and universities, and local public schools, police, and fire departments.

• Most of the services that the government actually provides directly are produced by agencies at the local government level, and local governments account for most public employment. Only one third of local government spending, however, is funded by local taxes, with an additional third funded by federal and state aid, and a third funded by charges and other service-related revenues.

• Most government revenues can be divided into three categories: taxes, which are not connected with the receipt of a particular service; charges, which are connected with the receipt of a particular service at a particular time; and insurance trusts, which take in money now in exchange for a promise of services or benefits returned later. Whether the latter may be better classified as just taxes depends on the extent to which one trusts the government.

• In particular, a substantial share of local services that lack age, means or need-based eligibility restrictions, particularly services in the infrastructure and public amenities categories, are funded by charges for services, not by taxes.

Subsequent posts will discuss the details.