Why It is Meaningless to Distinguish Between Big and Small Government

In many of my debates with American people the persistent theme that emerges out of these discussions is that whatever problems we may have in our economy and society, the government should play no role in fixing it. Americans distinguish between a ‘big’ and a ‘small’ government, and a big government is supposedly very cost ineffective, has a large, unaccountable bureaucracy, and does jobs that should best be left to the private sector. Now I could make it easy and only attack the libertarian and laissez-faire conservative wing for holding this view, but this will not suffice. Because even people, who hold more moderate political positions, and those who are less politicized, and generally concede to the ideological position of the other side when they encounter it, will repeat that libertarian argument even if they do not believe in it, and even if they see the benfits or the necessity of government intervention. This makes the anti-government ideology enormously effective and powerful in America.

In this paper, I point out some problems and limitations with this approach to government, essentially by explaining the economic and political history of the United States, which actually reveals a growing necessity for the government to intervene, and that ideological distinctions between a big and small government absolutely miss the point about the trajectory of the capitalist economic system that can not live without ‘big government’, which historically has been growing bigger (cf. Figure below).

Source: http://azizonomics.com/2012/01/03/taxation-nation/

But before I begin my analysis I should point out that as a European I have my own objections to the single-minded anti-government rhetoric. If there is a genuine political problem, which has to be solved by the entire community then it is very natural to let the government make the decisions to put these changes into effect. So if the environment gets polluted by corporate actors, then the government is expected to intervene and make sure that the companies internalize the externalities, i.e. pay for the pollution which they have caused. If labor disputes go out of hand, because the employers are squeezing too tightly on their workers as a result of competitive pressures, it is the government’s responsibility to provide a regulatory framework in the form of labor laws and labor bureaus that set the minimum wage, determine labor unions, establish workers’ safety standards etc. If the roads and bridges are falling apart, then the government has to come in and hire the workers to fix it, because there is no reason for the private-sector to provide a public good, which can not exclude non-payers from using that good. No revenues means to investment. The government does not have to worry about non-payers, because they have the legal power as sovereigns to impose taxes on any part of the population it chooses to tax. Another example would be the provision of social and welfare services, such as maternity leave or unemployment benefits, which will never be voluntarily provided by employers, who control most of the wealth. And there are plenty more examples that are too long to list.

The more perceptive people in America will not dispute this point, and they certainly see the importance of government intervention, but culturally and psychologically this remains a very unpopular position. So it will be important for me to turn to a historical account of American capitalism to argue that the role of the government really has increased over the past 200 years since its founding. The decisive point in American political history was the defeat of the British empire in the Revolutionary War (1776-1783), which really arose as a form of protest against the lack of representation in the British parliament even as the British were entitled to tax their colony. That was a very common practice in most of the European empires, but there was no substantial rebellion against it, or when they occurred then they came much later. Many of the African and South East Asian colonies were not released into independence until the mid-twentieth century. This is not to say that colony-empire relations were always very smooth. America is in a special situation, because many of the settlers were white Europeans themselves, preferably from northern and western Europe, and so the treatment of the colonial powers of the American settlers, who were their relatives, friends and kin, was not as harsh as might be predicted if the Europeans had encountered a larger indigenous population. The Native American indigenous population certainly made up the early Americans, but they were quickly reduced by smallpox, measles and cholera (maybe as much as 90% upon first contact), so we can not factor them into our analysis.

In any case, Americans, sensing the enormous natural riches that they were discovering and the vast oceanic distance from the motherland in Europe, declared independence from Britain, and they were able to get their way, but now there was a separation between two major political factions: the Democratic-Republican Party under Thomas Jefferson and the Federalist Party under Alexander Hamilton. The former believed in a weak central government and wanted the small farmers to retain most of the power, and the latter believed in a strong, centralized government that would expand investments in a national infrastructure and banking system to primarily benefit the interests of the wealthy along the East coast. As Americans were pushing further into the West, it seemed to be that Jefferson’s ideals would carry the way, and Hamilton’s east coast base seemed to be eroding. (As we shall see later, Hamilton’s vision prevailed.) In popular myth the small government ideal is inextricably linked with the idea of expansion to the West (the Manifest Destiny) and the rule of the small farmers against the oppressive central government consisting of bankers and manufacturers. From such a populist perspective, one can certainly understand the fact that the common man perceived the central government as an obstacle to his free advancement. Laisez-faire ideology can actually gain more traction in the open plains of North America than in the densely settled feudalist Europe, where a strong state had long been the rule, whether under feudalism or under capitalism.

I will also make the concession that Hamilton did believe that the common people were not really capable of ruling themselves, and that the central state has to be advanced in order to propel American economic development. That was with the backdrop of independence that had just been gained from Britain. Despite the vast physical separation between Britain and the US, it became clear to some members of the US elite that successful US independence can only continue if economic development was advanced as quickly as possible. One may also look at contemporary China or other East and Southeast Asian countries, which have also taken to heart the lesson that developing quickly- with the backdrop of oppressive core-periphery relations between the already Western developed countries and the less developed Asian countries- requires significant investments and regulation policies from the central state.

But this analysis actually emphasizes my crucial point that, historically, successful capitalist development really requires an increase in state intervention, and this state intervention, indeed, occurred. The course of nineteenth century history in America revealed a three-part division of the economy in different parts of the country. First, the northeast, which may include even the midwest, which had most of the factories, mills and banks. It was the wealthiest part of the country, and drew most of the investments from both, public and private, sources. The northeast clearly benefited from relatively abundant natural resources, which were used to fuel their development. Some strongly populated cities like New York City had the strongest governments, developing elaborate bureaucracies through the corrupt spoils system. The need for regulation is certainly the greatest in densely populated urban areas, and this was certainly the situation in the northeast, which continuously pulled in more immigrants from Europe, which in the beginning of the twentieth century was supplemented by the northern migration of African Americans from the south. The northeast was the locus for economic development so the state had to play an increasing role there.

The second region is the West, which includes many of the Rocky mountain states and central plains, and there we had open plains and agricultural development. The Jeffersonian freedom ideal may best be pursued there, but the picture is not all that romantic. Many of the small farmers were actually indebted to the bankers on Wall Street. It was expensive to acquire all the required equipment for agricultural development, and so they borrowed money from the banks, which had plenty of surplus cash from the manufacturers in the east. The free farmer also faced the obstacle of the unfavorable economics of small-scale farming, because prices would fluctuate so strongly that earnings and profits could not be guaranteed to farmers. The use of fertilizers and other modern equipment had the consequence of raising agricultural productivity, which squeezed out farm labor, and was certainly an impetus for migration to the cities in search of factory jobs. Another threat to the freedom of the farmer was the acceleration of soil depletion, which was the consequence of unregulated agriculture. Soil nutrients were sucked out quicker than they could be replenished, and safe practices like leaving a strip of land fallow rather than using the whole land indiscriminately, were simply not implemented.

And the final blow for the free farmers came with the Great Depression. In the 1920s, US farmers had already been suffering from a fall in foreign demand for US food products (especially from Europe that recovered from WW I), and protective tariffs made it even more difficult to sell the products abroad competitively. With the Great Depression, prices and wages were falling so dramatically that many farmers were put out of business. The New Deal intervention of the Franklin Roosevelt administration saved the farmers by subsidizing them for not growing crops, thereby reducing oversupply and raising agricultural prices, which helped the farmers to stay in business. Ever since then the government had undoubtedly played a huge role in the agricultural sector. Jefferson’s small farmer was increasingly being crushed through the combination of farms into a few big farms and the continuous rise in agricultural productivity, and the government had to step in to prevent the impoverishment of the remaining farmers. Today, we see enormous subsidies to the agricultural sector from the government especially for large farmers, so no small farmers can be found anywhere. I do not find this development to be avoidable, because successful capitalist development presupposes a rise in agricultural productivity, which allows a greater re-allocation of labor and other resources toward the production and provision of manufacturing and services, but the example of the Jeffersonian small farmer, who can cling onto the idealized notion of a small government needs to be discarded given the historical trajectory.

The third section of the US includes the south, which had mainly been marked by the growth of cotton in large plantations, which is fueled by the use of slaves that were imported from Africa. Cotton growth was favored by the humid and warm climate, and it was a very profitable business, such that the plantation owners saw no need for industrialization and innovation. Cotton was a remarkably labor-intensive industry, and the availability of black slaves implied the necessity of a socio-political arrangement such as this in order to maintain continued cotton production. However, cotton growth came into direct conflict with northern industrial interests. The conflict among the different interests between north and south had little to do with northern humanitarian concerns for blacks in the south, though that surely played a small role. The dispute that prepared the grounds for the civil war was, among others, the trade issue. Northern industrialists wanted a protective tariff, and southern planters rejected it, because it would benefit the former while harming the latter’s interest. The sticking point between the north and the south was also whether the western states that had not yet been incorporated into the Union should be free states, i.e. no slavery, or slave states. The bitter disputes surrounding the Missouri Compromise reveal these tensions on both sides. It became clear to the Southern leaders that they will soon be outnumbered in Washington. The initial provision was a national compromise, where for every new free state there should be one new slave state. But the sheer population and economic size of the north led to the not unjustified fear that the southern slave system was under peril. Senator Stephen Douglas pushed the Kansas-Nebraska Act, which allowed for popular sovereignty in the two new states, which meant that the people on the ground should decide by plebiscite whether they wanted slavery or not. That was threatening to the southern planter interests. Even worse, the Republican party, which was founded in 1854 and campaigned on free soil, quickly built up political support in the north, yielding in the election of Abraham Lincoln as president in 1860. That broke the straw for the south, and they decided on secession from the north, proclaiming their Confederacy in 1861. That was the beginning of the Civil War.

The secession may be the best example of defiance to federal power. Here the debate about big and small government does not have as much to do with what powers the government should or should not have, but which level of government should exercise power. Small government can really mean more state power and less federal power. In this case, the south argued that power should go to the states. Interposition and nullification were both concepts advanced by the southern states, and it was a challenge to federal power. If there was a law that the federal government passed and that the southern states did not like they would not enforce that law. The federal government should have less rights than the state government. This is, of course, a breach of the federal constitution, but the south had thought that population and economy-wise they were in the minority and could not uphold slavery so long as the northern majority opposed it. This cultural norm plays out even today, when you see some southerners still embracing the confederacy flag. It might look like a harmless gesture, but what it implicates is defiance to the supremacy of the federal state, which supposedly only benefits the north. Actually, a comparison of states in terms of which state contributes most to the federal government and receives the least funds in return (net contributors) and which state that contribute the least and collect the most (net receivers) reveals that most of the net receivers are located in the south, principally Florida, Louisiana, South Carolina and Mississippi. The cultural hatred against the federal state is no better than hatred against the state in general. In real material terms, it might even be considered harmful.

From a larger, macrosocial perspective an even more interesting theme is the fact that the southern way of life of slavery was destroyed and replaced by ‘free’ labor. Here free labor has to be enjoyed in a Marxian sense, namely that the replacement of slaves with free workers implied the types of restraints on these workers that made them practically slaves. The mode of cotton production did not entirely change in the post-Civil War period. Slavery was abolished and replaced by sharecropping, which was simply a more benign form of slavery for many blacks in the south (and also many whites). But northern capitalism prevailed eventually, which means that with the adoption of new machinery beginning in the early twentieth century and concluded in the 1940s, sharecropping and cotton labor was dismantled, as more productive machinery replaced labor on a large scale. This automation process was the real driver of the northern migration of African Americans. But the main point to take away is that northern capitalism prevailed, and with it the strong state, which is there to support it. Any opposition whether they showed up in the west or in the south was eventually defeated or submerged by the industrial north.

Let us turn to the discussion of US history in the rest of the nineteenth century and then the twentieth century. After the end of the Civil War the period of peace was marked by rapid economic development. The northern capitalists successfully spread their influence throughout the whole of the country, and toward the end of the century America also began harboring international and imperial ambitions. This again cuts against America’s cultural ideal, which is isolationist. But isolationism was only a temporary mechanism in the early nineteenth century in order to prevent further British incursion in America. When US industrial power started to match and even surpass European industrial power, the question of outward expansion became inevitable. In 1890, the Manifest Destiny was concluded with the complete settling of the western states, and that in a roughly over 100 year time span, counting from the beginning of the republic! The policy of easy land grab was over, and if the US wanted to expand any further it had to happen outside the national boundaries. Some people might suggest that US isolationism could have continued forever if the world wars had not occurred. These were caused by Europeans, who built their empires with the support of a deadly military machinery, which they directed against each other. I would contend that US isolationism could not continue forever, because sooner or later the country had to expand, capture new markets, find new customers and workers. This is the logic of capitalism, and people, who don’t grasp it essentially fail to recognize an important dynamic within capitalism. US expansion had already embroiled itself with its neighbors in mid-nineteenth century in the border disputes with Canada and especially Mexico. But foreign interventions in the end of the century followed. In 1893, Queen Liliuokalani from Hawaii was overthrown by the US, and Hawaii was formally annexed in 1898. Hawaii became a US state in 1959. In 1898, the Spanish-American War secured Cuba and the Philippines for the US. Cuba was released into independence in 1902 though with the caveat of permanent US foreign intervention rights (Fidel Castro can give some speeches on it!), but the Spanish made concessions of Puerto Rico and Guam, which are still US territories to this day.

This foreign expansion required a strong, centralized government, which is determined to carry out this mission with the requisite military, technology, diplomatic and business relationships. This is the most evident with the conclusion of World War I and II. After the first war, Woodrow Wilson was a forceful advocate for the Treaty of Versailles and the League of Nations. The isolationist US senate rejected US involvement in the League of Nations, which is the major reason why the League could not sustain itself. One learns in international relations theory that the world behaves like a Hobbesian-anarchist system if there is no strong ruler, and this may well have been the case in the inter-World War era. The Americans were so passionately isolationist that president Franklin Roosevelt even declined to proclaim war himself, and prefer to let the Japanese carry out the ‘surprise’ attack on Pearl Harbor (which I doubt was a complete surprise) before getting involved in the war. Can World War II be considered a turning point in US history? Yes and no. From my previous account of US imperial history, which stretches as far back as the Monroe doctrine of 1823, there had been a continuous increase in US involvement in global affairs. On the other hand, I do think that World War II made the US the undoubted ruler over the Western empire. The ascendancy of the totalitarian Soviet regime in Eastern Europe and East Asia certainly provided the necessary impetus for the Western countries to tie themselves more closely to the US, and the US had the impetus to take the leadership role. Germany and Japan were defeated, and France and Britain had formally won the war, but really lost it, because they had sacrificed their colonies in the world soon afterwards. They were exhausted and had lost many people and resources. The US had to fill the gap, which it did during the Cold War.

And so there are at least two more applications to US government power over the past 70 years that require special attention. First, is the increasing size and role of the military and the technology sector that comes along with it, and has formed the crucial backbone for the very innovative high-tech sector. The military build-up was closely related with the Cold War, and for the first time the defense establishment received a permanently enlarged budget that would rapidly expand during a foreign military intervention and war such as in Korea, Vietnam or Iraq and Afghanistan. The high-tech sector received the necessary subsidies, and scientists were able to develop the computer and the internet, which was the major innovation, which accelerated productivity growth, company profitability and worker layoffs. Innovation is key to capitalism, and government investments saw to it that it happened. Technology was primarily geared toward the military, but the diffusion into the civilian private sector occurred simultaneously or with a small delay. Public investments are the backbone of Microsoft, Apple, Google and Facebook, and not vice versa. The military generally plays an important role for private capitalists, because they can absorb some of the excess products that companies would otherwise not be able to sell to private customers.

The second application of US government power is the rise of the welfare state, which is much smaller in the US than in Europe, but still plays an important role in the contemporary period, which is marked by more unemployment, more underemployment, and more economic insecurity among the American people. US social welfare policies really only had two periods where significant reforms were undertaken. Social welfare is probably the one field, where the most negative associations are made with government involvement, and this tells me the degree of political control that the powerful really exercise in this country. Social welfare policies can only get enacted if a particular socio-political environment allows it to expand. There was one phase in the 1930s under the New Deal, and another phase in the 1960s under the Great Society. I will not list all of the social programs, though they are certainly worth a read. The most important programs include the minimum wage, Social Security, Wagner-Labor Relations Act, Medicaid, Medicare, Food stamps (SNAP). The New Deal also involved a host of banking, housing, agricultural, infrastructure regulations and jobs programs, which were a modest way to redistribute wealth to the masses of middle and lower income people.

It is true that all of the social gains are currently under the chopping block in America, but the resilience of some of these programs show that it might be difficult to completely destroy them. Medicaid was expanded under Obamacare, but Food stamps received cuts under the Republican Congress. Social Security, which is one of the most successful social programs in the country, is now also increasingly under attack, though not due to demographic reasons but due to political reasons. The essential counterfactual question for me is what would have happened if the welfare state had not existed when the major recession happened. There would have been much more social suffering, and maybe even more extended social discontent. The welfare state also stabilizes capitalism, because it provides the markets and consumer demand for companies. In China, the private saving rate is enormously high, which is only partly related to the saving mentality, but can be in large part explained by the small welfare state, which encourages families to save a lot of money in the event of health care emergencies or retirement.

I have argued that capitalist development requires a strong state with growing influence. It is simply false to think that an alternative small government is possible under the configurations of capitalism. It might be possible to let the state “wither away” at one point, as Marx dreamed, but I don’t see us approaching this ideal stage. Among practical thinkers and policy-makers the big and small government distinction is completely meaningless. The essential challenge is how to use the government to do what is best for all rather than what is best for just the few.

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