Modelling the U.S. Federal Spending Process: Overview and Implications

Dempster, M.A.H. & Wildavsky, A. (1980). Modelling the U.S. Federal Spending Process: Overview and Implications. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-80-022

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Abstract

The purpose of this paper is to show how inflation is endemic to the budgetary process of the United States Federal Government. We relate models of government expenditure to models of the economy, thus joining in theory what has in practice always been together. The description given -- although presented in summary rather than detail -- is based on hard statistical and econometric evidence amassed over more than a decade. We attempt to show that, while they are complex, the relevant processes can be modeled reasonably simply. We conclude that the forces influencing U.S. Federal expenditures -- bureaucratic, political and economic -- are too entrenched and powerful to be easily deflected from their current course. Although expenditures decline during restrictive periods, they do not decline by nearly as much as they previously increased; thus each cycle of spending begins from a higher base.

After brief descriptions of the process by which fiscal and budgetary policy are formed in the name of the President and of the evolution of the broad pattern of Federal expenditure post World War II, we present simple, empirically supported models of the formation and coordination of budget requests, Congressional appropriations and the timing of Federal expenditures. Next we outline, by means of the comparative static analysis of a simple macroeconomic model with an endogenous government sector, the short and medium term economic implications of a government reacting -- through its wage bill, "mandatory" transfer payments and attempted fiscal policy -- to output, the price level and unemployment. When government involves a sizable proportion of economic activity, its budget deficit -- rather than private consumer and investment credit alone -- represents a major intertemporal credit demand, fueling both growth and inflation. In these circumstances a tight fiscal and monetary policy, which reduces this credit in response to inflation, can have precisely the opposite effect to that desired, namely, simultaneous stagnation and accelerating inflation. Finally, we speculate on the long term effects of the resulting growth of the public sector necessitated by short term political and economic forces in light of the slowly adapting nature of bureaucratic processes captured in our models.

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