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Government Beyond Obama?

Jeff Madrick’s The Case for Big Government arrives when one might imagine that Wall Street has made the case quite persuasively on its own. By mid-February, the Federal Reserve’s once-gargantuan $29 billion rescue of Bear Stearns had been dwarfed not just by the government’s hotly debated $700 billion “bailout bill” last fall, or even President Obama’s nearly $800 billion stimulus package, but far more stunningly by the $7.6 trillion the Fed and Treasury had by the beginning of 2009 already pledged to contain the ever-widening collapse of the economy, and the additional sum of up to $2 trillion that the new administration said it would raise from public and private sources to rescue banks. Governments from London to Beijing have meanwhile rushed to provide vast sums to their own capital markets.

These figures are mind-numbing to voters—and to sophisticated investors and economists as well, and for good reason: fifty years ago the United States spent what in today’s dollars would amount to only $115 billion on the Marshall Plan to reconstruct all of Western Europe; the 1980s savings and loans bailout—at the time the largest financial rescue operation since the Great Depression—cost taxpayers a mere $130 billion. But while bailing out the financial system should urgently concern us, Madrick argues, what is fundamentally needed is a different conception of the role of government.

In the midst of this crisis, one can make cases for three very different kinds of “big government.” The first is the rescue of Wall Street, an immediate but temporary intervention, already in play; the second is for government to act as a general contractor in the economy’s reconstruction—the medium-term investment in infrastructure, from roads to schools, that Obama is now unveiling in his “recovery plan.” But the third possibility, which is the central concern of Madrick’s book, has not yet been the subject of serious public debate: to use government as long-term guarantor of America’s (and indirectly the world’s) economic stability, as provider of widespread opportunity, and as partner with the private sector in restoring long-term stable growth. Madrick, in a nuanced and wide-ranging fashion, makes the case for that third approach.

The book’s logic runs something like this: at the heart of the US government’s economic policies since the Nixon administration is a set of arguments that may cripple Obama’s ability to carry out more ambitious reforms, and has, in Madrick’s well-documented view, already damaged the well-being of most Americans when their lives are compared to those of previous generations and to citizens of other well-to-do countries. These arguments deride the idea of “big government” in any form, and are widespread and deep-rooted in our history; those who make them are well financed, often fiercely ideological, and committed to resisting policies that aim to increase the role of government in the social and economic life of the country.

Market-based solutions,” in this new conventional wisdom, have become—for every Republican and Democratic administration since Jimmy Carter deregulated the airlines—the mantra for solving the big public policy issues of our times. Ronald Reagan, guided by such economists as Milton Friedman and Arthur Laffer, declared government “the problem, not the solution,” but it was Bill Clinton a decade later who, prodded by Robert Rubin and the Democratic Leadership Council, proudly announced that “the era of big government is over” before going on to back legislation for a balanced budget, welfare reform, and an ever-declining public workforce.

Leaders who have endorsed this bipartisan consensus running from the right to the center left don’t always agree fully on particulars, but tend to share a uniform enthusiasm for “market-based solutions,” whether the deregulation of transportation, utilities, telecommunications, and finance; the privatization of services from trash collection at home to security services in Iraq, as well as retirement savings and investment; the provision of vouchers for education and health care; or so-called cap-and-trade solutions to issues of the environment such as global warming.

How and to what degree such “market-based solutions” will end up influencing the Obama administration is much debated. So far the members of his economic team have not reassured some of his more progressive supporters. Announced by Treasury Secretary Timothy Geithner on February 10, for example, the administration’s strategy for the banking crisis includes the establishment of a Public Private Investment Fund, or “bad bank,” to buy up and hold as much as $1 trillion in bad assets, as well as further capital injections in banks and a vast expansion of a lending program to finance student loans and consumer debt. But it does not go as far as some economists would like in imposing conditions on the financial sector of the economy. Together with Geithner, the appointments of Lawrence Summers as head of the National Economic Council, Jason Furman as his deputy, Austan Goolsbee on the Economic Recovery Advisory Board, and Christina Romer as chair of the Council of Economic Advisers have collectively prompted disquiet among such economists as Robert Reich and Paul Krugman, even as their selection reassured capital markets—however unevenly and briefly.

Madrick himself is not a declared political partisan. He is a former economics columnist for The New York Times, the author of several well-regarded books on contemporary economic policy, and he writes frequently in these pages. During the past decade, he has grown increasingly alarmed about the direction of economic theory and policy, and he puts forward large-scale alternatives for government action. But his goal here is not to persuade conservative commentators such as George Will or disciples of Milton Friedman, but rather journalists, academics, policy intellectuals, and politicians who have embraced the earlier “public marketeering” consensus—as well as members of a younger generation who may be unfamiliar with past achievements of government and the potential of the public sector.

Madrick first provides a short history—a primer, really—of government’s often-forgotten but central role in the nation’s long economic rise from the 1770s to the 1970s. He then assesses how the economy, the nature of competition, and living standards have changed over the past thirty years. Although he completed his book last summer before the scope of the current collapse became visible, he concludes that there are deeply worrisome signs of a sharp and accelerating deterioration in the quality of American life. The book closes with a prescriptive essay, “What to Do,” in which he outlines how the federal government could substantially increase current revenues, and where to spend them to greatest long-term effect.

The book’s opening historical essay reminds us that from the American Revolution to the Great Depression, government’s share of GDP—that is, federal, state, and local public spending as a proportion of the nation’s total income—was quite small. It was probably about 1 or 2 percent in 1800, and 7 to 8 percent a century later. Yet its influence was disproportionately large for several reasons. First, upon organization of the Northwest Territory in 1789, the federal government became the nation’s largest landowner—a fact not reflected in conventional GDP calculations. And over the next century and a half the federal government was able to shape economic growth through its land distribution policies: for example, it used sales and leases of its land to foster small-scale farming, promote free primary (and later higher) education, encourage forestry and mining, and finance the nation’s vast transportation network.1 Second, state and local governments from the beginning of the Republic actively promoted large-scale investments in infrastructure, notably in roads and canals, and subsidized America’s primary education system, which made the young nation the most literate in the world—an enormous advantage in utilizing the new technologies on which mass production was founded.

Between the Civil War and World War I, moreover, governments at the federal—but especially the state and local—level all steadily expanded their regulatory powers to meet the challenges posed by the surging immigration, urbanization, and industrialization that made the United States the world’s largest economy by the 1890s. Although primarily at state and local levels initially, government intervened actively and repeatedly in matters of business organization, consumer rights, working conditions, new technology, utilities, public health, agriculture, urban design, and private and public finance.2 Particularly impressive, for example, was the construction of large-scale sanitation systems in cities throughout the nation.

As Madrick makes clear, the effect of all this government intervention was to enhance the country’s overall rate of growth even as it helped equalize income and wealth distribution. Government legislation helped create an educated workforce and build crucial infrastructure, guaranteed enforceable contracts, reduced corruption, opened new markets domestically, sponsored scientific and technological research and development, and globally, through expanded trade agreements and gradually reduced tariffs, made America an international economic giant.

The Great Depression began a substantial shift from a predominantly regulatory state to a revenue state. The public’s demands for economic security meant that government would need to invest large amounts of money in the economy to assure stability and near-full-employment growth. In consequence, the government’s 7 to 8 percent share of GDP at the start of the century tripled over the next fifty years. As Madrick explains, our vastly overheated debates about today’s “big” versus yesterday’s “small” government rarely focus on that simple fact: since the late 1950s, American government —federal, state, and local—has annually spent approximately 30 percent of GDP, and neither Democrats nor Republicans have altered that by more than a percent or two, upward or downward. Indeed, the size of government, as a share of GDP, reached its greatest extent since World War II not under Kennedy, Johnson, or Clinton, but under Ronald Reagan, and on average has been higher under Republican presidents. (Long the champion of “fiscal responsibility,” GOP presidents since Eisenhower have not been able to balance the federal budget.)

Having carefully established the long-running and generally beneficial effects of “big” government, Madrick turns to the intellectual claims of figures such as Milton Friedman, whose work was central to creating the new “small government is better government” consensus. In fact, Madrick writes, the Chicago economist “offered much ideology but little evidence” that big government undermined economic growth. Friedman claimed in the 1970s that the corrosive rate of inflation at the time was caused by rising public spending and the growth of the money supply. In reality, however, the government’s share of GDP didn’t rise during this time, and far larger budget deficits under later Republican presidents produced no noticeable increase in inflation. International comparisons likewise have shown that big government does not undermine a nation’s ability to produce more efficiently. Citing the economist Peter Lindert, who spent years compiling his data on the effects of the welfare state on economic growth, Madrick writes that there is a stark “conflict between intuition and evidence” on this topic. As Lindert wryly observed, “It is well-known that higher taxes and transfers reduce productivity. Well-known—but unsupported by statistics and history.”

Madrick, like everyone else, recognizes that corrupt and inefficient governments, of whatever size, damage not only growth but freedom. But he presents persuasive evidence that

  1. 1

    Government—federal, state, and local —still controls nearly 40 percent of all the land in the country. See www.nrcm.org/documents/publiclandownership.pdf

  2. 2

    Morton Keller’s Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Harvard University Press, 1990) and Regulating a New Society: Public Policy and Social Change in America, 1900–1933 (Harvard University Press, 1994) provide an overview.

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