Risk reduction and public spending

As governments grow richer, the share of their GDP devoted to public spending rises. Public spending in the United States was 7.5 percent of GDP in 1913. It is 33 percent today. Although industrial countries spend twice as much as developing countries, government spending on goods and services is the same in both groups of countries. The difference is almost entirely due to transfer payments, which are about 22 percent of GDP in the industrial world. Most of these transfer payments - pensions, health insurance, unemployment insurance, guaranteed loans- are aimed at mitigating risk in the private sector The authors explore how the framework for evaluating government spending on goods and services can be extended to incorporate the government's various risk-reducing activities. The authors argue that there is a case for incorporating risk reduction into government spending, if doing so meets standard welfare-economics criteria for government intervention in the economy. Through examples - government-provided health insurance and crop insurance, price stabilization schemes, transfer programs for income support, public investments, publicly provided health care, and government credit guarantees - they show where government spending on risk reduction could improve welfare, by either alleviating a failure in risk markets or by reducing uncertainty in otherwise distorted markets. They illustrate calculations of the risk-reduction benefits of public spending and cite cases where their neglect could lead to serious underestimates.