As much as a quarter of nondefense expenditures consists of transfer payments to individuals, including benefits paid to veterans, public assistance, employee pensions, unemployment compensation, and old-age and survivors' insurance payments. (Inclusion of the net cost of agricultural price supports, subsidies to the merchant marine, etc., would increase the fraction.) To the billions of dollars of transfer payments, interest on the federal, state, and local debt adds more billions (after deducting interest received), and makes the total of transfer and interest payments equal to a third of nondefense expenditures. Half a century ago government transfer payments, largely of veterans' pensions, constituted only about a tenth of nondefense expenditures; and transfers plus interest, about a seventh. The great increase in transfer and interest payments may be compared also with the increase in income. Transfer and interest payments by government to individuals amount today to 1 out of every 14 dollars of personal income; half a century ago these probably amounted to no more than 1 out of every 75 dollars of personal income. Figures such as these remind us of another significant cause of government's large role today: by direct assistance and subsidy and by administering social security, insurance, and pension systems, government has shouldered a far larger share than before of the responsibility of protecting citizens against the hazards of unemployment and other causes of indigence. In addition, government helps to provide health, hospital, and similar services.
Apart from national defense and transfer payments, government expenditures (and also government workers and capital goods) go largely into the production of a great variety of goods and services, including education, highways, health and hospital services, and municipal services generally. The remainder is used to maintain and build up government plant and equipment. Compared with half a century ago, the resources used by government to provide its services have grown considerably. The work of federal, state, and local government has been expanded to satisfy wants not taken care of by government before (some of these, of course, were not felt a half century ago) and—far more important—old services have been expanded in scope and improved in quality. Here then is another and major reason for the high level of government's current activities.
Growth has been especially rapid in regulatory activities—regulation in one form or another, of one aspect or another, and in greater or less degree, of security and credit markets, of agricultural and other commodity markets, of labor markets, of markets for professional services, of markets for consumer goods—activities entirely absent or of much narrower scope fifty years ago. Except for the agricultural commodity price supports, however, these do not involve large expenditures by government—which is not to say that their effects are small.
Government services are generally distributed to the public without specific charge or at relatively nominal fees. However, government enterprises—those government agencies whose product is sold to the public at something approximating cost—are not negligible. They also have grown in scope and variety since the opening of the century. Except for the postal service, almost none of the many present enterprises of the federal government were in existence at that time; and the functions even of the post office have expanded in several ways. There has been expansion also at the state and local levels, though in municipalities public enterprises were already of considerable importance in earlier days. Taken all together, it seems that public enterprises have grown somewhat more than other nondefense activities of government. Employment in public enterprises equaled about 13 per cent of all nondefense government employment in 1900; it amounts to about 16 per cent today.
Of course, modest growth in relation to other government employment means rapid growth in relation to employment in the economy at large. Some of this resulted from increase in government's share in various industries. According to a tabulation to appear in Stigler's forthcoming report on the service industries, government employees in street railway and bus lines constituted a third of all employees in this industry in 1950, and in gas and electric utilities, a fourth; both percentages were larger than in 1900. Some of the expansion in public enterprises reflected the entry of government into industries in which government had no hand at all at the opening of the century; examples are workmen's compensation insurance, housing, state liquor stores, and finance. Some came from increase in the industry concerned, apart from change in government's share. Recent steps on the part of the federal government to divest itself of certain public enterprises and limit the growth of others has so far produced only a ripple on the trend.
To these facts we may add a related piece of information. Many of the services of government that are distributed without charge, or at a nominal charge only, are also produced in the private sector. Thus, threefourths of medical and other health workers were in private industry in 1950. Government's share in such activities has increased somewhat over the years (though elementary and high school education is an important exception). In this sense, some of the expansion of government reflects "encroachment" on the private sphere.
In summary: more resources to government for national defense; more resources to government for national security against other hazards; more resources to government for the provision of public services; the entry and further penetration of government into fields tilled by private enterprise or philanthropy—these are the substantial developments that have led to government's present place in the economy.