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.