Big v small government


My opinion piece in the today’s AFR is linked below.  I wrote it to counter the idea that the debt ceiling crisis is simply a partisan, short-term opportunistic attempt by the parties to score points against each other.  I wanted to explain that the showdown in Washington this last two months is an expression of genuine and deeply held beliefs about the size of the federal government in America.  From the very birth of the Republic this has been a deep division.  The Federalists (under Alexander Hamilton) favoured a large and strong federal government (as their name suggests).  The Republican Democrats under James Madison, and especially Thomas Jefferson, favoured a small and weak federal government.  The debt crisis is not just business as usual in Washington.  A big issue, central to the different conceptions that Americans have of their country, is being worked out.

I also wanted to point out just how recent a big central government is in America.  You can see a Office of Budget Management’s historical tables of annual receipts and expenditure by the US Federal Government, here.  Those tables show that as recently as 1930 the expenditure the US Federal Government was only 3.4% of GDP.  This year it will be 25.4%.  So, (relatively) big government is only 80 years old and some Americans have not accepted that it is a permanent feature of their country.  

A showdown in Washington over the size of the federal government in the US has been a long time in the making.  Since the birth of the Republic, and even before, there have been Americans who favour a large and powerful centralised government, and others who want a loose confederation of states and a small federal government.  This dichotomy is only one of a set of divisions that have riven America throughout its history: including, the division between the established eastern seaboard and the frontier, the North and the South, and the religious and the secular.

For many Americans of previous eras, freedom from the interference of centralised authority in their lives was a definitive part of being American.  Their forefathers, or they themselves, went to America to break free of ancient institutions that bound them in an immutable social structure, and prescribed and circumscribed every part of their lives; down to where they lived, what they could own, what work they did and how they worshipped.  They believed that America was a new society in which people were free to pursue their own interests and happiness without interference from monarchs and nobility, established religion or nation states.  Slavery in America put the lie to this belief.  But just as Australian suburbanites hold onto the self-image of hardy bush folk, Americans retain their self-image of creators of a new society, free of Europe’s stultifying and venal centralised authority.

Until 1930, small government Americans had their wish.   The US Federal Government was small, and almost irrelevant to most Americans.  It was responsible for foreign relations and national defence, immigration and border control, enforcement of the law and the constitution, and little else.  Federal Government spending as a percentage of GDP was only 3.4% in 1930.

Government to most Americans still meant state, and especially local Government.  1930 is no so long ago — it is within the living memory of some Americans.  Ronald Reagan grew up in an America of small government.  He was 19 years old in 1930.

But then it went wrong for small government Americans.  The next 81 years saw the Federal Government swell into a great controlling and usurping beast, in their view.  Federal Government spending grew by 22% of GDP to 25.4% of GDP in 2011.

President Roosevelt set the US on the path of (relatively) big government with his ‘new deal’ response to the Great Depression.  By 1934 Federal Government spending was 10.7% of (a shrunken) GDP and Roosevelt had created a centralised system for funding retirement incomes of working Americans — the demographic time bomb that is the Social Security System.

The Federal Government then expanded massively during WWII.  But after the war the bureaucracy did not unwind itself, as it had done after the Civil War and WWI.  Instead, big government and big taxes were justified by the need to organise and fund the containment of communist expansionism.

In the 1950s high military spending and repayment of the debt accumulated in WWII kept spending high at 18% of GDP.  As those expenditures declined in the 1960s, they were replaced by spending on the social programs of President Johnson’s Great Society, especially healthcare programs of Medicare and Medicaid in 1965.  Presidents Bush and Obama introduced major new healthcare programs in 2003 (prescription benefits) and 2010 (universal healthcare).

If taxes had grown at the same rate as spending over time then there would be no debt crisis in the US today.  But a determined minority of Americans has never accepted that a large federal government is a permanent feature of the Republic.  They have always felt confident that they will be able to shrink the Federal Government by  ‘starving the beast’ of tax revenue.

And now there time has come.  The yawning gap between the receipts of the US Federal Government and its spending has precipitated a crisis.  In 2011 receipts will be a mere 14.4% of GDP, the lowest figure since 1950.  Spending will be 25.4% of GDP, the highest figure ever.  The combination gives a Greek sized deficit of 11% of GDP.

In the Congressional elections of November 2010, the American public sent 87 new Republican members of the House of Representatives to Washington.  Many of them are members of the Tea Party – the political party that has opposition to a large Federal Government as its founding principal.  Most of those new Republican representatives have promised their voters that they will not compromise in their quest for smaller central government.  They will not accede to increases in taxes, whatever the cost.  Last week 22 of them voted against their own leader, House Speaker Boehner, because his proposed bill for increasing the debt limit did not cut spending enough.

What is surprising about the debt crisis in the US is not that a showdown between big government and small government visions of America has arrived – that showdown has been in the making since President Roosevelt turned America away from a small federal government.  The surprise is how suddenly it arrived.  The massive spending increases and revenue reductions of the GFC, the concern that America would go the way of Greece and the emergence of the Tea Party as a small but superbly effective political force have come together suddenly to create this all or nothing impasse.

20 Responses to "Big v small government"
  1. Given the policies of the two parties have largely been similar in past decades.  Perhaps, in the long run, the emergence of the Tea Party may re-energised the bipartisan structure and lead to some positive outcomes? 
    As Churchill said “You can always count on Americans to do the right thing – after they’ve tried everything else.”  Hopefully these words still stand today.

  2. what you have missed is that the golden age of economic growth occured under alleged Big government not smaller government.

    Deficits and debt can occur under any size of government.

    you cut spending when growth is healthy not when it is weak such as now

  3. Thanks Sam, very good piece. The primary system really makes American politics different. In many ways, we can’t really talk about the same GOP of five or ten years ago, because many of its reps have been primaried out or had to change their spots under pressure. Grassroots intensity is translated much more directly into who represents you than here. The debt ceiling mechanism is a boon to the tea party. Previously, you had to go to others and ask them to stop spending. Now, they have to come to you to ask for permission to spend. Makes all the difference in the world. What seems surprising is that the debt ceiling hasn’t been used like this before.

  4. @KB Keynes

    But was this golden age of growth due to the presence of large government or is it a historical coincidence that the golden age of growth occurred in the decades following WW2 which both caused a massive increase in the size of government (legacy of war mobilisation/economies) and laid the foundation for decades of high economic growth (rebuilding of Europe, USA left with few competitors, etc)? I’m sure you can deduce my opinion on the matter.

    I think you’re implying causation where only correlation exists.

  5. KB  
    The advantage in big government is not the rate of growth in GDP, but the reduced volatility.  Big government spending is typically counter-cyclical, so recessions are not as deep as they are without the automatic stabiliser of government spending.  
    Growth in the US was very strong from 1865 – 1929, a long period of mostly small government, but recessions were common and deep.  

  6. Sam You refer to “the demographic time bomb that is the Social Security System”. In fact, since the mid 1980s the US social security system has been running a surplus of between 1 and 2% of GDP each year. So if not for the social security system the US would have accumulated public debt about 40- 60% of GDP higher. The problem is that by setting up a trust fund the USA has incurred obligations that need to be met later this decade when payouts are projected to exceed revenues – although with reasonable rates of economic growth that turning point gets pushed out. Even when the trust fund is completely exhausted, revenues will be able to finance about 75% of payouts – so the US argument is basically about cutting benefits now in order to avoid benefit cuts in the future. Health care costs are a completely different story …

  7. Peter 
    I made Social Security contributions of 6.6% of my salary (with another 6.6% from my employer) up to the limit (about $90k) for 7 years when I was at the Tuck School at Dartmouth.  But, you have to contribute for 10 years before being eligible.  So, the trust has USD 45k of my money and I will never get a cent back.   

  8. Sam,
    hmmm. I am not convinced. For one, what you say about the increase in government spending for the US is even more true for many European countries, where you dont see the same thing.
    Then the story about American history. You say “Their forefathers, or they themselves, went to America to break free of ancient institutions that bound them in an immutable social structure, and prescribed and circumscribed every part of their lives; down to where they lived, what they could own, what work they did and how they worshipped. ”
    Such stories always sound hollow to me: did the Irish peasant escaping from the potato famine really come to escape his village church or did he bring it with him? Did the Dutch traders and their colonies (which pre-existed the English influence) really come to escape anything? What about the Chinese fleeing from the 19th century famine, or the Southern European migrants from 1860-1960? I have basically never believed a word of this mythical history about migration to the US being about escaping persecution. More likely than not, they came to do some persecuting and indoctrinating of their own. Even more likely, they went for the prospect of a better life.

  9. Paul
    Do you mean that you are unconvinced that the argument in Washington is not purely partisan, but an expression of deep and genuinely held views about how America should be governed?  Because that is my point.  

    On your second point.  I think if we include the preceding sentence then the quote you provide makes more sense
    “For many Americans of previous eras, freedom from the interference of centralised authority in their lives was a definitive part of being American.”  It is those people, who define their American identity in terms of the greater freedom of America, that I am referring to — which would seem to be uncontroversial. 
    I agree, of course, that many, even most, people travelled to America for reasons that are not closely related to freedom.  (I state in the article that supporters of small government are a minority).  But it is undeniable that many people went to America to attain more freedom.  Think of the English Puritans, Russian Jews, German peasants — who were still bound in serfdom into the 19th century.  

  10. Sam,
    there is obviously a problem in Washington, but groups try to win the present by owning the past. I see no innate difference between the migrants going to the US from any other place that got filled up the last 500 years. Were the people going to Argentina or Australia any less freedom oriented? Methinks not.

  11. Paul
    There really is no analogue of the US immigration story in scale, or type or nature.  Just taking the Argentina and Australia comparison.  It is undeniable that for millions of people who travelled to America the attainment of greater religious freedom was first order issue, if not the only issue.  Can that be said of Argentina? Of Australia? 
    Which of these countries had fought for and won its independence by 1783?  And then created a living breathing democracy?  Or, are there any other immigrant people for whom that is true?  The American experience is unique.  

    The reality, and idea, of the frontier is also very important in the US (but also existed in the Russian expansion eastward).  There is no denying that people who went to the frontier were not solely motivated by economic gain.  They saw themselves as gaining their own freedom from central authority.  Let me refer you to deTouqueville’s Democracy in America (which I read only recently) and the Dire Strait’s song Telegraph Road.  

  12. Sam,
    there will be no shortage of people who want to agree with you that the US is special. And I wont argue that the US lacks groups who came with some ideology in mind. But I dont buy for a second that the US is especially free or that that typifies its history more than other places.
    Just ask yourself: a breathing democracy in 1789? You mean the rich white men who were part of the franchise, right? You dont mean the slaves, women, or poor people. Which means you cannot really mean the type of person who needs to flee from oppression.
    Ask yourself also about groups that never asked to come to the US, i.e. the slaves. Australia was never sent large groups of slaves (even convicts were not slaves since their children were deemed to be born innocent), so do we have more of a freedom history than the US?
    Ask yourself whether you know of particular groups that went to other places than the US to ‘be free’. I can think of the family members of Nietsche who chose Patagonia to live out their fantasies of Aryan superiority. I can think of the Boers in South Africa, who went over the Great Karoo in the early 19th century in search of ‘freedom’. I can think of the waves of persecuted Huguenots who fanned out over many western colonies, including South Africa and Australia. I merely have to look at Canada to see a country full of small communities with particular religions. Indeed, most persecuted people moved within their continents, i.e. from Germany to England or from Spain to the Netherlands.
    Then ask yourself how free the US has actually been. You mean free from witch-hunts like the McCarthy era? Or tolerance towards individual behaviour, like we saw during the prohibition? Or do you mean freedom from indoctrination, such as continuous swearing to the flag and an almost mindless patriotism? I would venture that by many definitions of freedom, Australia is far freer than the US.

  13. Paul
    You are clearly not a big fan of the US and I am.  Getting back to the point of the article.  I am only trying to make a few simple of points.  First, that the a great issue is at the heart of the debt limit dispute — the size of central government.  The dispute should not be mistaken for mere partisan point scoring.  Second that deep differences on this question have existed since at least 1783.  And hard core opposition to big government is an expression of determined opposition to centralised authority that has always existed in the US and has its roots in immigration from Europe.  Fourth that big government in the US is very recent — within living memory and a determined minority have not accepted it is permanent.  Fifth a showdown was always coming but arrived suddenly.  
    I think all those points are easily defended.  

  14. Sam,
    for me, the US has both good and bad points, like any country.
    The main thing I disagree with is the idea that we are talking about a political issue that can be explained by who migrated to the US with what intent in mind. I would seek explanations in other realms, such as the effects of high income inequality and poor state education on the political debate in the US. I would point to the hurdles to vote which leads to those who vote being more polarised. I would point to the underlying reasons for the high degree of religiosity, where the divergence between the US and Europe/Australia is recent: if you go back 80 years there was little difference.
    To explain a current policy difference on the supposed intent and character of those who migrated centuries past seems to me to confuse the rhetoric that political groups appeal to in order to legitimize themselves with a more complicated historical and current reality.

  15. “First, that a great issue is at the heart of the debt limit dispute — the size of central government.  The dispute should not be mistaken for mere partisan point scoring.” This seems to be an oxymoron. Opposition to big government is the raison d’etre of the GOP. It defines their partisanship.
    “Second that deep differences on this question have existed since at least 1783.” Hard to see how there could have been much to argue about if, as you assert, government had only grown to 3.4% in 1930.
    “Third, hard core opposition to big government is an expression of determined opposition to centralised authority that has always existed in the US and has its roots in immigration from Europe.” If this were true, other destination countries would have similar hostility to big government. Canadians and Australians have a very different view of government. Largely speaking, we think of the government as “us”.
    “Fourth, that big government in the US is very recent. I do not really think of 80 years as recent.” I guess it depends on your perspective. There are very few voters alive now who remember truly small government.
    “Fifth a showdown was always coming but arrived suddenly.” That would be the perfect storm of Iraq, the GFC, a hostile congress and a born-to-rule Tory party that extend Malcolm Fraser’s supply blocking into an art form.
    There are some unique characteristics about America. Paul has mentioned their obsession with God bothering and their mindless patriotism. They have a tendency to view things apocalyptically (e.g. war on terror) instead of pragmatically. They actually think that God is watching them and gives a damn.

  16. Chris 
    Let me pick up on just a couple of your points.  In your third point you suggest that American and Australia have had similar immigration experiences.  Paul F. did the same.  But that is not right.  Immigration into the US is 150-200 years earlier that Australia; it is much more varied — America has a lot more ethnic diversity than Australia; it is an order of magnitude larger; and many it had different motivations.  It makes more sense to compare Australia, or Canada, to one of the big US states.  The US is more comparable to all of Western Europe, than to Australia.  
    You imply that if immigration was the significant then the US would be like Australia.  But it is much more reasonable to say that large differences between Australia and the US are due, in part, to the difference in the immigration to the two countries.  Why do you think that America is a such a religious country versus Australia? Do you think that is an accident, and unrelated to immigration experience of the two countries.  
    On your second point — there have been plenty of arguments about the size and reach of central government.  Think of the arguments over: internal improvements (like the Eirie Canal, the Second bank of the US and slavery.   

  17. have a look at Table 1 of

    This table shows you how government expenditure evolved in a selected group of countries including the US from 1870 onwards. In 18070 and 1937, the US had higher general government expenditures than Norway and Sweden. Even Australia had less government expenditures by the end of the 1930s. The rise in expenditures after the early 1900s was a general thing across all Western countries. Does this mean the Swedes are freedom loving anti-big government people who are destined to have a major internal clash about government expenditures in the future?
    The quoted paper talks about general government. You can of course to look at federal government, in which case the US in 1930 wouldnt look all that different from Australia which was also still very federal. Any way you look at it, there was nothing special about the US expenditure pattern.

  18. Paul 
    I am saying that there is a group in the US who have a strong aversion to big government and centralised authority in general that their antecedants brought with them to American.  So I am saying that A (the desire for more freedom of some immigrants to America) is a cause of B (strong aversion to centralised authority in a group of Americans).  You are saying that Norway and Sweden had small government until  recently (which is not the same as my B but let’s say is anyway) but they don’t have A.  
    I am saying that A caused B and you are saying that you can present a B that wasn’t caused by A.  So what.  Two outcomes can have different causes.  
    The second thing is that comparing Norway to the US in terms of the size of Government or concepts like the importance of freedom is drawing a very long bow.  The US is two orders of magnitude larger than Norway.  The average population of the 50 states of the US is twice that of Norway.  It is better to compare Norway to individual states of the US.  The same is true of Australia and Sweden and Canada.  Comparisons with Germany, the UK and France are better made.  

  19. FWIW, I found Sam’s piece an excellent background and historical context for much of what we witness today. In addition, there is another psychological factor at work…

    [nb – my use of CAPS is just for emphasis, not yelling.]

    Watch a little American TV and it won’t be long before you encounter a stream of diet adverts promising essentially that you can lose weight while eating anything you want or never feeling hungry. These schemes are very popular… much like the “small government” rhetoric. 

    The essential hypocracy in America is that we voters want all of the benefits of big government even as we don’t want the actual big government. So, you will see lots of signs at rallys saying “Cut my taxes” but you’ll never see signs that say “cut MY social security benefits” or “eliminate MY mortgage interest tax deduction” or “close the defense plant where I work.”

    Similarly, to the best of my knowledge, not one of these newly-elected Tea Party representatives — so committed to cutting the size of government — has identified any “wasteful” government spending in THEIR OWN districts. It seems that the government as a whole is too big, but the government (and the jobs) in their individual districts is, if anything, too small.

    A few years ago, PBS (Frontline?) produced a well researched and thoughtful documentary which concluded that Americans want all the benefits from their big government, they just don’t want to pay for them.   

    In other words, “eat whatever you want, never feel hungry, and still lose weight!” 

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