THE ERA OF BIG GOVERNMENT IS NOT OVER: SYDNEY WILLIAMS
“I say again, the era of big government is over.” President William J. Clinton January 23, 1996
“For he on honey-dew hath fed/ And drunk the milk of Paradise;” so ends Samuel Taylor Coleridge’s poem “Kubla Khan.” Xanadu, an extravaganza, was located in Mongolia, north of Beijing. Kublai Khan, grandson of Genghis Khan, was Emperor of China. Xanadu became his first capital, later his summer palace. Khan was the founder of the Yuan Dynasty and ruled China for thirty-four years (1260-1294).
We in the United States have not been so grandiose…yet. However, in Washington there is a sanctimonious belief that all problems can be solved by government, that its bounty has no limits. In the September 12, 2023 issue of The Telegraph (London), Ambrose Evans-Pritchard and Jeremy Warner wrote: “The fiscal scale of Bidenomics is larger than Roosevelt’s New Deal in the 1930s by a wide margin. It is larger than Johnson’s guns and butter in the 1960s, or Reagan’s military rearmament in the 1980s. We are witnessing an extraordinary experiment in U.S. economic policy.” The New Deal was a response to a global depression. Johnson’s Guns and Butter was to fund the Vietnam War and his “Great Society.” Reagan’s rearmament won the Cold War. Bidenomics was to mend the nation’s infrastructure, combat a pandemic that was already being addressed, and to fight inflation, a result of easy money, business closures during the pandemic, and rises in energy prices caused by Mr. Biden’s curtailment of exploration and production.
Expanding tentacles of our enlarged administrative state raise questions: How much larger can the federal government grow? White House employment alone, at 524 people, has grown by 27% in the past three years. Is it possible to shrink entitlements, the fastest growing segment of spending? What will be the effect of rising interest rates, which in two or three years will cost a trillion dollars a year? Interest costs are already roughly equal to defense spending. Will defense suffer in an increasingly dangerous world? (At 3.5% of GDP, defense spending is about half of what it was in 1982.)
The numbers are sobering. U.S. GDP is estimated to be $27 trillion in 2023. Total federal debt for this year is estimated to be $32 trillion, or 118.5% of GDP. In addition, state and local debt were $2.1 trillion in 2022. To put those number is in perspective, the ratio of federal debt to GDP at the end of World War II was 117.5 percent. That ratio declined for several years, troughing in 1981 at 32.5%. Fitch Ratings recently lowered their rating on U.S debt from AAA to AA+, saying that “the ratio of debt interest to tax revenue will reach 10% by 2025, the level where it starts to create a snowball effect.”
Led by the credit crisis of 2008 and the pandemic of 2020, the recent rise in debt has been a bi-partisan effort, first peaking above 100% in 2013. As Rahm Emanuel famously declared, “a crisis is a terrible thing to waste.” Neither the credit crisis nor the pandemic were wasted. A recent editorial in The Washington Post began: “In 2023 – with the economy humming – the federal deficit is spiking to $2 trillion, according to calculations from the Committee for a Responsible Budget.” Setting aside whether 2.1% GDP growth is actually “humming,” it is good to know the Left is taking notice.
When we look at federal expenditures, as a percent of GDP, they came down sharply after World War II, though never approached the levels of pre-World War II. During three War years (1942-1944) federal outlays exceeded 40% of GDP. For the next seventy-five years, expenditures remained in the general range of mid-teens to 20% of GDP, rising during recessions and falling during periods of economic growth, but inching toward the higher end of the range as time went by. That changed in 2020 when the response to COVID was to shut down the economy. Since, federal expenditures, as a percent of GDP, have consistently been above 24% of GDP. Entitlement spending, which has ratcheted up each year, now approaches 66% of total government spending. What will happen to the needs of defense, education, etc.? Will taxes be raised? Will benefits be cut? Will we be able to pay interest on the debt? Will the economy slow further?
The catalyst that has caught everyone’s attention is the rise in interest rates, compounded by the rise in debt. Fed Funds began 2008 at 4.25% and ended the year at 0.25 percent. They stayed at the level for the next twenty-seven quarters, despite positive – though anemic – GDP growth. The fact that the Dow Jones Industrial Averages rose 70% during those six years lends credence to the claim that low interest rates benefit asset holders and help to widen the wealth gap. Today, the rate on Fed Funds is 5.5 percent, having been raised to combat inflation. Will the Fed, again, be asked to accommodate ballooning debt?
No one would disagree that a healthy and growing private sector is necessary for an income-consuming government, yet as the private sector shrinks relative to the public sector the job becomes more difficult. Since 2000, and apart from two years during the George W. Bush Administration (2004 and 2005) and the bounce-back year of 2021 from COVID, U.S. GDP growth has consistently been under three percent. More government spending, higher taxes and increased regulation are brakes on economic growth. Is the current unemployment rate of 3.8% telling us that the economy is maxed out at 2.3 percent? We better hope not.
In contrast with today and apart from six years (1981, 1982, 1990, 1991, 1993, and 1995), the twenty years between 1981 and 2000, saw economic growth range between 3.46% and 4.79 percent. While wealth inequality did increase – in part due to the use of options in executive compensation – the incoming tide lifted all boats. Unemployment remained low and the S&P 500 rose from 136.34 to 1,320.28. Perhaps gaps in wealth and incomes will narrow as the tide ebbs, but what will that do for standards of living?
In 1986 at an August 12th press conference, President Reagan said: “The nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help.’” Ten years later, in his State of the Union, President Clinton confirmed the sentiment. But the words must be placed in perspective. Government is necessary. Without it we would have anarchy. Government does much to help individuals, the elderly, the sick, and those no longer able to care for themselves. We need it to keep civil order, for education, and to protect us from enemies, at home and abroad. We need it to facilitate trade and to keep open sea lanes. We live in a nation of laws, under a representative government. We could no more survive without government than we could survive without air. But there are limits to what we can afford. A limited government is what we were given. We cannot smother free market capitalism that has enriched our lives.
We need serious people to consider how big government can grow before we are impaled on a petard of our own making. We have only to look at Western Europe’s global decline to see our possible future. In an 1867 address at the University of St. Andrews, John Stuart Mill said: “Bad men need nothing more to compass their ends, than that good men should look on and do nothing.” Xanadu has not been built in the United States, but we live in an era of big government. We need wise and good people with common sense to tell the truth about the consequences of where we are headed.
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