Government Spending

Clinton Confidential

The best-kept secret of the Clinton years is economic.


When President Bill Clinton declared in this year's State of the Union address that "the era of big government is over," he was probably just playing politics, seeking to temper his "liberal" image and enhance his re-election chances. Still, there is some substance to his claim. Despite Clinton's own ideological leanings, the record for federal involvement in the economy during his first term is remarkable: It compares favorably with that of his presumed antithesis, Ronald Reagan.

In declaring the end of the big government era, Clinton was merely acknowledging a trend in American political and economic life that is driven by forces largely independent of partisan ideology and politics. Because free trade and electronic commerce allow capital to flow around the world, seeking the best return in the most congenial environment, the discretion of governments to regulate, manage, and exploit economic resources is shrinking. This fact of life will continue to constrain the actions of our political leaders, no matter how statist their sympathies or lofty their ambitions.

After Clinton's election, Dwight Lee and I argued that the damage the new administration could do would be limited by global economic forces. We predicted that "government, on balance, will be no greater a presence in the economy in 1996 than it was under George Bush." (See "White House Wager," February 1993.) We were right. In fact, based on the indices that fiscal conservatives generally use to assess a president's economic performance, Clinton is a more faithful successor to Reagan than Bush was.

Clinton's opponents have the strongest case on taxes: Federal revenues have shot up since Clinton took the oath of office. Conservatives understandably complain that Clinton pressed early for an increase in tax rates that helped hike federal tax revenues from 17.7 percent of gross domestic product in fiscal 1992 to 19.1 percent this fiscal year. Clinton's critics should not forget, however, that taxes in one form or another were also raised during the Reagan years–four times. Partly as a result of Reagan's push to cut tax rates at the start of his first term, federal revenues as a percentage of GDP dropped from 19.7 percent in 1981 to 17.6 percent in 1986. But by Reagan's final budget, they had risen to 18.5 percent of GDP. As shown in Chart 1, federal revenues as a percentage of GDP have been somewhat higher, on average, during the Clinton years (18.8 percent) than during the Reagan years (18 percent for Reagan's first term, 18.2 percent for his second).

Clogging the Drain

It's government spending, not simply taxes, however, that ultimately imposes a cost on the private sector by draining away resources that would otherwise create wealth. Government expenditures have risen by an average of nearly $55 billion a year in current dollars from fiscal 1993 to fiscal 1996. But the increase in real (mid-1996) dollars has been only $46 billion during the entire three-year period, for an average real increase in federal outlays of just 1 percent a year. While not exactly frugality, that compares very favorably with the 2.9 percent average annual increase in real federal outlays during the eight Reagan years. Also, as shown in Chart 2, federal outlays have fallen from 22.5 percent of GDP in 1992 to 21 percent this year. The federal government is taking a smaller share of the country's output, and federal resources are being spread more thinly over a larger economy with more people. The drop of one and a half percentage points may not seem very large, but without that drop federal outlays this fiscal year would have been more than $100 billion higher than they will be.

The unrecognized (or ignored) fact remains that federal spending this year and next year will be a lower fraction of GDP than it was in any year of the two Reagan terms: 21 percent in 1996 and 20.8 percent in 1997, versus Reagan's low of 21.3 percent in 1989. Average federal spending as a percentage of GDP during the first Clinton term, 21.1 percent, will be lower than it was under either of the two Reagan terms: 23 percent and 21.8 percent, respectively.

Conservatives will quickly object to using total government spending as a measure of the federal government's importance in the economy. While defense spending increased during the first Reagan term, the end of the Cold War provided an opportunity for easy cuts–leading to the ongoing decline in defense spending that began in the last half of the 1980s. But defense isn't the whole story. Federal spending went down as a share of GDP during both the Reagan and Clinton years even after subtracting not only defense spending, which has been falling relative to GDP, but Social Security and Medicare payments, which have been rising relative to GDP, and federal interest payments. Leaving out those three categories, federal spending declined from 8.9 percent to 6.3 percent of GDP between 1981 and 1989, only to rise rapidly under Bush, reaching 7.7 percent in 1992. This measure of spending started falling again under Clinton, dropping to 7.1 percent this year.

The eras of the Clinton and Reagan presidencies share an unremarked commonality: The growth in key measures of federal spending relative to GDP that occurred during the Carter years (and four prior administrations) was reversed under Reagan. Similarly, the relative growth in federal spending seen during the Bush years has been reversed during the Clinton years. And the recent decline in federal spending relative to the economy cannot be totally attributed to the Republicans' congressional victories in the 1994 elections. Nearly three-fourths of the percentage decline in the relative size of federal spending during the Clinton years occurred before the advent of the Republican Congress.

The Balancing Act

Balancing the budget has long been an obsession of fiscal conservatives, and it was a prominent item in Newt Gingrich's Contract With America. By this measure, too, the Clinton record looks quite respectable. The federal deficit has fallen from 4.7 percent of GDP in 1992 to 2 percent this year. The deficit averaged 5.1 percent of GDP during Reagan's first term and 3.5 percent during his second. During Clinton's first term, the deficit will average 2.3 percent.

Similarly, fiscal conservatives often fret about unproductive government workers. But contrary to the popular impression that the Reagan administration throttled government growth, the number of federal workers went up by close to 200,000–nearly 8 percent–during the eight Reagan years. By contrast, if the federal government is now playing a more disruptive role in the economy, federal workers must be getting more productive at what they do wrong. The federal government, like major private firms, is downsizing its staff. The count of federal workers fell by more than 150,000, or 5 percent, during the first three and a half Clinton years.

As evident in Chart 3, federal employment as a percentage of total civilian employment has declined as well. In mid-1996, federal employment represented 2.3 percent of the country's total (nonfarm) employment, the lowest proportion since World War II. Furthermore, federal employment has averaged only 2.4 percent of the country's employed labor force during the Clinton years, lower than for Reagan's two terms, when the proportions were 3 percent and 2.8 percent.

The conservative trend can also be seen in the proclivity of the federal government to fund and staff its regulatory agencies. True, total federal spending on all regulatory agencies has risen substantially. It is up 4 percent in real dollars since Clinton took office. But the jump is caused in part by new regulations passed under Bush. And the climb in regulatory spending as a percentage of GDP that began during the second Reagan term and continued during the Bush presidency has been capped. This year, regulatory spending will be a slightly lower percentage of GDP than in 1993.

Employment in regulatory agencies has grown during the Clinton years, but only by 2,300, less than 2 percent. Given the absolute decline in overall federal employment, the growth in regulatory employment must have come at the cost of contractions in employment at other federal agencies. This means that any increase in economic damage done by more regulatory workers must be offset at least partially by less damage done elsewhere in the economy.

Of course, the cost of regulations is hardly limited to the salaries paid to government workers enforcing them. The real question is the regulatory burden placed on the private sector and not recorded in the federal budget. To capture regulatory trends, pundits and politicians have frequently cited the count of pages in the Federal Register, which records all proposed and enacted changes in federal regulations. Here, too, Clinton's record is better than Bush's. He has not yet achieved–and may never achieve–the low annual page counts recorded during the Reagan years (the lowest was 47,418). But the upswing in the page count that began during the second Reagan term and continued during the Bush administration has apparently been reversed. Between 1986 and 1993, the page count grew by close to 50 percent. During the first half of 1996, the Federal Register was publishing pages at a rate of nearly 66,000 a year, but that is 4,000, or 5 percent, fewer pages than were published in 1993.

Reluctant Conservative

Noting the divergence between Clinton's economic record and his reputation and early rhetoric as a liberal, it is natural to wonder who this guy really is. Is Clinton a Roosevelt liberal or a Reagan conservative? The choice between the two political labels may be a false one. Neither admirers of Franklin Roosevelt nor fans of Ronald Reagan will find much comfort in Bill Clinton's policies during his first term. FDR liberals will worry that Clinton has put too little emphasis on extending redistributive programs, while Reagan conservatives will not likely forgive him for raising tax rates or tampering with labor markets.

Clinton unsuccessfully pressed for a national health care system. He sought and secured mandated parental leave for workers and an increase in the minimum wage (with the votes of some Republicans). After resisting, however, he also in August signed welfare legislation that eliminates the entitlement status of cash welfare, establishes time limits, cuts spending by $55 billion over six years, and allows states to experiment with a wide variety of programs. Early in his term, he energetically supported passage of the North American Free Trade Agreement, which Ronald Reagan vigorously applauded.

Despite occasional agreement, Clinton and Reagan are decidedly different in their basic attitudes toward government. Reagan firmly believed that the overall size of the federal government was a fundamental problem. By contrast, Clinton seems to earnestly believe that the federal government should be a wellspring of policy solutions for many of today's social and economic problems. Still, the economic record for the federal government during the Clinton years, as evaluated by measures conservative Republicans hold dear, is decidedly more conservative than Bush's record and can, in key ways, be favorably compared to the record of the Reagan years.

There is, of course, a subtle but important distinction between describing what has happened during the "Clinton years" (or "Reagan years") and identifying the "Clinton effect" (or "Reagan effect"). The economic record of any short span of years obviously results from the interplay of many domestic and global forces, not the least of which is the extent of partisan conflict and cooperation between the White House and Congress. No doubt, the Clinton White House has been constrained by Republicans in Congress, with the differences between the two on budgets often a matter of a few billion dollars a year. While Clinton has benefited from the economy's growth, its lackluster performance relative to the 1980s may have worked against a more rapid decline in the relative size of government. All that can be done here is to let the record speak for itself.

Neither Republicans nor Democrats are likely to welcome this review of the data. Republicans do not want the Clinton era to be painted with even moderately conservative stripes. They prefer to present their candidate to the electorate as only more conservative than a very liberal Democrat with a very liberal record on all counts, so that Bob Dole will not seem too far to the right. The real challenge for Republicans is to portray Dole–who is partially responsible for the economic record, good and bad, of the last three (if not 35) years–as more conservative than Clinton (and, for that matter, Bush) in not just rhetoric but policy substance. That's no easy task, given Dole's penchant to date for talking like George Bush–with little conviction, clarity, or specificity on matters of economic policy–and his record of support for tax increases, huge social programs such as Medicare, and regulatory monstrosities like the Americans with Disabilities Act.

Nor are Democrats apt to welcome my analysis. They do not want their liberal allies to see the Clinton years as more economically conservative than the Reagan years. Liberal Democrats may begin to see Clinton as ineffective in the pursuit of their causes. If so, the Democrats risk disaffection of their core constituencies.

Both Republicans and Democrats seem to want to keep voters in the dark, holding close the year's best-kept political secret: Although the era of big government is really not over yet–after all, the federal government still accounts for more than a fifth of GDP–the government's relentless growth relative to GDP has been checked. There seems to be little that even a president with the purest of liberal intentions (if that is indeed true of Clinton) can do about it. The evidence is mounting that government policies are constrained more and more by global economic forces rather than domestic political forces.

In the face of this trend, the relative growth of government under Bush was only a blip. It can be partly explained by the sluggish economy, which in turn was partly due to increases in taxes and regulation. (The same combination of factors helps explain Bush's defeat.) It may also be that the "Reagan Revolution" went further than global economic forces required, giving Bush some leeway for expansion. But the continuing worldwide competition for capital has prevented Clinton from building on his predecessor's accomplishment.

Clinton has a strong chance of being re-elected precisely because he has not been able to expand federal involvement in the economy as much as he imagined he could four years ago. His favorable ratings began to climb just after he lost his struggle to mount a hostile takeover of the country's health care industry–and as federal outlays began to shrink relative to the expanding economy. Conservatives understandably lament the passing of the Reagan era. At the same time, given the actual economic records of the last two administrations, they should be happy that Bill Clinton defeated George Bush.

Richard B. McKenzie ( is the Walter B. Gerken Professor of Enterprise and Society in the Graduate School of Management at the University of California, Irvine. He is coauthor, with Dwight R. Lee, of Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World (Free Press). He is author of What Went Right in the 1980s (Pacific Research Institute) and The Paradox of Progress: Can Americans Regain Their Confidence in a Prosperous Future?, forthcoming this fall from Oxford University Press.