Slicing the Pie: Classes and the Distributive Effects of Post-WWII U.S.Governmental Fiscal Policies

Time series analysis of the relative class income distributional consequences of postwar U.S. fiscal practices reveals that governmental revenue policies have had a procapital bias while state expenditures have tended to favor labor. The net impact of these processes has served to leave the marketgenerated income distribution largely intact, despite the historically unprecedented growth of the public sector during this period. Finally, in light of these findings, the distributive impact of the current administration's fiscal program are considered. Less than three months into his presidency, Ronald Reagan submitted to Congress the administration's proposed fiscal year 1982 budget (1), a document reflecting in a number of particulars the conservatism of the President, his cabinet officers, Congress, and, apparently, a large segment of the electorate. At the heart of this budget were unprecedented peacetime increases in defense outlays and equally significant, perhaps historic, reductions in a broad range of social service outlays. Admirers of the administration argued that the slashing of federal entitlements together with the personal and business tax cuts enacted in the 1981 Economic Recovery Act were necessary to control the growth of the federal government and to increase private economic initiative. In short, these measures were a welcome first step along a political path culminating ultimately--at least in the eyes of administrative spokespersons--in a return to "fiscal responsibility". Together with the relaxation of current and proposed federal regulation and a tight monetary policy, this fiscal package was designed to enhance individual incentive and to induce substantial economic growth (Executive Office of the President, 1982a: 3-10). Critics of budget director David Stockman's "budget ax" and the underlying supplyside prophesies of George Gilder and Arthur Laffer, of course, portray a rather different scenario: that the Reagan administration does not simply wish to reduce federal spending and regulation, but also desires to redistribute wealth and income from the lower and working classes to the (already) enriched segments of American society and to the corporate sector by dismantling the vestiges of Johnson's "Great Society" and by reducing the tax burden on the wealth. (2) In sum, the administration is not simply reducing the growth in federal spending and taxation and hoping to enhance private accumulation but is attempting to engage in an unprecedented regressive redistribution of income. In an effort to adjudicate between these positions and shed further light on some of the economic consequences of the Reagan administration's New Economic Program (NEP), it is useful to place these policies in historical perspective. Hence, the present research provides an empirical analysis of the class income distributional effects of governmental spending during the post-Second World War era (3). Through application of a time-series regression analysis (4), the following questions are empirically assessed: (a) Have governmental expenditure and revenue policies (i.e., fiscal policy) altered the relative shares of national income received by labor and capital? (b) If so, who benefits--capital or labor-and through what budgetary mechanisms are these advantages conferred? Empirical exploration of these questions not only adds to our understanding of the mechanisms by which material resources are distributed in the U.S., but also establishes baselines to appraise the distributive impacts of the Reagan administration's fiscal policies. Before undertaking these analyses, however, it is instructive to obtain an overview of governmental spending patterns and trends in the post-war era. Post-WWII Trends in Governmental Expenditures It is an incontrovertible fact that governmental spending has undergone an unprecedented expansion since the end of the Second World War -regardless of which governmental level or metric of presentation we choose to examine. In Table 1, this growth is chronicled at the aggregate, federal, and state and local levels of government. Data for spending by each of these governmental units are presented in nominal (current), real -716(constant), real per capita dollars, as a percent of the gross national product (GNP), percent of total governmental spending, and in terms of mean annual changes for the years 1946-1980. During this period total governmental expenditures have undergone more than a fourfold increase in constant dollar terms and have risen from approximately a fifth of the gross national product to a third (5). In nominal terms this growth is even more vivid. lhile state and local governmental expenditures still trail behind federal spending, the ration between them had dropped from approximately 1:2 to 2:3, indicating that an increasing proportion of total governmental spending is undertaken at the sub-national level. Similarly, since the mid-1950's, state and local governmental spending growth has tended to escalate more sharply than federal expenditures. In addition, Table 1 reveals that the federal government has been required to resort to deficit financing at an increasing level. Whereas the average annual federal budget was in surplus during the late 1940's, since that time there has been a tendency towards ever larger budget deficits so that by the late 1970's the mean annual deficit was in excess of $49 billion. Additional light is cast on these expenditure trends in Table 2 where sub-national governmental spending in the post-war U.S. is decomposed into its state and local components, the federal budget is divided into its civilian and defense categories, and annual budgetary figures for each of the governmental units and the federal defensecivilian functions are shown for five year intervals for the years 1949 to 1974 and annually for the 1974-1980 period. As disclosed in Table 2, local governmental spending has run consistently higher than state spending throughout the post-WW II era. While