Big government and government spending.
Those two concepts have polarized (and paralyzed) debate in Washington, D.C. in recent times. The introduction of financial regulation in the aftermath of the Great Recession and the Affordable Care Act has further fueled conversation about the merits and demerits of an overarching government. The revolt against big government has led to an ideological divide within the Republican party and sustained polemics against government spending.
In its simplest form, a big government is a government that controls the economy (and, by extension, its citizens’ welfare) through regulation. While it encompasses multiple meanings, big government has a strong correlation to government spending. The more a government spends on providing services, the more influence it wields on its citizens’ lives. Increased government spending for providing basic services translates to greater bureaucracy to provide those services. This results in an unhealthy power dynamic that shifts control of a democracy from citizens to governments.
1. How do Americans define big government?
Many Americans fear big government because it is anathema to the principles of liberty. (It was the British big government in the form of a tax on teas, that led to the Boston tea party.) The fear of a large government is rooted in the notion of America as a capitalist society, where market forces determine losers and winners. That fear was further stoked during the country’s Cold War with the Soviet Union during which big government became synonymous with communism. The narrative about American exceptionalism is about individual initiative and not about government largesse.
But there are some problems with this narrative.
Although it started out as a capitalist enterprise, the United States has increasingly become a mixed economy over the years with government interventions necessary to smooth the boom-and-bust cycle characteristic of capitalistic economies. This intervention often takes the form of increased government spending. For example, President Franklin D. Roosevelt created a plethora of government services and programs, such as Social Security and Works Progress Administration, during the Great Depression of the 1930s to resuscitate the economy. Government spending around that time peaked at 35.9% of the total GDP.
2. Did government spending really increase during the last recession?
In writing about the latest economic recession, commentators have fed into popular misconceptions that the percentage of government spending has increased as part of the GDP. In fact, it peaked at around 24.9% in September 2010, but mostly averaged around 21% for most of the recession. This is in line with government spending as a percentage of GDP over the last 20 years. That percentage averaged around 22.9% even during Reagan’s presidency, an era marked by tax cuts and sops for enterprise.
The only time that the share of federal government’s spending as part of GDP went down was during the Clinton administration in the 1990s, when it declined from 33.9% to 29%, as a result of the “peace dividend” due to the end of the Iraq war and dismantling of the Soviet Union.
3. How does this compare with government spending in other countries?
According to an analysis of economic freedom conducted by the Heritage Foundation and Wall Street Journal, the share of government spending in the world’s most developed economies as a percentage of GDP tends to be on the higher side. Thus, countries that were “free” economically and ranked high on the list also had a greater share of government spending as part of their GDP. For example, New Zealand and Canada, which ranked third and sixth respectively, had 43.6% and 41.5% of their government spending as part of GDP. With 41.5% of its government spending on GDP, the United States ranked 12th on the list.
4. Does this mean that government spending is not bad?
Some argue that the role of government should be restricted to law enforcement and protection of property rights. Individual initiative will provide the rest. However, individual initiative is not exclusive. Capitalism involves competition and well-capitalized individuals or firms possess an advantage over less-capitalized firms. They have access to capital and network that other firms or individuals do not.
Capitalism is necessary to create wealth and value. But, it can also result in concentration of wealth in the hands of a select few. The profit motive, which is essential to drive down the costs of goods and services, creates a class structure that makes it difficult for workers and employees to become rich. Inequality, which has been rising across developed economies and, most notably in the United States, can cause class warfare. The invisible hand of government is necessary to ensure that its citizen’s basic survival needs are met.