Commentary

The End of Small Government?

By William A. Niskanen
This article appeared on the American Spectator on Sept. 20, 2005.
On September 8, 2005, Wall Street Journal columnist David Wessel announced that “the era of small government is over. Sept. 11 challenged it. Katrina killed it.” Wessel’s declaration comes nearly a decade after President Clinton declared that “the era of big government is over.”

But Clinton and Wessel are both wrong, for different reasons. The relative size of the federal government has been remarkably stable for over 50 years. In 1952, the third year of the Korean War, federal spending was 20.3 percent of GDP; in 2005 to date, the third year of the Iraq War, federal spending is 20.4 percent of GDP. The federal spending share of GDP in these two years was only slightly higher than the average of 19.85 percent over the whole period from 1952 to date, primarily because of the temporarily high military spending. The primary change in the budget has been a massive increase of federal transfer payments at the expense of military spending within a roughly constant federal spending share of GDP.

Clinton proved to be wrong because he could not imagine that his Republican successor would increase spending at the highest rate since Lyndon Johnson, and for much the same reasons — the combination of an extended war and a rapid increase in domestic spending.

Wessel will prove to be wrong because he does not understand why federal spending increased so rapidly under George W. Bush or the conditions that will constrain the growth of future spending. The war on terrorism has been a rationale for increased spending, but not its primary cause. President Bush has endorsed a substantial increase in spending for agriculture, defense, education, energy, homeland security, Medicare, and transportation — only a trivial amount of which is a direct response to Sept. 11 — all the while refusing to veto a single spending bill. The primary cause of the rapid increase in federal spending to date is that the Bush administration and too many Republicans in Congress have embraced big government conservatism in both foreign and domestic policy at the expense of their traditional party commitment to fiscal responsibility.

If the era of small government is over, it ended in 2001, not in 2005.

The spending already proposed for relief of the Katrina victims and the restoration of the Gulf Coast is extraordinary, probably on the order of $100,000 per displaced household. But the net increase is not likely to be as large as Katrina-related spending for several reasons:

* Spending for Katrina relief will jeopardize other Bush priorities, such as “staying the course” in Iraq, the indefinite extension of the tax cuts, and Social Security reform.

* Bush will have much less influence on congressional Republicans during his second term, especially if Democrats gain seats in the 2006 election.

* The economic and political conditions that have led to remarkable stability in the federal spending share of GDP for over 50 years are likely to restore a spending share somewhat closer to the average after the temporary spending increases for the war in Iraq and Katrina relief.

The primary condition that will threaten a substantial increase in the federal spending share of GDP is the combination of unfunded promises for Social Security and Medicare and a substantial increase of the ratio of retirees per worker — a problem that will become clearer as baby boomers begin to retire in 2008. The primary cost of the war in Iraq and Katrina relief may turn out to be the inability to gain bipartisan attention to these much larger long-term problems. Whether the era of small government is over depends primarily on how these long-term problems are sorted out, not on the temporary spending for the war in Iraq and Katrina relief.

William A. Niskanen is chairman of the Cato Institute and was a member and acting chairman of the Council of Economic Advisers under President Reagan.