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Appendix: Government and the National Product, 1929–1932

In footnote 21 of Chapter 9, we explain how we arrive at our estimate of the degree of government depredation on the private national product. The critical assumption is the challenge to the orthodox postulate that government spending, ipso facto, represents a net addition to the national product. This is a clearly distorted view. Spending only measures value of output in the private economy because that spending is voluntary for services rendered. In government, the situation is entirely different: government acquires its money by coercion, and its spending has no necessary relation to the services that it might be providing to the private sector. There is no way, in fact, to gauge these services. Furthermore, every government-conscripted dollar deprives the citizen of expenditures he would rather have made. It is therefore far more realistic to make the opposite assumption, as we do here, that all government spending is a clear depredation upon, rather than an addition to, private product and private output. Any person who believes that there is more than 50 percent waste in government will have to grant that our assumption is more realistic than the standard one.

To estimate the extent of government depredation on private product, we first find private product by deducting "product" or "income" originating in government and "government enterprise"—i.e., the payment of government salaries—from Gross National Product. We now have the Gross Private Product. Government depredations upon this GPP consist of the resources that government drains from the private sector, i.e., total government expenditures or receipts, whichever is the higher. This total subtracted from the GPP yields the private product remaining in private hands, which we may call PPR. The percentage of government depredation to gross private product yields an estimate of the burden of government's fiscal operations on the private economy.[1]

If government expenditure is larger than receipts, then the deficit is a drain on private resources—whether financed by issuing new money or by borrowing private savings—and therefore the expenditure figure is chosen as a measure of government depredation of the private sector. If receipts are larger, then the surplus drains the private sector through taxes, and receipts may be considered the burden on the private sector.[2]

One significant problem created by the vagaries of the official statistics—fortunately, again, a problem not significant for our period—is that the official statistics lump together the bulk of the spending of government enterprises (roughly, the government agencies that charge fees) in the private, rather than the governmental, sector. There are, therefore, no figures available for the total spending or total receipts of government enterprises—although there are separate figures for the salaries paid by, the "income originating in," government enterprises. Below, we will present very rough estimates for government enterprises for these years.

Furthermore, we do not, as do the Department of Commerce accounts of government expenditures, deduct government interest received from interest paid by government, to arrive at a "net interest paid" figure. On the contrary, the full amount paid by government is deducted from private resources and must therefore be included; while "interest received" is a receipt from the private sector, and should be included in the estimation of government receipts.

We are presenting here the figures not only for gross product, but also for net product, which are also of interest. Net National Product is Gross National Product minus depreciation and other capital consumption allowances, and if we consider private product as net income without drain on the value of capital, then we should estimate the percentage of government depredation on net private product.[3]

Table I presents Gross National Product and Net National Product in current prices. (Figures in this and following tables are from U.S. Income and Output, Department of Commerce, November 1958; and National Income, 1954 Edition, Department of Commerce.)

Table I

  Gross National Product (billions) Net National Product (billions)
1929 104.4 95.8
1930 91.1 82.6
1931 76.3 68.1
1932 58.5 50.9

Our next step is to find the gross product of government and government enterprises, or "income originating in government and government enterprises." Table II presents these figures for Federal, and for state and local, government and government enterprises.

Table II

Income Originating in Government ($ billion)

  Fed. Govt Fed Govt. Ent. State & Local Govt. State & Local Govt. Ent. Total Govt. and Govt. Entr.
1929 0.9 0.6 3.4 0.2 5.1
1930 0.9 0.6 3.6 0.2 5.3
1931 0.9 0.6 3.7 0.2 5.4
1932 0.9 0.5 3.6 0.2 5.2

Deducting the total figure for income originating in government and government enterprises, from GNP, we arrive at Gross Private Product (and from NNP, we arrive at Net Private Product). This is shown in Table III.

Table III

  GNP NNP Total Inc. Orig. in Govt. & Govt. Ent. Gross Private Prod. Net Private Prod.
1929 104.4 95.8 5.1 99.3 90.7
1930 91.1 82.6 5.3 85.8 77.3
1931 76.3 68.1 5.4 70.9 62.7
1932 58.5 50.9 5.2 53.3 45.7

Table IV presents our estimates for government expenditures, not including government enterprises. As we have indicated above, "interest received," which had been deducted from "interest paid" by government to arrive at the Department of Commerce figure for government expenditures, was re-included; also, for similar reasons, "surplus of state and local government enterprises," which the Department deducted from its aggregate of state and local government spending, was re-included in our estimates.

Table IV: Government Expenditures ($ billions)

  Fed. Expends State & Local Expends. Total Govt. Expends
1929 2.9 8.2 11.1
1930 3.1 8.9 12.0
1931 4.4 8.9 13.3
1932 3.4 8.0 11.4

Estimates of the expenditure of government enterprises are divisible into two parts: income originating (i.e., employee salaries), which are available from the Department of Commerce, and purchases from business, which are not available at all. Neither the Department of Commerce nor the Treasury has any figures available for purchases from business. The only estimates we may obtain, therefore, must be highly sketchy and arbitrary. Professor Fabricant has prepared figures for the fiscal year 1932 (we have so far been dealing in calendar years) of the total purchases from business by federal and state and local governments, including government enterprise.[4] Fabricant estimates total Federal purchases from business, general government and government enterprise, as $1.02 billion for 1931–32. The average of the Department of Commerce figure of Federal government (general) purchases from business for 1931 and 1932 is $.54 billion. We may therefore estimate the expenditure by Federal enterprises on goods from business as $.48 billion for 1931–32.

On the state and local level, Fabricant estimates a total of $4.08 billion spent by government and government enterprise on business products in 1931–32; the average of 1931–1932 for general state and local government purchases from business is $3.48 billion (Department of Commerce). This leaves as the estimate for 1931–1932 of purchases of government enterprises, state and local, from business at $.60 billion.

Unfortunately, Fabricant presents no figures for any other years for our period on the state and local level. For Federal purchases from business, Fabricant estimates the total, for government and government enterprise, at $.88 billion for fiscal 1929. Now, unfortunately, we have no data for 1928; using calendar year 1929, therefore, we obtain $.36 billion as the Department of Commerce estimate for Federal government (general) purchases. Subtracting this from the Fabricant figure, we obtain a rough estimate of $.52 billion for the purchases of Federal enterprises from business during 1929.

To extrapolate these sketchy figures into estimates of federal, and state and local, government enterprises for each of these years is certainly arbitrary, but it would just as certainly be more arbitrary if we simply ignored the problem altogether, and permitted government enterprises to remain partially ensconced in the private sector. We will therefore assume that, for each of our years, Federal enterprises spent $.5 billion on the products of business, while state and local enterprises spent $.6 billion. Our estimates for the expenditures of government enterprises are then as follows in Table V. The grand total of expenditures for government and government enterprises for these years is therefore as follows in Table VI.

What were governmental receipts during these years? Here we may take the Department of Commerce data, adding to them for both federal and state and local, "interest received." As for government enterprises, we may simply and roughly assume that their receipts balanced their expenditures, and estimate them in the same way, except that we know from the Department of Commerce the current surplus of state and local government enterprises, which we may add to the receipt figure. Total estimated receipts of government and government enterprise are presented in Table VII. It might be thought that, to arrive at the highest aggregate figure of government expenditures or receipts for any year, we simply total federal and state and local receipts, and the same for expenditures, and see which one is the higher. This is not correct, however. Whenever we have independent centers of governmental activity, the deficits and surpluses of these centers do not cancel each other in their impact on the private economy. Suppose hypothetically, that, in a given year the Illinois state government has a fiscal surplus of $200 million, while New York has a deficit of $200 million. If we are interested in a figure for the governmental impact of New York and Illinois states combined, we do not simply aggregate receipts and expenditures and compare them. For Illinois's surplus taxes drain the private sector, and New York's deficits also drain the private sector. The ideal step, therefore, is to take each state's and each locality's receipts or expenditures, whichever is the higher, and add up each of these higher figures, along with the higher figure for the Federal budget, to estimate the total fiscal impact of all level of government. With the data we have available, we can only do this for state and local on the one hand, and Federal on the other.[5]

Now, at last, in Table VIII, we are ready to estimate the fiscal "depredations of government" for Federal, and for state and local authorities (including government enterprises), and compare them to the data for private product.

Table VII

Receipts of Government and Government Enterprises ($ billions)

  Federal State & Local Total Govt.
1929 5.2 8.8 14.0
1930 4.4 9.1 13.5
1931 3.4 9.0 12.4
1932 3.0 8.5 11.5

We see here, in stark relief, the record of the enormous increase in the fiscal burden of government during the depression, from 1929 to 1932. The percent The percentage of Federal depredations on the private product rose from approximately 5 percent to 8 percent of the GPP, and from 6 percent to 10 percent of the NPP; state and local depredations rose from 9 percent to 16 percent of the GPP, and from 10 to 19 percent of the NPP. Total government depredations rose from 14 percent to 25 percent of GPP, and from 16 percent to 29 percent of NPP, not far from double the burden!

  1. It is conventionally argued, e.g., by Professor Due, that we should not include government transfer payments, e.g., relief payments, in any such expenditures deducted because transfer payments are not included in the original GNP figure. But the important consideration is that taxes (or deficits) to finance transfer payments do act as a drain on the national product, and therefore must be subtracted from GPP to yield PPR. Due claims that, in gauging the relative size of governmental and private activity, transfer payments should not be included because they "merely shift purchasing power" from one set of private hands to another, without the government's using up resources. But this "mere shift" is just as much a burden upon the private producers, just as much a shift from voluntary production to state-created privilege, as any other governmental expenditure. It is a government-induced using of resources. John F. Due, Government Finance (Homewood, Ill.: Richard D. Irwin, 1954), pp. 64, 76–77.

  2. A surplus slightly overestimates the extent of depredation if it is used to deflate the money supply, and government expenditures slightly overstate the extent of depredation by counting in the amount of government taxes levied on government bureaucrats themselves. The amount of distortion is slight, however, particularly for the 1929–1932 period, and is less than the distortion of using GNP instead of GPP, and thus counting governmental payment of salaries as equivalent to the "product" of government.

  3. Of course, official figures are not always accurate estimates of true depreciation. For a cogent discussion of the advantages and disadvantages of using net or gross measures of the governmental burden on the economy, see The Tax Burden In Relation To National Income and Product (New York: Tax Foundation, 1957).

  4. Solomon Fabricant and Robert E. Lipsey, The Trend of Government Activity in the United States Since 1900 (New York: National Bureau of Economic Research, 1952), pp. 222–34.

  5. Because, in our figures, state and local governments are already lumped together, our estimates will, from this standpoint, considerably underestimate the fiscal burden of government on the private sector.