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How Big Should Our Government Be?
By Jon Bakija, Lane Kenworthy, Peter Lindert, Jeff Madrick
UNIVERSITY OF CALIFORNIA PRESSCopyright © 2016 The Regents of the University of California
All rights reserved.
Can Government Help?
LANE KENWORTHY AND JEFF MADRICK
The size of government is the most fundamental axis of political disagreement in the United States. It has played a significant role since the Jeffersonian era and has been at the heart of American politics for the past eighty years, since the New Deal programs of the 1930s. It won't fade from prominence any time soon, regardless of how ongoing debates about government debt, entitlement reform, and taxes play out.
Much of the contemporary American right, along with many nominally centrist deficit hawks, insist that our government is too big. They want it to shrink.
We believe it ought to be bigger, and if Americans can shed themselves of the baggage of the past thirty years of public discourse, we believe they will agree. Imagine how a proposal for the New Deal would have been received if it had been put forward in the 1920s. A decade later, however, it was common sense. A similar new and vigorous extension of government, along with higher taxes to finance it, is now needed in the United States.
There are four areas where a bigger government can help. First, America has been underinvesting in infrastructure. To maintain our economic strength and assure continued improvement in living standards, we need to boost funding for this vital public good.
Second, as the country continues to get richer, Americans, like their counterparts in other affluent nations, will want more insurance against risk — more economic security. We have commitments to the elderly for cash transfers and medical care that will require increased spending in coming decades. Beyond this, we'll want to expand some existing programs, such as unemployment insurance, Medicare and Medicaid, and individualized assistance for the disadvantaged, disabled, and displaced. And we'll want to add others, including paid sick leave, paid parental leave, and wage insurance.
Third, we have a large opportunity deficit. Americans who grow up in low-income families face long odds of rising into the middle class. This violation of equal opportunity, which has long been one of the nation's most cherished aims, begs a renewed effort to improve and expand schooling and to provide more resources and programs for less-advantaged children in their most malleable years, zero to five.
Fourth, as wages have stagnated, too little of the economy's growth has gone to middle- and low-income households. Experience here and abroad since the 1970s suggests that wages for people in the bottom half of earners are unlikely to increase in the absence of strong unions or sustained full employment. A helpful alternative, or complement, to rising wages would be to broaden eligibility for the existing Earned Income Tax Credit so that it benefits not just the working poor but also much of the middle class, and to tie it to GDP per capita so that the amount of the credit rises in sync with the economy.
Given the state of contemporary American politics, the notion of increasing government spending (as a share of GDP) may seem radical or utopian. But it is neither. The expectation of a larger government in the future follows directly from our history and from that of other rich nations.
THE MYTH OF LAISSEZ-FAIRE AMERICA
America was never a nation of laissez-faire economic policies, though it has often told itself it was — and continues to do so. The myth goes further. It claims that laissez-faire sentiments are what made America great, keeping government out of the way, making people self-reliant, and allowing individualism to prove its benefits.
This self-identifying myth is largely wrong. Government was always a strong force in the United States, even in colonial years — serving both as a key to true freedom and economic prosperity and, at times, as an obstacle to it.
For all the talk of the advantages of small government in America, even politicians such as Thomas Jefferson, who warned of the dangers of big government, fortunately never really practiced what they preached. In the beginning, America's prosperity was mostly dependent on its abundant land, which was especially important in an agrarian age. In the United States, owning arable land was the source of independence. If you could feed yourself, you could be free. Remarkably, scholars estimate that well over half of early Americans owned their own land around 1800.
However, much of the distribution of land was controlled or made possible by government. The colonies themselves owned most of the land to their west, having confiscated it from giant landlords after the Revolution. When the United States was formed, a key concession the colonies made was donating their land to the federal government, which became the largest owner of land in the nation. Soon enough, partly because of Jefferson, rules and regulations were adopted for the sale of that land. Some rules were designed to make the price relatively cheap to facilitate land ownership.
There were countless regulations on the prices and sales of products in early America as well, which might surprise contemporary readers. Many from the Old World immigrated to the new land as indentured servants and had to win their freedom. How poorly America's history is understood through myths that cannot see beyond markets and that neglect the central role government has historically played.
Two early events in the nation's history fully qualify as the actions of "big government" by any historical standard. Defying the US Constitution, Jefferson bought the Louisiana Territory from France, which roughly doubled the size of the young nation. This was partly a decision made to secure the country's borders, but it was at least equally, if not more so, an economic decision to enable Americans to buy land for themselves at cheap prices for as far as the eye could see and as long as the imagination could conjure.
In the meantime, Jefferson's nemesis, Alexander Hamilton, insisted the United States start a national bank, in opposition to political forces that feared centralized government. He also insisted the nation borrow money. In fact, Jefferson had borrowed money to make the Louisiana Purchase.
Hamilton went further, of course. He supported tariffs to protect budding manufacturing and also promoted loans for new business. Today, we call such measures industrial policy. Today's right firmly opposes industrial policy, as do even some left-leaning economists. Yet Hamilton fully supported it. A tariff passed, ironically, under James Madison, Jefferson's Republican successor and an author of The Federalist Papers.
In the fog of mythmaking, one of the most important purposes of government goes unstated: government is a key agent of change. America became what it is today by adjusting constructively to a radically changing economy, new social ideas, and rising expectations of security and fairness. On balance, the nation reacted well to change. But it didn't always do so, and it often took a long time to make the right decisions. Political battles to limit government's role in adapting to new needs were persistent. Sometimes checks on power were needed, to be sure. But delays in public investment, social reform, and central banking held the nation back. Fortunately, most of the time America eventually righted itself and recognized and implemented the constructive uses of government. Yet too often it did not do enough — or do it quickly enough. We grew nevertheless, including in the twentieth century, when government spending as a proportion of the economy rose most rapidly.
But let's step back to conjure up again the history of the last 250 years. Jefferson and Hamilton enabled and supported change by making government bigger. This didn't manifest in more government spending, as it does today, but as regulations, land purchases, tariffs, and borrowing.
None of the founding fathers could have anticipated what was to come. The rapid commercialization of the economy changed America in the early 1800s. Trade of agricultural goods within the nation and exports overseas required roadways and canals. The federal government unfortunately resisted the requests to build this infrastructure, but the states took up the call. Members of Jefferson's own party in New York State started building the Erie Canal, mostly with funds from state-financed borrowing. The canal was operating by 1825, and many other states followed suit. Trade across America and exports to foreign markets boomed.
The federal government provided financing for roads during the presidency ofJohn Quincy Adams. But, despite the efforts of John Calhoun and Henry Clay, Congress demurred. Had it not, American development would have proceeded more rapidly. In the 1800s, the states generally compensated, albeit late and less than adequately, for what the federal government failed to do.
The development of the canals in many states — including, notably, Maryland, Massachusetts, and Pennsylvania — was a major achievement. But the greatest achievement of the states was creating a primary education system that was free and mandatory. The rapid development of free public education in America was extraordinary. Massachusetts led the way, having made primary schooling mandatory by the late 1820s. Although it is rarely seen as such, primary schooling in America was the first great income distribution plan in the United States, as primary education was financed by property taxes and rich and poor alike attended. By 1850 or so, America spent as much per child on education as France or Prussia and had about as many children enrolled as a proportion of the population as either of those European leaders. The nation was only sixty years old. This was among the great accomplishments of the young government. To this day, states do most K-12 education financing in America, and one of the results of this system is that the financing of K-12 is highly unequal. Had the federal government been more active in investing in education and maintaining its quality in the 1800s, America's K-12 schooling arguably would be more effective and provide more equal services today.
After the Civil War, industrialization again changed America, perhaps more radically than ever before or since. There were countless new demands on society. As big business — oil, steel, retailing, and more — boomed, the federal government financed much of the development of the nation's railroads through donations of its vast land holdings. Corruption and waste characterized railroad development, but the amount of track laid was astonishing. The speed and reach of the railroads made a national marketplace possible, enabling business to fully exploit economies of scale in producing oil, steel, and other mass-produced products. Transportation infrastructure was key to development in this era.
Meanwhile, the government set aside land for agricultural and technical colleges under the 1853 Morrill Act, a favorite of Abraham Lincoln's. The land was donated to the schools, which could in turn sell it to finance themselves. This is how UC Berkeley, MIT, Texas A&M, and Ohio State, among many others, got their start.
And let's not forget the postal system. Postal boxes soon dotted street corners in cities across America.
Little of this showed up as government spending, but it was big government nevertheless. If the value of the land given away had been measured, it would have been clear that America already had a large government by standards of the day in the late 1800s.
It was also clear by then that political power in America was being consolidated in Washington. The Civil War did not end discrimination against blacks, but it did result in the rise of a centralized federal government — Lincoln's dream.
Industrialization, as noted, brought a radical change to life in America. Land was no longer the single source of self-esteem and independence. Now a job was. But there weren't enough jobs, and they typically didn't pay adequately. Working conditions were often inhumane. Children and women worked long hours.
At the same time, the phenomenon of involuntary unemployment appeared, which was something new in America. Though many balked at the idea that anyone could be unemployed, historians say the unemployment rate in these years reached up to 15 percent. But until the 1890s, America was slow to use government to reform and control business. Social Darwinism influenced the nation's attitudes — there was a belief that people should be self-reliant and that the strong would rise from the pack.
By the late 1800s and early 1900s, however, political attitudes again turned toward constructive uses of government. Antitrust laws were passed, and a new federal commission was created to control commerce across state lines. Reforms were underway to limit work hours, prevent child labor, and oversee product quality. One wonders how the invisible hand would have solved these problems over time had the government not interceded.
One widely overlooked but critical area of federal, state, and local intervention was sanitation. During industrialization, cities boomed and overcrowding resulted in unhealthy conditions. Life spans were far shorter in the cities than in the countryside. Above all, as was widely understood by then, water had to be purified and streets had to be cleaned. In the 1850s, a contaminated water source in London caused a cholera epidemic, and the story was reported around the world. Private enterprise did not sanitize America; the government did. In fact, the best water purification methods were developed by chemists in the US Army in the early 1900s, and these discoveries are still the basis of water purification today. Sound familiar? The Internet, to take but one well-known example, was originally developed in the US Department of Defense.
American states and cities were the leaders in developing sanitation. Indeed, the late 1800s and early 1900s became known as "the age of sanitation." Cities could not have expanded and advanced without these innovations. New York, the greatest city of the era and the hub of American trade, had clean running water and widespread indoor plumbing before any other major city. It also had a clean street campaign before others did. American cities themselves then became critical engines of economic growth, creating efficient pockets of demand, manufacturing, and marketing.
Economic development became more complex in the twentieth century. Booms and busts had taken too big a toll. The first nationwide financial crash and recession occurred in 1819, but there were others, and they grew worse. J. P. Morgan famously refinanced America after the devastating Panic of 1907, but it was clear a government central bank was needed (Andrew Jackson vetoed renewal legislation for the first one). The Federal Reserve (commonly known as the Fed) was created in 1913, and, although it took time to make it operate smoothly, the institution became critical to later finance and stability, if not free of controversy.
America went through political cycles of pro- and antigovernment sentiments. In the 1920s, antigovernment attitudes prevailed, similar to what had happened in the post–Civil War era. Free enterprise and unregulated finance were in vogue. It was a decade of consumer transformation. Cars, electricity, refrigerators, washing machines, radios, and cinema became widespread. Mass production was perfected by Henry Ford and others. Mass marketing also flourished, especially with the advent of nationwide radio. But unfettered capitalism proved itself to be incapable of self-management. The 1929 crash and the Great Depression made its immense vulnerabilities and excesses manifest.
The federal government under President Franklin D. Roosevelt not only cleaned up much of that mess but also created rules and regulations that would foster stability and prosperity, bring about rising wages and technological advance, and produce the nation's first true middle class. In the 1930s, the government regulated finance through the Securities and Exchange Commission, created Social Security, developed jobs programs, introduced unemployment insurance, provided insurance for deposits in banks, and passed laws enabling labor unions to organize. All these measures were reactions to a radically changing economy.
Excerpted from How Big Should Our Government Be? by Jon Bakija, Lane Kenworthy, Peter Lindert, Jeff Madrick. Copyright © 2016 The Regents of the University of California. Excerpted by permission of UNIVERSITY OF CALIFORNIA PRESS.
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Table of Contents
1 Can Government Help? 1
2 Are Government Social Programs Bad for Economic Growth? 34
3 Would a Bigger Government Hurt the Economy? 67
4 Thinking Sensibly about the Size of Government 135