Does government need to grow?

Reuters

Customers shop in the produce section at the Whole Foods grocery story in Ann Arbor, Michigan, March 8, 2012.

Article Highlights

  • Election 2012 cemented in place higher spending, increased regulation, and federal control over the health sector.

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  • From 1900-2012, federal government spending rose from less than 7% of GDP to over 40%.

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  • Does government need to grow in order for the economy to grow? @AEIecon’s Andrew G. Biggs responds.

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  • Government can and should do many things to help ordinary Americans, but open-ended transfers aren’t among them.

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Thomas Jefferson thought that "the natural progress of things is for liberty to yield and government to gain ground." Little in recent history shows him to have been wrong.

The 2012 election cemented in place higher spending, increased regulation, and federal control over the health sector. More broadly, from 1900 to 2012, spending by the federal government rose from less than 7 percent of the gross domestic product to over 40 percent. As the population ages and entitlement spending rises, government outlays—financed by rising taxes, expanding debt, or both—will increase only further. Under President Obama's budget, government spending as a share of the economy would be significantly higher than post-World War II norms. Even Representative Paul Ryan's ambitious Roadmap would allow for a small increase in government outlays.

But why?

Does government need to grow in order for the economy to grow? Data from around the world do show that as economies grow, government spending tends to rise even faster. But this isn't to say that big government causes economies to grow: Another explanation is that countries with large economies are simply able to afford larger governments. Economists Andreas Bergh and Magnus Henrekson have documented that when we look specifically at developed countries, we find a negative relationship between government size and economic growth.

Do social programs require an ever-expanding state? Consider the basic case for these social programs: Without such assistance, it is said, a substantial number of people will suffer significant and perhaps irreparable harm during hard times. For instance, in 1929, the final year before the Great Depression, the average per capita income was around $9,730 in today's dollars. People living on farms had incomes about one-third the average, and many were even worse off. In other words, if you were poor in 1929, you were really poor. You didn't have electricity or indoor plumbing, and in truly tough times you might not have even had food. You would be hard-pressed to find anyone who opposes government programs that prevent Americans from starving.

"But shouldn't the case for activist government grow weaker as economies grow larger and the threat of starvation, homelessness, and other forms of true want recedes?" -Andrew G. BiggsBut shouldn't the case for activist government grow weaker as economies grow larger and the threat of starvation, homelessness, and other forms of true want recedes? Today, per capita income is around $42,000. Even the very poor are doing better than the average American of 1929, with food, shelter, and modern conveniences far beyond the subsistence levels government sought to maintain during the Depression. Moreover, today's poor are defined less by misfortune than by bad choices regarding education, marriage, and child-bearing—all abetted by incentives embedded in government social policy. As Ron Haskin and Isabel Sawhill of the Brookings Institution have pointed out, for individuals who graduate high school, wait until marriage to have children, and hold a full-time job, the poverty rate is only 2 percent.

Rather than declining as incomes have risen, government spending on social programs has grown. This year we will spend nearly $1 trillion on means-tested welfare programs, an amount that, even when adjusted for inflation, exceeds the entire U.S. gross domestic product in 1929. Government spending will only increase as Baby Boomers retire and swell the Social Security and Medicare rolls, even though the elderly have more wealth than do children or working-age Americans who receive different entitlements.

But government didn't grow as big as it has through absent-mindedness. Rather, a critical mass of Americans have bought into the idea that they need or deserve ever-increasing transfer payments from other Americans. The federal government's ability and willingness to borrow only facilitated this trend by shifting the bill onto future generations, who lack a voice in current debates.

This trend can't continue forever. As Europe currently demonstrates, and as we're increasingly likely to learn ourselves, when government grows faster than the economy's ability to support it, bad things tend to happen.

Change will require a discussion built around values more than numbers. President Obama got into political trouble for his comment that "you didn't build that," but defenders of free enterprise and individual liberty might have to engage in a conversation that will prove even more difficult. Think "you don't deserve that." If you're a middle-class American slated to draw far more out of Medicare than you ever paid in, you don't deserve that. If you're a high earner deducting the interest on a $1 million mortgage, you don't deserve that. And even if you're poor, if you got there by doing everything you've been told not to do—quitting school, taking drugs, having a child out of wedlock, borrowing money you can't possibly repay—then you don't deserve government assistance either.

Simply put, able-bodied Americans who are capable of working don't deserve government largess in amounts that are ever increasing. Government can and should do many things to help ordinary Americans, but open-ended transfers financed by our kids and grandkids aren't among them.

Moreover, as my AEI colleague Arthur Brooks has shown, this dependence doesn't merely hurt the economy or those who are required to finance it. It ultimately hurts those who receive government payments, by reducing their scope for making choices about important aspects of their lives. Satisfaction in life depends not simply on the income one receives but on the knowledge that one has earned it.

It defies logic to hold that a fourfold increase in average incomes since 1929 justifies a nearly 25-fold increase in federal spending. Government's rising share of a growing economy, even as true poverty recedes, adds data points to Jefferson's insight. Believers that the individual is both resourceful and responsible for his own welfare will be swimming against the tide in their effort to arrest and eventually reverse the growth of government. But it remains an objective worth fighting for.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. 

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