Is Big Government Back? the Political Economy of Activist Government Policy
Gallagher, Tom, Business Economics
For most of the past twenty years there has been a trend toward smaller government, but now it appears that the trend has reversed. Such trends and their reversals appear to have more to do with society's perceived needs than with electoral politics. Although there might appear to be a political cycle that drives periods of greater and lesser government activism, it is more likely that a dominant trend toward relatively little government activism is periodically countered by periods of crisis. The dominant contemporary "crises" are the war on terrorism and the collapse of the stock market bubble. Also, although not a crisis, the aging of America is an emerging structural problem that poses challenges for expenditure and regulation. This paper describes these issues and their likely long-term implications.
Republicans are regarded as the party of small government, yet consider what happened after they triumphed in the 2002 elections:
* The main order of business in the lame duck session immediately following the election was passing the party's top priority, the creation of a new cabinet department, the first in over a decade.
* The first order of business in the New Year was an extension of unemployment benefits.
* One of the next priorities was funding the government for FY2003. The omnibus spending bill added $330 billion to the ten-year baseline.
* And one of the most important domestic priorities for the Republicans this year is to expand Medicare by adding a drag benefit, which would increase
Medicare by about twelve percent.
My overall theme is that these are not isolated examples or aberrations in politics but represent a new phase for public policy. For the better part of the last twenty years, the prevailing approach to solving problems was to reduce the role of government. Now we are on a trend in which the predominant approach to solving problems will involve an expanded role for government.
Figure 1 shows the best measure of the government's economic role, federal spending as a share of GDP. This isn't a complete measure, since it omits new regulations and higher steel and lumber tariffs, for example, but it tells the story. Even the Bush Administration's own budget projections show no material decline in the government's share of the economy. Once the Iraqi war, occupation, and rebuilding costs are added, this line will continue to trend upwards.
[FIGURE 1 OMITTED]
The trend toward a bigger role for government means that government actions will take on a more central role in the economic and financial outlook for the United States.
A Long Political Cycle?
It seems odd to postulate about a return of activist government with an all-Republican government in place. But my argument has to do with the direction of policy, not partisan politics. The two can be linked to the extent this means one party or the other has the home field advantage in elections. I would argue that the Republicans were successful last year despite, not because of, their image as the party of smaller government.
While we tend to think of Democrats as favoring a bigger role for government and Republicans a smaller role, it's better to think of that statement relative to a trend line.
* Clinton gave us a bigger role for government after the 1992 election than George H.W. Bush would have, but the trend line was pointing down, so his two terms were characterized by his famous statement that "the era of big government is over," for welfare reform, for continued economic deregulation (of banks and telecommunications), and for budget surpluses.
* Nixon gave us smaller government after the 1968 election than Hubert Humphrey would have, but the trend line was pointed up, so we'll remember his domestic policy for the creation of the Environmental Protection Ad-ministration (EPA), Occupational Safety and Health Administration (OSHA), CETA (the temporary public jobs program), for wage and price controls, and for the indexing of Social Security benefits to inflation. …