Question

Discuss how the role of the government in the US economy has changed over time from the end of the 19th century to the present.

Answer 1

Government is not a single thing, measurable along a scale like inches of height or pounds of weight. The size of government can change in different dimensions, many of them incommensurable.

One dimension of government is the burden of taxation. In the early years of the 20th century, federal, state, and local governments took in revenues equal to 6 to 7 percent of the gross national product (GNP). By 1950, revenues had risen to 24 percent of GNP. Over the past 40 years the tax proportion has drifted irregularly upward, and now stands at about 32 percent of GNP

Many people seem to think that taxes were cut in the 1980s, perhaps because certain politicians worked hard to create the impression and to take credit for it. The truth, however, is that overall—that is, considering all taxes together—taxes as a percentage of GNP were slightly higher at the end of the 1980s than they were at the beginning of the decade. The tax laws were changed repeatedly, and some tax rates were reduced, most notably the top rate of the Federal individual income tax. But other taxes were increased, most notably the payroll tax rate and the base earnings on which it is levied. Altogether, there has been no tax cut.

Another dimension of government—and an even more appropriate index of its fiscal burden than tax revenues—is government spending. In the early years of the 20th century, federal, state, and local governments spent an amount equal to 6 to 7 percent of the gross national product. By 1950, government outlays, net of intergovernmental grants, had risen to 21 percent of GNP. Over the past 40 years the spending proportion has drifted irregularly upward, and now stands at about 34 percent of GNP.

Many people seem to think that a so-called Reagan Revolution cut government spending in the 1980s. In fact, nothing of the kind happened. Government spending continued to grow rapidly, and relative to GNP it was slightly greater at the end of the 1980s than at the beginning of the decade. Of course, some forms of spending grew relatively slowly, some relatively rapidly, but overall government spending grew faster than the private economy.

Still another index of the size of government is government employment. Early in the 20th century, federal, state, and local governments employed about 4 percent of the civilian labor force. By 1950, government employment had risen to about 10 percent. During the past 40 years, government employment rose and fell: it reached a peak in the mid-1970s at nearly 16 percent, then fell to its present level of roughly 14 percent—that is, one worker in every seven.

Although the employment ratio seems at first glance to indicate a recent decline in the government’s size, one should not jump to that conclusion. Many people who are classified as members of the private labor force actually work for governments as contractors (or employees or subcontractors of contractors). Between 1980 and 1987, for example, about a million additional workers found jobs in the defense industries—virtually all of them, obviously, working on projects set in motion and financed by the government. Similar changes have occurred elsewhere as governments have “privatized” more functions by contracting out the performance of tasks previously performed by workers on the regular government payroll. It would be a mistake to suppose that government has shrunk just because regular government employment hasn’t kept pace with the growth of the labor force.

Indexes of government taxing, spending, and employing tell us something about the growth of government, but what they tell us is far from the whole story. Even if government had grown in none of these dimensions, it might have become a bigger factor in determining the allocation of economic resources, the distribution of wealth, and the rate of economic growth. It could have done so—and in fact it has done so—by means of in creased regulation.

Most important, governments established the legal framework of property rights within which the price system Could operate to allocate resources. As economic conditions changed, governments molded the law to new conditions and allowed economic growth to continue relatively unimpeded by obsolete legal restraints. Innovation of the doctrine of eminent domain, for example, played a crucial role in permitting construction of the canals and railroads that did so much to facilitate economic development.

The growth of government cannot continue forever. An economy totally dominated by government isn’t viable—even the Communists now recognize this. Eventually the government will eat up so much of the private sector that it will destroy the means of its own sustenance. At some point the balance of political power will swing away from support for bigger government in an effort to revive the dying goose that lays the golden eggs. If such reaction can occur in the Soviet Union and Eastern Europe, it certainly can occur here.

The most important change in this country in the last forty years took place in 1973, when the upheaval of Watergate triggered a shift from presidential government to congressional government.

The term congressional government was coined by a young history scholar named Woodrow Wilson as the title of his first book, an analysis of the way Congress seized control of the nation after the near impeachment of President Andrew Johnson in 1865. Wilson foresaw the danger of an aggrandizing legislature. “In proportion as you give it power it will inquire into everything, settle everything, meddle in everything.”

On the negative side, American political life has been demoralized by the twin failures of liberal politics in the 1960s and 1970s: the war in Vietnam and the abandonment of the Great Society. In some ways 1994 resembles 1954: There is a sense that democratic politics is no longer usable by ordinary people as an instrument for making positive changes in society; that government has become too large, too conservative, too bureaucratic, too locked up by interest groups (they used to be called power elites) to be an instrument for reform. But the passion and the capacity for action that emerged in the 1960s were in fact latent in the silences of the gray-flannel fifties. Perhaps that is true today as well.