The Rise of Big Government

Harold G. Vatter, John F. Walker

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317454847
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The Rise of Big Government chronicles the phenomenal growth of local, state, and federal government over the last 100 years. The authors explain this growth by arguing that public and social acceptance of government intervention has allowed government to maintain a presence at all levels of the economy. The authors take issue with the opposing argument that government has grown by itself and by the bureaucracy's constant push for its own expansion.

CHAPTER ONE

The Erosion of Laissez-Faire

The enlargement of government’s role in the industrialized market economies during the twentieth century is one of the most striking historical transformations of modern times. The widespread nineteenth-century laissez-faire era of moderate, pro-business intervention experienced a significant shock in the 1880s, when the conservative German government under Otto von Bismarck introduced a package of social measures. The purpose of Bismarck’s welfare measures was to forestall the presumed threat of a socialist attack on the private market system. That configuration of capitalist industrial development, social action, and government reformist intervention was prophetic of much future history.

In Japan, on the other hand, the giant industrial market system that developed after the Meiji Restoration in 1867 never experienced laissez-faire. Japan was a state-guided capitalist system from the start of modernization, and it remains such to a very large degree. But the other industrially advancing market systems of the world that had accepted the laissez-faire arrangement in the nineteenth century gradually discarded it in the twentieth century.

In the United States, the prevailing domestic laissez-faire relationship between government and the market was, in fact, slowly undermined—although not ideologically—in the decades between the end of the Civil War and the Great Depression of the 1930s. Prior to 1933, restraints were indeed placed on the customary assistance given to the private market. Regulatory restraints were instituted at both federal and state and local levels. The period from the turn of the twentieth century to about 1915 in particular was marked by a wave of reform legislation. But like reform programs generally, the objective was to maintain a “social balance” to obviate possible turmoil brought on by contentious groups. These programs were instigated largely by middle-class people who were both appalled by the market system’s harsh treatment of the economically disadvantaged and fearful of the emerging labor discontent. The middle class was also seriously hurt by the increasing predation by great industrial, transportation, utility, and commercial monopolies, which took over more and more markets in the late nineteenth and early twentieth centuries.

However, the U.S. experience is rather unusual among the industrially advanced nations for the distinct historical break evinced by the New Deal’s sudden public activism at the federal level in the span of less than a decade. The activism first appeared in 1933 as a set of emergency measures, but it soon produced a package of abiding interventionist reforms, such as the Social Security Act, the National Labor Relations Act, and the Fair Labor Standards Act. The reform package was a far-reaching expression of two forces: the most severe market system breakdown in U.S. history and a powerful surge of specific societal responses in the context of a deep-rooted humanistic and progressive cultural current. The combination introduced the “mixed economy” to the American experience.

The purpose of this survey is neither to view with alarm nor to condone the rise of big government—federal and/or state and local—but to determine its sources. We find those sources to be neither episodic nor transient. The competitive interest groups, generated by the evolving market system, are driven by their maximization goals to invoke lasting governmental intervention on their behalf. Expanding political reflection of the growing market system’s rewards and punishments is ensured by the persistence, increasing sophistication, and greater organizational power of those rival interest groups.

An essential and encompassing fact about the twentieth-century interventionist developments is that, in the first place, they have not been confined to one or two countries, but have occurred in quite a few major market economies. In the second place, despite unrelenting attacks on the allegedly Leviathan character of those developments, they have apparently gained sufficient social acceptability to forestall any serious efforts toward reversibility.

The endurance over time shown by large-scale public interventionism suggests the hypothesis that a profound social insistence or approval must underlie it. The hypothesis acquires persuasiveness from the fact that the substitution of “big government” and welfare states for laissez-faire has taken place in countries enjoying what are customarily considered to be democratic political institutions.

In the United States, as elsewhere, laissez-faire governments at all three levels played for the most part a selective, pro-business development role. They also pursued a sort of balancing act designed to make adjustments for particular weaknesses, vulnerabilities, and inequities in the market system’s impact on people. Examples of such diverse activities are the minimization of business regulation; various direct subsidies and grants to business; protective tariffs; general incorporation laws; direct infrastructure investment such as sewage and potable water systems in cities; indirect infrastructure encouragement such as the 1916 Federal Highway Act and state and local highway construction; encouragement of easy natural resource exploitation such as the provision of grazing lands to cattle ranchers, particularly free mining privileges; official subversion of Native American land claims; acquisition of continental land areas; free homesteading; the 1862 Land Grant College Act; agricultural experiment stations; rural free postal delivery; an open immigration policy to increase the labor supply; and the establishment in 1913 of an economy-wide central banking system (the Federal Reserve).

Examples of social-balance policies under laissez-faire are the Commonwealth v. Hunt court decision in Massachusetts in 1842 ruling that labor unions were not per se illegal conspiracies; the extension of voting rights to the proper-tyless and later to women; state legislation overruling the “fellow servant” rule that had judged employees responsible for injury or death on the job; and the Sherman Anti-Trust Act designed to restrain exploitive business monopolies. Government spending on education was both an aid to social balance through its contribution to enriching the quality of life and a contributor to the market’s need for better-quality human capital. On the other hand, so far as the rights of labor were concerned, laissez-faire government was as anti-labor as possible because such a stance was deemed good for business, that is, it kept wages down and profits, the source of savings, up.

The fiscal policies of laissez-faire government were classical political economy to the core: minimize the public budget, balance it every year to obviate debt growth, tax consumption (tariffs, excises, property, no income levies), and tax only in order to finance the work of the spare government personnel. Transfer payments to persons were undreamed of. Regressive taxation was designed to reinforce householders’ frugality and augment private savings, all of which would presumably be invested for economic progress. The imperviousness of this philosophy to inimical institutional change throughout the nineteenth and twentieth centuries, however violated in practice, is one of the more incredible continuities in modern history. Indeed, the staying power of the general philosophy of domestic laissez-faire defies almost all explanations of intellectual history.

It needs to be recognized, of course, that during the entire evolution of the capitalist market system, laissez-faire and thereafter, government has provided the indispensable, basic, legal framework protecting the essentials of private property and the security of the person, guaranteeing the “sanctity of contracts” and assuring national defense. The vital contribution of this protective institutional framework to the very existence of a national market system has been dramatically demonstrated in the Eastern European transformations during the present decade. Furthermore, U.S. history along with the history of other similar economies has shown that, with a growing population and rising per capita incomes, the legal framework itself has changed as to its role, its personnel, and its complement of physical facilities. The size of the judicial and law enforcement apparatus has therefore of necessity had to grow.

The size of the government establishment under laissez-faire was historically small—one fact that provides a critical indicator of the meaning of laissez-faire itself. Charles William Eliot, president of Harvard University for forty years, dramatically pinpointed this fact of smallness as early as 1888, with a shocking contrast between the large size of a “certain railroad” corporation and the government of the important state of Massachusetts.¹ Eliot’s figures for annual totals may be tabulated as follows:

	“A certain railroad”		State of Massachusetts
Gross receipts	$40,000,000		$7,000,000
Employees	18,000		6,000
Top salary paid	$35,000		$6,500

Eliot’s essay, “The Working of the American Democracy,” was dated early in the career of the big business era.

For the United States, small laissez-faire government may also be appraised quantitatively by a comparison of its size before and after about 1930, the census year that will be used here as a rough benchmark for the final demise of an era already in a state of decline.

Two readily available measures showing the small size of government during laissez-faire are public employment and purchases of goods and services. For example, in the United States, the ratio of all-government (federal, state, and local) civilian employment to the total civilian labor force averaged at census dates over the period from 1890 to 1929 about 4.7 percent. But the average over the initial mixed economy period 1939 to 1959 had already become twice that size at about 9.5 percent.

To be sure, before 1929 the public employment ratio slowly crept upward, even as laissez-faire was being undermined. While the ratio was less than 4 percent in 1900, it was more than 6 percent by 1929 (Table 1.1). Over 80 percent of this 1929 proportion was accounted for by state and local employees. This gradual rise in the total proportion through 1929 was empirically quite supportive of the famous “law” of the nineteenth-century German social theorist Adolf Wagner, who forecasted absolute and relative growth in society’s demand for government services as economic development in capitalist economies brought about increasing industrialization and urbanization.

A second customary measure of all-government size in the United States is purchases of goods and services by federal, state, and local governments (G) in comparison with GNP, also shown in Table 1.1. The G/GNP ratio in current dollars from the mid-1870s to about 1900 rose about a percentage point from a little over 5 percent to a little over 6 percent. In the next twenty years, as the table shows, the ratio drifted upward, but it remained historically small compared to what the future had in store. A similar comparison holds for the employment ratio, which also jumped dramatically by 2 percent a year between 1929 and 1959 with the great transformation to the mixed economy. A slowdown to six-tenths of 1 percent annually for the ratio’s succeeding thirty-five years, 1959–1994, indicates that the selection of 1959 reveals nicely the break in the historical trend.

Table 1.1

Growth in Government Size, Twentieth-Century Purchases, and Employment, 1900, 1929, 1959, 1989, 1994

	Percent purchases/GNP (current $) (1)	Percent civilian employees/civilian labor force (2)	Ratio (1)/(2)
1900	6.02	3.86	1.56
1929	8.12	6.42	1.27
1959	20.27	11.65	1.72
1989	18.70	14.35	1.30
1994	17.43	14.53	1.20

Sources: Historical Statistics and Economic Reports of the President for 1967, 1992, and 1996.

The New Deal year 1939 would also show a trend break insofar as the G/GNP percentage at 14.7 for that year is concerned. Apparently the New Deal was busy increasing aggregate demand. But the all-government employment ratio by that year had risen to only 7.23, a modest 13 percent above 1929. It is true, however, that the ratio of federal civilian employees to state and local workers rose from 21 percent in 1929 to 29 percent in 1939.

The last column in Table 1.1 satisfies one’s curiosity but otherwise tells us very little. It does not measure efficiency in a strict output/input sense. The drop shown between 1959 and 1994 might superficially appear to be some indicator of a growing bureaucracy that raises government jobs without raising work done (purchases). However, “purchases” contains a very large component of government wages and salaries. Furthermore, transfer-payment work by public employees is not contained in purchases, whereas total government transfers to persons (such as Social Security payments) exploded from $28 billion in 1959 to $956 billion in 1994 (real transfers from $109 billion to $758 billion in 1987 dollars).

In making these long-run historical comparisons it is important to remember that the national defense purchases of the federal component of all-government purchases became for the first time chronically very large after 1948. Hence, civilian G in ratio to total GNP averaged 11.2 percent for the three dates 1939, 1949, and 1959. Nevertheless, this was still about 58 percent higher than the average of the two percentages for 1900 and 1929, as shown in Table 1.1. It would be still higher if civilian GNP were the denominator of the fraction.

The record shows that the demise of the domestic laissez-faire relationship occurred in two phases in the United States: a more or less gradual, long-drawn-out decline in the half-century before 1929, followed by a relatively sudden jump in government’s role as the mixed economy was inaugurated during the decade of the Great Depression. It also shows that the long rise in big government has always entailed in quantitative terms, as distinguished from discretionary public policies, a strong rise in the state and local component. The state and local sector was by far the largest part of the public sector throughout the laissez-faire era and also in the mixed economy era. To be sure, some of its growth was financially supported by the federal government. Such a pattern is to be expected in a culture that worships grass roots. The financial support pattern will be looked at in Chapters 3 and 5. In any case, in 1994 there were 16,171,000 state and local employees and 2,870,000 civilian federal employees. However, about 1 million of those “civilian” federal employees worked for the Department of Defense. On a truly civilian comparison, state and local employees outnumbered federal by about 8 to 1.

Changes Driven by the Market’s Evolution

Up to this point the concern has been primarily with description. We now turn to Wagner’s Law, which treats some major aspects of the decline of laissez-faire. To appreciate the operation of the law in the United States, we can take as examples a number of chiefly long-run changes in the enterprise: household nexus comprising the market system and changes that induced responses in both society and government. Suc...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Tables
• Preface
• Acknowledgments
• Chapter One. The Erosion of Laissez-Faire
• Chapter Two. The Beginnings of the Mixed Economy, 1930–46
• Chapter Three. The Postwar Economy and Government Growth
• Chapter Four. Fiscal Policy and Government Growth
• Chapter Five. The Rise of the American Welfare State
• Chapter Six. International Influences and the Expanding American Role
• Chapter Seven. Why Government Must Continue to Grow
• Index
• About the Authors