The size (of our government) really does matter

To balance the state budget, more than $20 billion in the red, California legislators are fighting over spending cuts. Legislators also disagree whether California government is too big. Fortunately, there is a way to quantify the size of government, and all Californians will find it illuminating.

Most discussions about the size of government start and finish with the amount government spends, and how it has grown over time. The estimate for California’s total state spending in 2009-10 is $125.1 billion. This represents roughly 66 percent growth over the last decade, higher than population growth and the increase in prices (inflation) during the same period.

Such measures don’t, however, give us a good idea of the burden of government spending. The best measure we have to understand and contextualize government spending is as a share of the economy (GDP). After all, it is entirely feasible for government spending to be increasing in dollar terms while decreasing as a share of the economy.

The latest data for the size of government as a share of the economy (2008) show California state and local government representing 22.3 percent of the state economy. Put differently, in 2008, state and local government accounted for more than one of every five dollars in the California economy. This ranked California 41st among the 50 states.

Understanding whether 22.3 percent of GDP is too much or too little rests on a fairly simple concept regarding government and economic growth. Certain functions require government involvement, such as the protection of people and property and the enforcement of contracts. When government completes these tasks in a relatively efficient manner, it promotes economic growth.

If government fails to provide these services, economic growth suffers. In too many Third World countries, the problem is insufficient and corrupt government. However, the opposite also occurs. If government grows too large and enters into activities, such as redistribution, it can retard economic growth. The goal is to get government right so that economic growth is maximized.

Economists Richard Vedder and Lowell Gallaway estimated the growth-maximizing size of state and local governments in the U.S. at approximately 11.4 percent of GDP. This means that California’s state and local government sector is roughly twice as large as what has historically maximized economic growth. For those willing to recognize facts, that explains, in part, why our state economy is lagging so far behind its huge economic potential.

A second way to understand the size of government is value for money. If, for example, residents in one state face a heavy tax burden (large government) but receive exemplary and nation-leading services then the tradeoff might make sense.

Similarly, if residents in another state have a light burden of government but limited services they, too, may have made a good bargain.

Unfortunately, Californians have made a terrible bargain: we face a large burden of government, 10th highest in the country, and get poor value-for-money from government services. But how do we quantify that value?

Our recent study of government spending in California compared the outcomes of a variety of government programs including education, healthcare and infrastructure as well as the resources (money) used to finance the programs among 23 industrialized countries as well as the state of California.

California ranked 15th among the 24 jurisdictions. It’s score of 0.99 was markedly below the score for the United States as a whole (1.09). The data indicate that other countries are able to deliver much better results in areas like education, healthcare and infrastructure at the same or lower levels of government spending.

The empirical evidence clearly demonstrates that California’s government is too large. It exceeds the size linked with maximizing economic growth by a factor of two and state spending is not providing value-for-money to Californians. This is unacceptable, but legislators have a way to address the problem.

California must conduct a comprehensive review and reform of all government spending with a clear goal of reducing the total amount of money spent by governments in the state. That is a key step toward returning the Golden State to the path of prosperity.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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