How big is government in the United States?

• Author: Higgs, Robert
• Position: Etceteras ... - Report

How big is government in the United States? The answer depends on the concept used to measure its size. Although many such concepts are available, and several are used from time to time, by far the most common measure, especially in studies by economists, is total government spending (G) as a percentage of the gross domestic product (GDP). Using official data available at the online repository maintained by the Federal Reserve Bank of St. Louis (n.d.a) and official data available online for the U.S. Bureau of Economic Analysis (n.d.) National Income and Product Accounts, I have calculated that for the five-year period from 2010 to 2014, this measure of the size of government--including all levels of government, not only the federal government, and all types of spending, not only purchases of currently produced goods and services--was 35.8 percent.

On reflection, however, one might well wonder why G has been "normalized" so often by measuring it relative to GDP. One reason this practice is questionable is that GDP includes a large part--equal in recent years to about 10 percent of the total--known as the capital-consumption allowance. This is an estimate of the amount of spending that was required during the reference year simply to maintain the value of the nation's capital stock as it depreciated because of wear and tear and obsolescence. Given that GDP is defined to include only "final" goods and services, it is questionable that expenditures made solely to maintain the capital stock should be included at all rather than excluded as "intermediate goods," as a large volume of the economy's total output is already excluded (e.g., steel sold to the manufacturers of machinery, wheat sold to flour mills).

One way around this difficulty is to measure G not relative to GDP but relative to net national product, which, except for a statistical discrepancy, is the same as the accounting concept known as national income (NI). Using NI as the denominator, for the same period 2010-14, we find that the size of government in the United States was 41.4 percent. This figure, however, may still give a misleading impression of the relative size of government because NI includes elements that are more or less remote from individual households' economic affairs.

After some adjustments to NI, including several deductions (e.g., for contributions to government social insurance) and several additions (e.g., for personal-income receipts on assets), we arrive at...