Let’s say that you’re a policymaker interested in reducing the size of government. Strategically, is it easier to cut government regulation or roll back the welfare state (thereby reducing government spending)?
The Niskanen Center’s Will Wilkinson recently wrote a piece relating to this question that’s gotten a lot of attention: “What If We Can’t Make Government Smaller?” His argument rests on an inference from what’s known as Wagner’s Law, or the law of increasing state spending. This law suggests that as per-capita GDP rises in a country, so does the government share of GDP.
If this empirical regularity reflects a kind of law of politics, it suggests that it’s impossible to cut government spending as the economy continues to become more prosperous.
Wilkinson argues we should instead focus on deregulation and leave the welfare state alone.
Note: Whether one believes that the welfare state is just or efficient is a totally separate question from the one that Wilkinson’s piece raises. You could think that the welfare state is unjust and inefficient yet be persuaded by Wilkinson’s argument that shrinking it is just too difficult in the near future. Or you could support the welfare state yet not be persuaded that it’s invulnerable to political attacks. In fact, there’s an ongoing debate in political science on just this question. The general consensus seems to be that welfare states have remained stable in size, but that economic risks have become more privatized.
Questioning Wilkinson’s Conclusions About Reducing the Size of Government
I want to take a closer look at the data on this question of whether welfare state or regulatory state retrenchment is politically easier.
First, we need to make a distinction between welfare state transfers and the overall economic footprint of government. “Government consumption” measures what the government spends on wages and benefits and goods for its own use.
We see no Wagner’s Law in government consumption (Figure 1, data from Penn World Table 9.0).
In fact, in periods of economic prosperity, like the 1980s and 1990s, government consumption has fallen as a share of the economy. In times of economic stagnation, like the 2000s, government consumption has risen. Of course, it could be that government consumption significantly harms economic growth. Still, these data show little evidence for the view that it’s impossible to cut government consumption.
So what has risen over time? Welfare state transfers. Between 1985 and 2012, Medicare and Medicaid spending nearly tripled as a share of GDP and are projected to rise further. Social Security spending has also risen, more than quadrupling as a share of GDP between the mid-1950s and early 1980s before leveling off somewhat. Most of these increases are driven by the aging of the population and cost disease in the health care sector, not public demand for new programs.
What about regulation? Figure 2 shows how the number of pages in the federal register, which includes administrative rules, proposed rules, public notices, and presidential orders, has changed over time.
Figure 3 does the same for the number of pages in the federal administrative code.
Figure 4 shows how the inflation-adjusted budgetary cost of enforcing federal regulation has changed over time.
Finally, Figure 5 shows the number of economically significant final regulations by year for different presidential administrations.
However you measure them, the number of regulations octupled between 1963 and 2013. Over that same period, real GDP less than quintupled. The inflation-adjusted budgetary cost of enforcing regulation has also increased by a factor of about 10 over the last 55 years. Every recent presidential administration has added more regulation, but the Reagan administrations are an outlier in their lighter regulatory touch. There’s certainly an indication that George W. Bush was a more avid regulator than Bill Clinton, and Barack Obama yet more avid than Bush.
By any measure, then, the federal regulatory burden has skyrocketed, even as a percentage of the economy. It’s difficult-to-impossible to believe that the state and local regulatory burden has fallen enough to compensate for this rise.
These data certainly don’t suggest that cutting federal regulation will be easier than trimming the welfare state.
Whether a Providing a Social Safety Net Makes It Easy to Reduce the Size of Government
A final point to consider is whether cutting the welfare state would make it harder to cut regulation. Perhaps a social safety net makes voters more amenable to free markets.
The best way to examine this idea is to look at how changes in free markets correlate with changes in size of government.
I’ve looked at five-year changes in government consumption share of GDP and in economic freedom, excluding size of government and international trade (which is often controlled by international agreements, not domestic politics) for all western European countries and the Anglo-American democracies of North America and Oceania since 1990. (For 2010–2014 the change examined is just four years.)
Figure 6 shows a scatter plot of the two variables for all these countries.
Figure 7 limits the scatter plot to larger countries.
Figure 8 lags government consumption change by five years.
Figure 9 does the same for just the larger countries.
None of these figures suggest a strong, linear relationship between cutting government and either increasing or decreasing other elements of economic freedom, either contemporaneously or with a five-year lag. Now, this is pretty crude evidence and not definitive on the question, but it definitely casts doubt on the claim that bigger government leads to freer markets.
Governments do have a tendency to grow. However, the U.S. has cut government consumption significantly in the past and could do so again. The drivers of welfare spending are the aging of the population and rising health care costs, not political support for new programs.
And finally, there really is no evidence that cutting federal regulation is going to be easier than cutting spending.