The debate should be about the quality – not the size – of government

The COVID-19 pandemic has forced many people around the world to reevaluate state capacity in their own country and contrast it with that of other peer countries. For far too long, the debate involving government’s role in society has been dominated by economists (especially those sympathetic to the small-government movement) who created the impression that the raw size of the government (measured, for instance, by government consumption’s share of GDP) was of critical importance. Recent developments and insights from political science and other related disciplines suggest that we should have placed greater emphasis on the factors that influence the quality of the government instead of being distracted by a never-ending and ideologically-driven battle over the superficial size of the government.

In “The Economists’ Hour,” Binyamin Appelbaum examines the rise to prominence in policymaking circles of economists during the second half of the 20^th century and highlights the influential role played by the Chicago School of Economics. Led by the irrepressible Milton Friedman, leading economists aligned with the University of Chicago and several other major research universities clustered around the Great Lakes region (which gave rise to the moniker, “Freshwater economics”) put forth an influential argument for reducing the role of government in economic affairs. Inspired by Friedman and his colleagues, the Reagan revolution initially produced some much-needed curtailment of government interference in economic matters and led to the pruning of regulatory thicket that had grown burdensome over time. (The Carter administration deserves some credit as well.)

However, the landmark legislative achievement of the Reagan administration, the Economic Tax Recovery Act of 1981, not only offered dramatic reductions in marginal tax rates but also gave birth to a new political era in which the Republican Party gradually embraced deficit-funded tax cuts and spending (especially military spending). In “Starving the Beast: Ronald Reagan and the Tax Cut Revolution,” Northwestern University sociologist Monica Prasad offers an intriguing historical examination of the forces that gave rise to the modern-day Republican Party’s preoccupation with tax cuts and its implicit abandonment of fiscal discipline.

In theory, the oft-repeated “starve the beast” metaphor suggested that small-government conservatives were pursuing some clever strategy of forcing fiscal spending discipline by enacting ever more unaffordable tax cuts. In practice, however, there was little appetite among the Republican Party faithful towards undertaking cuts to expensive but very popular social safety net programs or to military budgets. Instead, the U.S. came to rely on the “kindness of strangers” and embarked on a multi-decade path that was centered around running persistent federal budget deficits partly financed by foreigners.

Equally momentous, President Reagan’s famous inauguration quip (“Government is not the solution to our problems; government is the problem.”), which was in sharp contrast to President Kennedy’s inauguration remark (“Ask not what your country can do for you – ask what you can do for your country.”), marked a dramatic turnaround in the view of many Americans. A fundamental shift in sentiment and subsequent policy measures led to a gradual decline in the quality of U.S. government institutions and the steady erosion of state capacity.

The flailing response to the COVID-19 pandemic illustrated not just the incompetence of the current U.S. administration but also the extraordinary decline in America’s state capacity over the past four decades. In “Political Order and Political Decay,” Stanford University political scientist Francis Fukuyama highlights the historical evolution of political systems and emphasizes the importance of state power and capacity, rule of law and democratic accountability. The importance of competent, high-capacity states has been brought to the forefront by the pandemic. Democracies such as Germany, South Korea, Taiwan and New Zealand exhibited the advantages of having good leadership and competent and efficient bureaucracies. Meanwhile, the UK and the U.S., burdened by poor leadership and decades of neglect and hallowing out of critical state apparatus, failed miserably in their efforts to quickly bring the pandemic under control. In the case of the U.S., even the implementation of the huge fiscal stimulus program (the CARES Act) was initially bungled due to outmoded systems at key federal agencies.

There is now a growing appreciation of the need for high-quality government institutions and efficient states. New research clearly highlights the advantages of having better performing governments. There is some indication that the younger generation, even prior to the pandemic, was more favorably disposed towards a bigger role for government in society. The focus, however, needs to be on improving the quality of the government and not on blindly expanding the size, scope and complexity of government’s role. If the pendulum swings too far, a new set of problems typically associated with bloated and inefficient governments will be created.

Learning lessons from well-performing states and adapting and incorporating best global practices will help U.S. institutions regain their luster. Those worried about America’s institutional decline and lurch towards crony capitalism, and those rooting for the establishment of a fairer and more genuine free-market system should heed the following wise words from Brink Lindsey of the Niskanen Center: “…in appreciating the world-transforming virtues of the market system, it is vitally important for us to keep in mind this qualification: a well-functioning market system is neither self-executing nor self-sustaining. To achieve what they are capable of, markets need to be embedded in and supplemented by supportive legal, political, and social institutions.” 

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.