7

p Every January the President of the United States transmits to the Congress a series of economic documents which evaluate the current state of economic activity, forecast developments in the forthcoming period and chart the course of government actions in the economic sphere. These documents are: the State of the Union Message, the Economic Report of the President with the Annual Report of the Council of Economic Advisers and the Budget Message. The American press regards these documents as the “national economic plan" which, however, essentially differs in content and nature from directive plans of national economic development. The President and his economic staff merely indicate specific directions and set some general goals and guideposts for the Administration in performing its economic functions. But these recommendations are not binding on the private sector of the economy. Correspondingly, the final results of economic activity as a rule essentially differ from official outlines and forecasts.

p The budget occupies a unique place among the governmental economic documents. Since the main part of the national output in capitalist countries is produced by private enterprises the budget serves as one of the few channels through which the government is able to exert purposeful 8 influence on different spheres of economic activity. At present the budget has been elevated to the rank of the most important instrument of macroeconomic control and regulation. Being a condensed expression of the government’s policy, the budget reflects as a mirror the changing pattern of socio-economic priorities and preferences, and the arrangement of the Administration’s economic and political objectives from the viewpoint of their urgency and importance. The character of the allocation of the budget appropriations for various programmes and categories of expenditure, shifts in the relative significance of individual budget items, changing structure of tax receipts—all these express in a specific manner the peculiarities of economic growth, the acuteness of class and social conflicts, government policy and the state of relations with theh outside world. In brief, the government budget reflects the most profound economic and political changes under way in the country.

p The steady absolute growth of the government budget and its rising share in relation to the national income has become an essential characteristic of the capitalist economy at a high level of its development. This process is by no means accidental: it expresses the immanent laws of capitalism. Enhancement of the role of the budget is a reflection of the profound changes in the functions of the capitalist state which have occurred in the last half a century. These functions have become a serious factor which exerts a many-sided influence on all spheres of economic decisionmaking.

p Engels pointed out that as the productive forces of capitalism grow “... the state will ultimately have to undertake the direction of production".  [8•1  This development confirms the fact that production which is social in its nature requires social regulation for normal functioning. At the same time the tendency towards centralisation of economic management is displayed under capitalism in specific and contradictory forms. State guidance of the economy, while preserving 9 private ownership in the basic sectors of the means of production, is inevitably of a restricted, fragmentary nature and affects only separate spheres of productive economic activity. Moreover, the state does not compete with the private sector, seeks to supplement it and ultimately ensures the interests of the ruling upper crust of the capitalist class.

p Nor is it accidental that the state began to play a special, exceptional role in the economic process only in the 20th century. At the threshold of our century deep-going shifts took place in the economic pattern of capitalism. There developed a network of large corporations, which concentrated a substantial part of national financial and material resources. The free competition of producers began to give way to various forms of monopoly competition. At the same time the amplitude of cyclical fluctuations of output widened, the crisis of overproduction became particularly destructive, encompassing simultaneously many countries and shaking the capitalist economy to its foundations. Under these conditions the state was compelled to assume an ever increasing share of the economic, organisational and ideological functions.

p The process of restructuring the capitalist economy inevitably leads to interlocking and merging into one mechanism of the activity of large corporations with the economic power of the state. This process which is.now clearly observed in the economy of all developed capitalist countries is characterised as state-monopoly capitalism in Marxist economic literature. State-monopoly capitalism, as a special form of socio-economic relations, was profoundly analysed in the works of Lenin.

p Capitalist economy changes and the growing complexity of the state functions have exerted a significant influence on economic theory. This was expressed in the crisis which jolted traditional concepts and doctrines of classical political economy in the West. The laissez-faire philosophy which propounds the concept of reducing to a minimum the participation of the state in the economic process, has lost its significance. It has been replaced by a directly opposite thesis embodied in the doctrine of Keynes and developed by his followers. It proclaims that, as a result of peculiar features 10 of the “mature” capitalist economy, stable economic development cannot be achieved without systematic and energetic government action designed to eliminate the adverse consequences of the uncontrolled market mechanism. Today the overwhelming majority of economists, with the exception of the most conservative wing, admit that the market mechanism of economic activity under capitalism in principle cannot ensure either an adequate (optimal) distribution of resources and incomes or a solution of other important problems which arise in the course of economic and social development. Only the government, it is asserted in most of the economic works, is the sole instrument with the help of which it is possible to ensure relative stability of production, mitigate social conflicts stemming from economic and political inequality, and impart to capitalism the stability, dynamism and vital force it lacks. State-monopoly capitalist regulation makes it possible to impose on the entire society economic decisions which are especially beneficial in the first place to the capitalist class.

p The strongest impulse for revising the doctrine of noninterference by the state in economic processes was given by the chronic disequilibrium of the capitalist economy in the 20th century. The disastrous consequences of fluctuations in economic activity culminated, at the beginning of the 1930s, in what is known as the Great Depression. The programmes of state financial aid to the biggest companies hit by the crisis of those years facilitated the development of the theoretical concepts of permanent government intervention in the economic sphere. This greatly influenced the approach to problems of economic policy, including (in the first place), government fiscal policy. The sphere of public finance turned gradually into one of the main channels of the economic expansion of the state. Correspondingly, a huge budget and a growing public debt began to be regarded by Western theoreticians and political leaders not as an anomaly or a flagrant violation of all the canons of “sound finance" but as a necessary condition for balanced development. The fact that a considerable part of the country’s productive and financial resources are systematically removed from private economic circulation in order to undergo distribution and redistribution along government 11 Chart I Money Flows in the United States Economy -2- 1. Personal Consumption Expenditure 11. Personal Income 12. Corporate Income and Social Security Tax 13. Personal Taxes 14. Government Borrowing 15. Personal and Corporate Gross Saving 16. Disposable Income 17. Corporate Saving 18. Personal Gross Saving 19. Bank Credit 2. Government Purchases 3. Gross Private Investment 4. Gross National Product 5. Net National Product 6. Government 7. Indirect Business Tax 8. National Income 9. Capital Consumption Allowance 10. Transfers 12 budget channels in accordance with special criteria and purposes, is now regarded as a normal economic procedure (see Chart I).

p The above chart shows that the government draws into the budget part of the incomes of the private sector in the form of taxes, payments and loans and then returns these financial resources into the income circuit in the form of expenditures for the purchase of goods and services, transfers and grants. Participating in the redistribution of the national product and income, the government thus exerts an important influence on production, consumption and saving. This makes it clear why the sphere of public finance has become an active area of theoretical studies and practical policy.

p The position of a budget in a country like the United States influences not only the domestic economic situation but international economic relations as well. The United States is the most powerful capitalist country in the world, and its budget includes huge amounts which are spent by the government for rendering diverse forms of aid ( including military) to other capitalist countries, for the maintenance of armed forces and military bases abroad.

p The US Government budget is exerting a serious impact on the international monetary relations of capitalist countries. The dollar performs the role of an international reserve and means of payment and settlements in the capitalist world. To perform these functions stability of the purchasing power of the dollar is essential. But the latter is systematically undermined by the process of inflation affecting the American economy. And one of the serious factors spurring on the inflation process is that of the government budget, to be more exact, its chronic imbalance and the methods of deficit financing. It is not by chance that the condition of the American financial system is being closely watched by economic experts and government officials in other capitalist countries. A large deficit in the US federal budget serves as a sign of the further worsening in the international position of the dollar and aggravates the international monetary crisis.

p For several decades the enhanced economic role of the government has been the object of intensive study by 13 Western economists. On the theoretical side great attention has been paid to the nature and causes of the rise of a public sector in the capitalist economy.

p Many problems of public finance and fiscal policy are raised from this angle. At the same time there is also the statistical aspect of the problem linked with the quantitative evaluation of the scale of government economic operations and their influence on the economic system.

p Data on the amounts of money drawn into the national budget, government expenditures and the public debt to the private sector are among the main parameters which characterise the level of economic activity of the state. We show the change of these indicators at three main levels of government in the USA—federal, state and local (see p. 14).

p The data of the table cover a period of 40 years. They demonstrate the substantial growth of government activity financed through the budget channels. Thus, between 1927 and 1968 government revenue increased (in current prices) from $12,200 million to $265,600 million, i.e., almost 22 times, and the expenditure 25 times (from $11,200 million to $282,600 million). The public debt (at all levels) amounted to $33,400 million in 1927; in 1968 it reached the astronomical figure of $468,700 million (an increase of 14 times).

It goes without saying that an appraisal of government operations is also influenced by an external factor—the change in the purchasing power of money linked with the change in prices of goods. If the budget revenue and expenditure were expressed in base year prices, the figures denoting increase would be more modest. Thus, using as an indicator of price changes the deflator employed by the US Department of Commerce in calculations of the national product and income (1958 = 100), we obtain the following picture: the revenue of government institutions at all levels in the USA in constant prices rose 9 times between 1927 and 1968, the expenditure—10.5 times and the public debt (including that of state and local governments)—5.8 times. Nevertheless even these figures demonstrate the rapid expansion of the state economic activity. For comparison let us point out that the key indicator of economic development, the

14 Table 1-1 Revenue, Expenditure and Debt of All Governments, 1927-1968 (million dollars) Fiscal year All governments Federal State and local Amount Percentage distribution Amount Percentage distribution Budget revenue 1927 12,191 4,469 36.6 7,722 63.4 1940 17,804 7,000 39.3 10,804 60.7 1944 64,778 51,399 79.3 13,379 20.7 1950 66,680 43,527 65.6 23,153 34.4 1955 106,404 71,915 67.6 34,489 32.4 1960 153,102 99,800 65.2 53,302 34.8 1965 202,585 125,837 62.1 76,748 37.9 1968 265,639 165,239 62.2 100,400 37.8 Budget expenditure 1927 11,220 3,410 30.4 7,810 69.6 1940 20,417 3,177 45.0 11,240 55.0 1944 109,947 99,448 90.5 10,499 9.5 1950 70,334 42,429 60.3 27,905 39.7 1955 110,717 70,342 63.5 40,375 36.5 1960 151,288 90,289 59.7 60,999 40.3 1965 205,550 118,996 57.9 86,554 42.1 1968 282,645 166,411 58.9 116,234 41.1 Debt outstanding 1927 33,393 18,512 55.4 14,881 44.6 1940 63,251 42,968 67.9 20,283 32.1 1944 218,482 201 ,003 92.0 17,479 8.0 1950 281 ,472 257,357 91.4 24,115 8.6 1955 318,641 274,374 86.1 44,267 13.9 1960 356,286 286,331 80.4 69,955 19.6 1965 416,786 317,274 76.1 99,512 23.9 1968 468,736 347,518 74.2 121,158 25.8

p Note: Revenue and expenditure as of the end of the respective fiscal year; exclude intergovernmental transfer of funds; amount of debt outstanding as of the end of the fiscal year.

Sources: Statistical Abstract of the United States 1970, p. 403; Historical Statistics of the United States, Colonial Times to 1957 ( hereafter Historical Statistics... to 1957), Washington, 1960, pp. 722-30.

15 gross national product of the USA, during the same period rose (in constant prices) only 3.8 times.  [15•1 

p The figures show that the greatest increase was registered by indicators characterising the activity of the federal government: revenue rose 23.6 times; expenditure, almost 50 times and the debt, 18 times.

p Military spending and related types of budget expenditures (payments to veterans of war, military aid to other countries, payment of interest on public securities, and so on) are the main factors responsible for the rise in spending by the federal government.

p Revenue and outlays of the state and local governments are important components of the general system of public finance. A detailed analysis of these activities is given in Chapter VI. At this point we shall merely indicate the general tendency. In the 1920s the state and local governments accounted for the main part of all budget revenue and expenditure; in 1927 they represented 63.4 per cent of the entire revenue and almost 70 per cent of the expenditure. Then, in the 1930s, the role of federal finance began to rise until it reached its peak during the war. The comparative decline in the financing of state and local governments also continues in the post-war period, but their share in revenue and expenditure rose somewhat, to 37-42 per cent.

p Lastly, there are other indicators characterising the growing influence of the state. Among them is the number of persons engaged in the public sector. Thus, the total number of government employees in the USA (excluding the personnel of the armed forces) was 13.0 million in 1970 as compared with 4.5 million in 1940. Of this number about threefourths were employed by state and local agencies and a little less than one-fourth, by the federal government. The tendency towards a rise in the relative importance of the federal government is also reflected in employment figures. Prior to the mid-1940s the share of federal employees 16 steadily increased. But then an opposite tendency emerged—the proportion of employees in the states and municipalities began to rise (chiefly due to those engaged in education).

p Table 1-2

Government Employment in the USA, 1940-1970

(thousands)

Total Federal State and local total stale local 1940 1950 1960 1970 4,474 6,402 8,808 13,028 1,128 2,117 2,421 2,881 3,346 4,285 6,387 10,147 1,057 1,527 2,775 3,228 4,860 7,392 As a percentage of the total 1940 1950 1960 1970 100 100 100 100 25.2 33.0 27.5 22.1 74.8 67.0 72.5 77.9 16.6 17.3 21.1 50.4 55.2 56.8

p Note: Figures include all persons in government employment except for the armed forces.

p Sources: Statistical Abstract of the United States 1971, p. 420; Historical Statistics... to 1957, p. 709.

p It is also interesting to note the steady increase in the proportion of government employees to the number of persons engaged in the process of production and distribution. In 1929 government employees (excluding the armed forces) amounted to 6.5 per cent of the total number of persons engaged in civilian production and in 1969, to 15.6 per cent.  [16•1 

p Another widely used indicator of state activity is the proportion of government purchases of goods and services to GNP.

17

p The share of government purchases which during the Second World War reached up to one half of the GNP stabilised during the last 20 years at the level of one-fifth of the GNP. This shows that a huge and to a certain extent stable market for many enterprises of the private sector ensured by government orders, has arisen in the USA. It is difficult to overestimate the importance of this market in conditions of the dominance of market spontaneity. At the same time it is necessary to note that government-generated demand is largely of a one-sided, specific character. Its very uneven impact on different sectors and geographical regions gives rise to disproportions in the economy. A considerable part of the purchases is connected with unproductive expenditures by the government, specifically the purchases of armaments and supplies for the armed forces. The struggle for a share in the governmental “pie”, which is unfolding both among big corporations and geographical regions, is an important factor in US political life.

At the same time the data supplied in Table 1-3 underestimate the extent of state influence on economic activity because they do not include transfer payments. These payments, as we shall see later, play an important role in the

Table 1-3 Government Purchases of Goods and Services (’000 million 1958 dollars) Government purchases of goods and services Amount Per cent of GNP Years GNP Total Federal State and local Total Federal State and local 1929 203.6 22.0 3.5 18.5 10.8 1.7 9.1 1939 209.4 35.2 12.5 22.7 16.8 6.0 10.8 1944 361.3 181.7 165.4 16.3 50.3 45.8 4.5 1950 355.3 52.8 25.3 27.5 14.8 7.1 7.7 1955 438.0 . 85.2 50.7 34.4 19.5 11.6 7.9 1960 487.7 94.9 51.4 43.5 19.4 10.5 8.9 1965 617.8 114.7 57.9 56.8 18.6 9.4 9.2 1970 720.0 139.4 65.4 74.0 19.4 9.1 10.3

p Note: Excluding purchases of goods and services within the public sector.

Source: Economic Report of the President 1972, pp. 196-97.

18 redistribution of incomes among various groups of the population and they affect the functioning of the economy as a whole. Thus the relationship of all government spending to the GNP is often used as an indicator of the scale of governmental operations. In the 1969 fiscal year this ratio was 21 per cent for the federal sector (with the share of purchases of goods and services amounting to 11.4 per cent).

p Many other statistics could be cited demonstrating the high level of economic power and, correspondingly, the influence of the government in the USA. Thus, the federal government owns over one-third of the 2,300 million acres of land occupied by the United States. Governments at all levels own nearly 20 per cent of the total stock of accumulated wealth (in the form of tangible assets) which is estimated at $3,000,000 million. Government-owned electric power stations generate from one-fourth to one-third of all the electricity consumed in the country; 30 per cent of total annual new construction in the United States is accounted for by public buildings and other structures (highways, dams, and so on). Lastly, about two-thirds of the total annual expenditures for research is financed by the federal government.  [18•1 

p By comparing the public sector in the USA with that of other developed capitalist countries certain essential differences are revealed. The scale of direct participation by the US government in the organisation of productive activity is relatively small. The state primarily owns enterprises in the military sector, the atomic energy industry and space exploration, these enterprises constitute an insignificant group of all the companies in the country. The influence of the state on the private sector in the United States is expressed not so much in the form of direct nationalisation of industrial companies, as has been the case in France, Italy and Austria, but primarily in direct and indirect financing, subsidising and regulating of various sectors (railways, agriculture, and so on).

These special distinctions in the development of the public sector in the USA substantially enhance the role and importance of budgetary channels of government influence 19 in the economic sphere. It is not by chance that as regards the level and ratio of the budget expenditures (including local government budgets) to the GNP, the United States holds one of the first places in the capitalist world. Studies of the economy of the US public sector are largely devoted to an analysis of budget problems.