Thomas E. Borcherding

The causes of government expenditure growth: A survey of the U.S. evidence

Abstract The growth of government budgets can be broken down into a-institutional and institutional components. The former component — the familiar substitution, income, and population/public goods-tax sharing effects — is estimated to contribute about two-fifths of the growth of U.S. government spending. The latter component — rent-seeking political redistributions, bureaucracy and perceptual/informational impedimentia — is important, too, but an exact imputation cannot be asserted given the state of the art in empirical public choice theory. The cross-effects on spending of the growth of regulation and tax preferences or tax expenditures, though interesting, is not pursued.

Growth in the Real Size of Government Since 1970

From at least 1893 economists have viewed income as an important determinant of government size and the hypothesis that government size increases with income is now enshrined in the literature as Wagner’s Law. More recently, however, public choice economists and growth theorists have tended to reverse that causality by questioning whether government size is a constraint on (or promulgator of) economic growth. Typically, increases in government size arising from increased consumption are viewed as constraints on growth, while increases in size that arise from government investment are viewed as positive in their effect on growth. In this paper we are concerned with the two-way interrelationship between government size and income growth highlighted by these separate literatures and investigate this relationship in three distinct stages. In the first part of the paper we set out what has actually happened to the real size of government for twenty OECD countries over the period since 1970 and survey some of the newer factors and approaches used to explain its more recent evolution. The second part re-estimates the parameters of the demand curve for government allows us to speculate whether the changing pattern of government growth represents a break in the structure of the model determining government size or, more simply, represents a change in the variation of the underlying variables. We find that the same model works at least as well as it did in earlier periods with coefficients that are close to their earlier estimates. We follow this by estimating a simple growth model that highlights the size of government consumption in relation to income and output growth for the same countries over the same time period. Increases in size do appear to constrain economic growth. The third part of our paper recognizes that while each of the two causal relationships has received considerable attention in their own right, less attention has been given to effecting a separation of their co-mingled effects. To do so, we estimate the two relationships simultaneously in the context of our panel. This allows us assess whether ignoring the simultaneity of the two-way relationship seriously biases the measure of either the income effect (in determining government size) and/or the measure of government’s effect on economic growth when each are estimated separately. While our discussion suggests that single equation estimates of the income elasticity in Wagner’s Law may have been biased upwards (in absolute terms) and the constraining effect of government size on growth biased downwards, our three stage estimates finds only modest support in the data. The paper concludes by exploring the interrelationship between government size and government regulation. In particular, we test the hypothesis that the appearance of slower growth in government side is due to the increased substitution of indirect control of private production for direct governmental output. On cross sectional data, we find the opposite. In our sample, larger government size is associated with more rather than less regulation.

Group consumption, free-riding, and informal reciprocity agreements

We examine conditions under which group consumption is likely to involve informal reciprocity agreements rather than a price system. Our model shows that reciprocity agreements are used when transactions costs are high, the good is inexpensive, demand is inelastic, the group continues to interact over time, the consumers are patient, the time between interactions is short, and the group is small and homogeneous. Further, the results suggest that reciprocity agreements are likely to involve goods that are consumed along with other group benefits, such as companionship. We use the model to analyze overlapping social networks and investments in social capital.

The Growth of the Relative Size of Government

Throughout the 20th century most industrialized countries experienced a remarkable growth of public expenditure, despite marked differences in their institutional and demographic structures. Up until World War I the size of public spending was relatively negligible in most industrialized countries, due perhaps to the laissez-faire outlook that prevailed during the 19th century. According to Tanzi and Schuknecht (2000), the average share of public expenditure in Gross Domestic Product (GDP) among 17 industrialized countries was a mere 12 percent in 1913, only slightly above 11 percent of 1870. After World War I, however, government spending escalated rapidly as governments took more active roles in economic and social developments, especially so in reaction to the Great Depression. By 1937 the average size of government among Organization for Economic Co-operation and Development (OECD) countries grew to 23 percent of GDP, doubling the 1913 level.

Ethnic Diversity and Public Goods Provision: Evidence from U.S. Municipalities and School Districts

We revisit the claim that ethnic heterogeneity—the degree to which different ethnic groups make up the population—reduces local government spending on various public goods. Our analysis suggests that heterogeneity does not necessarily reduce local public spending due to two factors: (1) the low price elasticity of demand for local public goods and (2) the substitution between public goods. Using data from American cities and school districts from 2000 to 2010, we find that ethnic heterogeneity has offsetting positive and negative effects on various types of local government spending. Our findings imply that local governments respond to an increase in ethnic heterogeneity by rebalancing local public spending—for instance, adopting a policy that reallocates resources from roads to police and fire protection.

The Contemporary Political Economy Approach to Bureaucracy

Bureaucracy: The support staff that is responsible for developing plans, collecting and processing information, operationalizing and implementing executive decisions, auditing performance, and, more generally, providing direction to the operating parts of a hierarchical enterprise. Bureaucracy is attended by low powered incentives (due to the impossibility of selective interventions) and is given to subgoal pursuit (which is a manifestation of opportunism). Oliver Williamson (1994, 102)

The Contributions of James M.Buchanan to Public Finance and Political Economy

James M. Buchanan’s contributions to public finance and political economy are surveyed in six areas: (1) debt, fiscal illusion, and Keynesian criticisms; (2) London School of Economics cost approach; (3) methodological individualism and the economics of politics; (4) welfare price theory; (5) rent seeking and polity failure; and (6) political economy and constitutions. A comprehensive bibliography through 1984 of 10 books, 4 monographs, 43 refereed articles, 30 essays in books, 10 short papers, 33 papers in collected works, and a translation is offered.

Ethnic Diversity and Public Goods: Evidence from U.S. Municipalities and School Districts, 2000-2010

This paper examines the claim that ethnic heterogeneity reduces government spending on various local public goods. Our analysis suggests that higher ethnic heterogeneity does not necessarily reduce local public spending due to two factors: (1) the low price elasticity of demand for local public goods and (2) the substitution between public goods. Using data from American cities and school districts from 2000 to 2010, we find that ethnic heterogeneity has a robust, positive impact on various types of local government spending.