Government Growth

As the table shows, government expenditures have grown enormously during the past century. As late as 1913, for example, even in a group of seventeen economically advanced countries, government expenditures averaged only about 13 percent of GDP. At most (in Austria, France, and Italy), they came to just 17 percent, and for the United States they were less than 8 percent. Taxation and government employment were at similarly low levels. In contrast, by 1996, government expenditures in the same seventeen countries had reached nearly 46 percent of GDP. Sweden’s were the highest, at more than 64 percent, and U.S. expenditures reached more than 32 percent.1 Taxation, government employment, and other aspects of government had expanded similarly. Moreover, governments have vastly increased the scope and societal penetration of their regulation in ways that spending measures do not reflect. In the United States, for example, private individuals and firms spend hundreds of billions of dollars each year to comply with government regulations aimed at reducing air and water pollution, lowering health risks, and eliminating workplace discrimination against women and members of various ethnic and other protected groups.

Though imperfect, the measures illustrated in the table reflect the size of government. However, they have only a rough association with its scope—that is, the number of separate matters the government tries to influence or control. Over the very long run, governments have increased in both size and scope, but in any particular short period, the two measures may diverge widely. Likewise, we need to consider, apart from either size or scope, the government’s power—its authority and capacity to bring coercive force to bear effectively. Again, over the very long run, most governments have increased in size, scope, and power, but the three dimensions have grown at different rates in particular short intervals. To some extent, governments may substitute growth in one dimension for growth in another; they may augment, say, their scope or power rather than their size. Eventually, however, an increase in one dimension tends to lead to increases in the others. Passage of the Social Security Act in 1935, for example, increased the power and scope of the U.S. government, but not until two decades later did the operation of the Social Security system begin to have a major effect on the magnitude of federal spending.

Superimposed on the century-long trend to bigger government—measured by size, scope, and power—are several episodes of extraordinarily rapid growth associated with crises, especially the two world wars and the Great Depression. Although much of the wartime expansion of government was reversed when the wars ended, not all of it was, and thus each episode had a “ratchet effect,” lifting the size of government to a permanently higher level. Wartime expansions of government power tended to become lodged in the statute books, administrative decisions, and judicial rulings, and these legacies fostered the growth of government even during peacetime. New York City’s rent controls, for example, date from World War II (see rent control). Moreover, crisis-driven changes in the prevailing ideology supported greater long-term growth of government. Many who had opposed “big government” in the United States as late as 1930, for example, became convinced by the fifteen years of activist government during the Great Depression and World War II that government should play a much larger role in economic affairs. One upshot was the Employment Act of 1946, by which the federal government pledged itself to continuing management of the national economy.

Crises promoted the growth of government in other countries, as well. During both world wars, all the belligerents adopted extraordinary measures of economic control to mobilize resources and place them at the government’s disposal for war purposes. These measures included price, wage, and rent controls; inflationary increases in the money stock; physical allocations of raw materials and commodities; conscription of labor; industrial takeovers; rationing of consumer goods and transportation services; financial and exchange controls; vast increases in government spending and employment; and increased tax rates and the imposition of new kinds of taxation. On each occasion, the war left institutional and ideological legacies that promoted the subsequent resort to similar measures even during peacetime. As Bruce Porter wrote, “The mass state, the regulatory state, the welfare state—in short, the collectivist state that reigns in Europe today—is an offspring of the total warfare of the industrial age.”2

The Great Depression elicited similar responses, especially in the United States under Franklin D. Roosevelt’s New Deal. Many current welfare-state and regulatory institutions—the Social Security system, the Securities and Exchange Commission, the National Labor Relations Act, to name but a few—originated with the New Deal. Later crises, such as the social and political turbulence associated with the civil rights revolution and the Vietnam War between the early 1960s and the early 1970s, likewise contributed significantly to the expansion of the welfare state, spawning, for example, Medicare, Medicaid, and a host of welfare, antidiscrimination, and environmental regulatory programs that remain in force today.

Trends and crises interact. Because trends bring about the particular preconditions on which each crisis bursts, they affect how each crisis unfolds. And because each crisis leaves the long-run condition of the economic and political systems altered, it affects later trends. Although many economists have dismissed crisis events as “aberrations” or statistical “outliers” in the growth of government, this practice is a serious mistake: the long run, after all, is nothing more than a series of short runs.

In the nineteenth century, a number of interrelated “modernizing” changes began to accelerate: industrialization, urbanization, the relative decline of agricultural output and employment, and a variety of significant improvements in transportation and communication. As these developments proceeded, masses of people, though made better off in the long run, experienced tremendous changes in their way of life. In response, they sought government assistance in order to gain from, or at least to minimize their losses from, the social and economic transformations that swept them along.

The ongoing structural changes altered the perceived costs and benefits of collective action for all sorts of latent special-interest groups. Thus, for example, the gathering of large workforces in urban factories, mills, and commercial facilities created greater potential for the successful organization of labor unions and working-class political parties. New means of transportation and communication—the railroad and the telegraph, later the telephone and the automobile—reduced the costs of organizing agrarian protest movements and agrarian populist political parties. Urbanization created new demands for government provision of infrastructure such as paved streets, lighting, sewerage, and pure water supply. All such events tended to alter the configuration of political power, encouraging, enlarging, and strengthening various special interest groups.

The structural transformations, in addition to increasing the demand for government, also increased the supply. When, for example, more people received their income in pecuniary payments traceable in business accounts, as opposed to unrecorded farm income in kind, governments found it easier to collect income taxes. The modern welfare state is often seen as originating in Imperial Germany in the 1880s, when Otto von Bismarck established compulsory accident, sickness, and old-age insurance to divert workers from revolutionary socialism and to purchase their loyalty to the Kaiser’s regime. The lesson was not lost on governments elsewhere, and, by 1914, most other Western European countries had enacted similar programs. The U.S. government caught up in 1935, after such policies had been adopted at state and local levels earlier in the twentieth century.

From the mid-nineteenth century onward, collectivist ideologies of various stripes, especially certain forms of socialism, gained greater intellectual and popular followings. Traditional conservatism and classical liberalism increasingly fell out of favor and, with a lag, suffered losses in their political influence. By the early twentieth century, the intellectual cutting edge in all the economically advanced countries had become more or less socialistic (in the United States, in greater part, “Progressive”). The masses also had become more supportive of various socialist or Progressive schemes, from regulation of railway rates to municipal operation of utilities to outright takeovers of industry on a national scale. Not until the 1970s did this collectivist ideological tide begin to turn, and even now, collectivism remains the reigning mode of thought for most intellectuals and political leaders. In the United States, politicians who call themselves conservative today would have been regarded as socialists a century ago. Indeed, quadrennial Socialist Party candidate Norman Thomas announced in 1956 that he would no longer run for president because even the Republican Party had adopted all of his socialist proposals. And the scope of government has grown enormously since 1956.

Political developments mirrored the changes in the economy and in the dominant ideology. Throughout the nineteenth and twentieth centuries, democracy tended to gain ground. The franchise was widened, and more popular parties, including frankly socialist parties and labor parties closely allied with the unions, gained greater representation in legislatures at all levels of government— more so, however, in Europe than in the United States. Everywhere, the trend toward universal manhood suffrage and, eventually, women’s suffrage became seemingly irresistible. We might note that even Adolf Hitler came to power via the ballot box.

Modernizing economic transformation, collectivist ideological drift, and democratic political reconfiguration tended to bring about a changing balance of forces that favored, not always but as a rule, increases in the size, scope, and power of government.

For more than half a century, the political economy of the economically advanced countries has been rife with interest groups seeking policies that make government bigger. The old fundamental checks on such growth—vestigial allegiance to classical liberal ideology and, in the United States, a Constitution long understood as placing limits on the government’s role in economic life—have more or less dissolved as significant obstacles. Intellectual developments during the past thirty years, however, have revived the classical liberals’ hope that, ultimately, they may be able to stem the ongoing growth of government that now seems to be an inherent aspect of the workings of the modern political economy.