Government Consumption, Taxation, and Economic Activity

The size of government consumption relative to gross national product (GNP) has grown steadily in Europe and North America over most of the post-World War II period. In real terms, government expenditure in the United States has grown at nearly 4 percent annually over the last four and a half decades. As a percentage of GNP. it rose from approximately 13.7 percent in 1946 to 22.1 percent in 1989. Until recently, most of the increases in U.S. government spending have been financed through higher taxation (see Meltzer and Richard [1981]). What are the likely effects of such increases on output? How would they differ if deficit financing were used? Our analysis seeks answers to these questions.