The Case for Big Government
Source Dave Anderson
Date 09/03/17/19:22
from New York Review of Books
Volume 56, Number 4 · March 12, 2009
Government Beyond Obama?
By Richard Parker

a review of
The Case for Big Government
by Jeff Madrick
Princeton University Press, 205 pp., $22.95

Jeff Madrick's The Case for Big Government arrives when one might
imagine that Wall Street has made the case quite persuasively on its
own. By mid-February, the Federal Reserve's once-gargantuan $29
billion rescue of Bear Stearns had been dwarfed not just by the
government's hotly debated $700 billion "bailout bill" last fall, or
even President Obama's nearly $800 billion stimulus package, but far
more stunningly by the $7.6 trillion the Fed and Treasury had by the
beginning of 2009 already pledged to contain the ever-widening
collapse of the economy, and the additional sum of up to $2 trillion
that the new administration said it would raise from public and
private sources to rescue banks. Governments from London to Beijing
have meanwhile rushed to provide vast sums to their own capital

These figures are mind-numbing to voters—and to sophisticated
investors and economists as well, and for good reason: fifty years ago
the United States spent what in today's dollars would amount to only
$115 billion on the Marshall Plan to reconstruct all of Western
Europe; the 1980s savings and loans bailout—at the time the largest
financial rescue operation since the Great Depression—cost taxpayers a
mere $130 billion. But while bailing out the financial system should
urgently concern us, Madrick argues, what is fundamentally needed is a
different conception of the role of government.

In the midst of this crisis, one can make cases for three very
different kinds of "big government." The first is the rescue of Wall
Street, an immediate but temporary intervention, already in play; the
second is for government to act as a general contractor in the
economy's reconstruction—the medium-term investment in infrastructure,
from roads to schools, that Obama is now unveiling in his "recovery
plan." But the third possibility, which is the central concern of
Madrick's book, has not yet been the subject of serious public debate:
to use government as long-term guarantor of America's (and indirectly
the world's) economic stability, as provider of widespread
opportunity, and as partner with the private sector in restoring
long-term stable growth. Madrick, in a nuanced and wide-ranging
fashion, makes the case for that third approach.
Little Bookroom / Savoir Fare London

The book's logic runs something like this: at the heart of the US
government's economic policies since the Nixon administration is a set
of arguments that may cripple Obama's ability to carry out more
ambitious reforms, and has, in Madrick's well-documented view, already
damaged the well-being of most Americans when their lives are compared
to those of previous generations and to citizens of other well-to-do
countries. These arguments deride the idea of "big government" in any
form, and are widespread and deep-rooted in our history; those who
make them are well financed, often fiercely ideological, and committed
to resisting policies that aim to increase the role of government in
the social and economic life of the country.

"Market-based solutions," in this new conventional wisdom, have
become—for every Republican and Democratic administration since Jimmy
Carter deregulated the airlines—the mantra for solving the big public
policy issues of our times. Ronald Reagan, guided by such economists
as Milton Friedman and Arthur Laffer, declared government "the
problem, not the solution," but it was Bill Clinton a decade later
who, prodded by Robert Rubin and the Democratic Leadership Council,
proudly announced that "the era of big government is over" before
going on to back legislation for a balanced budget, welfare reform,
and an ever-declining public workforce.

Leaders who have endorsed this bipartisan consensus running from the
right to the center left don't always agree fully on particulars, but
tend to share a uniform enthusiasm for "market-based solutions,"
whether the deregulation of transportation, utilities,
telecommunications, and finance; the privatization of services from
trash collection at home to security services in Iraq, as well as
retirement savings and investment; the provision of vouchers for
education and health care; or so-called cap-and-trade solutions to
issues of the environment such as global warming.

How and to what degree such "market-based solutions" will end up
influencing the Obama administration is much debated. So far the
members of his economic team have not reassured some of his more
progressive supporters. Announced by Treasury Secretary Timothy
Geithner on February 10, for example, the administration's strategy
for the banking crisis includes the establishment of a Public Private
Investment Fund, or "bad bank," to buy up and hold as much as $1
trillion in bad assets, as well as further capital injections in banks
and a vast expansion of a lending program to finance student loans and
consumer debt. But it does not go as far as some economists would like
in imposing conditions on the financial sector of the economy.
Together with Geithner, the appointments of Lawrence Summers as head
of the National Economic Council, Jason Furman as his deputy, Austan
Goolsbee on the Economic Recovery Advisory Board, and Christina Romer
as chair of the Council of Economic Advisers have collectively
prompted disquiet among such economists as Robert Reich and Paul
Krugman, even as their selection reassured capital markets—however
unevenly and briefly.

Madrick himself is not a declared political partisan. He is a former
economics columnist for The New York Times, the author of several
well-regarded books on contemporary economic policy, and he writes
frequently in these pages. During the past decade, he has grown
increasingly alarmed about the direction of economic theory and
policy, and he puts forward large-scale alternatives for government
action. But his goal here is not to persuade conservative commentators
such as George Will or disciples of Milton Friedman, but rather
journalists, academics, policy intellectuals, and politicians who have
embraced the earlier "public marketeering" consensus—as well as
members of a younger generation who may be unfamiliar with past
achievements of government and the potential of the public sector.

Madrick first provides a short history—a primer, really—of
government's often-forgotten but central role in the nation's long
economic rise from the 1770s to the 1970s. He then assesses how the
economy, the nature of competition, and living standards have changed
over the past thirty years. Although he completed his book last summer
before the scope of the current collapse became visible, he concludes
that there are deeply worrisome signs of a sharp and accelerating
deterioration in the quality of American life. The book closes with a
prescriptive essay, "What to Do," in which he outlines how the federal
government could substantially increase current revenues, and where to
spend them to greatest long-term effect.

The book's opening historical essay reminds us that from the American
Revolution to the Great Depression, government's share of GDP—that is,
federal, state, and local public spending as a proportion of the
nation's total income—was quite small. It was probably about 1 or 2
percent in 1800, and 7 to 8 percent a century later. Yet its influence
was disproportionately large for several reasons. First, upon
organization of the Northwest Territory in 1789, the federal
government became the nation's largest landowner—a fact not reflected
in conventional GDP calculations. And over the next century and a half
the federal government was able to shape economic growth through its
land distribution policies: for example, it used sales and leases of
its land to foster small-scale farming, promote free primary (and
later higher) education, encourage forestry and mining, and finance
the nation's vast transportation network.[1] Second, state and local
governments from the beginning of the Republic actively promoted
large-scale investments in infrastructure, notably in roads and
canals, and subsidized America's primary education system, which made
the young nation the most literate in the world—an enormous advantage
in utilizing the new technologies on which mass production was

Between the Civil War and World War I, moreover, governments at the
federal—but especially the state and local—level all steadily expanded
their regulatory powers to meet the challenges posed by the surging
immigration, urbanization, and industrialization that made the United
States the world's largest economy by the 1890s. Although primarily at
state and local levels initially, government intervened actively and
repeatedly in matters of business organization, consumer rights,
working conditions, new technology, utilities, public health,
agriculture, urban design, and private and public finance.[2]
Particularly impressive, for example, was the construction of
large-scale sanitation systems in cities throughout the nation.

As Madrick makes clear, the effect of all this government intervention
was to enhance the country's overall rate of growth even as it helped
equalize income and wealth distribution. Government legislation helped
create an educated workforce and build crucial infrastructure,
guaranteed enforceable contracts, reduced corruption, opened new
markets domestically, sponsored scientific and technological research
and development, and globally, through expanded trade agreements and
gradually reduced tariffs, made America an international economic

The Great Depression began a substantial shift from a predominantly
regulatory state to a revenue state. The public's demands for economic
security meant that government would need to invest large amounts of
money in the economy to assure stability and near-full-employment
growth. In consequence, the government's 7 to 8 percent share of GDP
at the start of the century tripled over the next fifty years. As
Madrick explains, our vastly overheated debates about today's "big"
versus yesterday's "small" government rarely focus on that simple
fact: since the late 1950s, American government —federal, state, and
local—has annually spent approximately 30 percent of GDP, and neither
Democrats nor Republicans have altered that by more than a percent or
two, upward or downward. Indeed, the size of government, as a share of
GDP, reached its greatest extent since World War II not under Kennedy,
Johnson, or Clinton, but under Ronald Reagan, and on average has been
higher under Republican presidents. (Long the champion of "fiscal
responsibility," GOP presidents since Eisenhower have not been able to
balance the federal budget.)

Having carefully established the long-running and generally beneficial
effects of "big" government, Madrick turns to the intellectual claims
of figures such as Milton Friedman, whose work was central to creating
the new "small government is better government" consensus. In fact,
Madrick writes, the Chicago economist "offered much ideology but
little evidence" that big government undermined economic growth.
Friedman claimed in the 1970s that the corrosive rate of inflation at
the time was caused by rising public spending and the growth of the
money supply. In reality, however, the government's share of GDP
didn't rise during this time, and far larger budget deficits under
later Republican presidents produced no noticeable increase in
inflation. International comparisons likewise have shown that big
government does not undermine a nation's ability to produce more
efficiently. Citing the economist Peter Lindert, who spent years
compiling his data on the effects of the welfare state on economic
growth, Madrick writes that there is a stark "conflict between
intuition and evidence" on this topic. As Lindert wryly observed, "It
is well-known that higher taxes and transfers reduce productivity.
Well-known—but unsupported by statistics and history."

Madrick, like everyone else, recognizes that corrupt and inefficient
governments, of whatever size, damage not only growth but freedom. But
he presents persuasive evidence that

big or small government is not the critical criterion in
economics. To the contrary, government's management of change is what
is critical. And government is a key and arguably the main agent of
change.... In the laboratory of the real world, the governments of
rich nations have on balance been central to economic growth, and in
the process have retained their citizens' faith in their nations'
promise and social values.... If what we think of as big government is
necessary to manage change, and in a complex society it may well be,
then we should pursue it actively and positively, and make it function

Among the rich nations of the world, he points out, there really
haven't been any "small" governments for nearly a century. Among the
wealthy OECD countries, for example, the public- sector share of GDP
averages roughly 40 percent (the US's 30 percent is the lowest of the
group). It is no coincidence, in Madrick's view, that the US leads the
OECD in income and wealth inequality, poverty, crime, hours worked,
and infant mortality.

Since the 1970s, Madrick shows, the US economy has grown more slowly
than in the thirty-year period after the end of World War II, but also
very likely more slowly than in any other period in the nation's
history. For many years economists attributed this reduced growth to a
difficult-to-explain slowdown in business productivity. But as Madrick
points out, even after productivity growth returned in the mid-1990s,
average wages—which had stagnated for twenty years—continued to
stagnate. In fact, between 2001 and 2007, wages grew not at all,
something unprecedented in any previous recorded business recovery.

In the second section of his book, Madrick points to a number of by
now familiar changes that have occurred in the last three decades. The
percentage of women in the workforce has grown dramatically.
Manufacturing has declined precipitously; and health care costs have
tripled as a share of GDP (and now exceed manufacturing's share).
Consumer, business, and government debt have all soared. Household
debt, for example, has risen from fifty cents per dollar of family
income to $1.20 per dollar. The federal government's total debt over
the same period doubled from a third to two thirds of GDP. At the same
time, the social safety net, public and private, has deteriorated
badly, not only for the poor but for the middle class and even parts
of the upper-middle class. Pension savings are now largely the
responsibility of individuals, health care premiums are rising much
faster than the overall cost of living, higher education costs have
soared, and mortgage payments have reached an all-time record,
measured as a share of household income.

Two of the most critical factors behind these fundamental shifts,
according to Madrick, are the changing distribution of income between
men and women and the changing distribution of income by education.

From the 1970s onward women have modestly narrowed the wage gap with
men, although the gap is still wide. The nature of that differential,
however, has changed: in fact women's gains have come in part because
of a perverse convergence. Wages for men have been deteriorating at
the same time that women's wages have been rising. Among women, all
income levels have made some progress, but below the top 10 percent of
female earners, the progress has been much more slight.

Among men, the effects of stagnating income have been felt especially
by those without a college education, although even men with college
educations have not fared well. The median hourly wage for all males
has actually fallen since the 1970s—unprecedented in American
history—while the income for college-educated males has risen barely
10 percent, also a new historical low.

The fact that so many women work has, while closing the gender
earnings gap, ironically contributed to widening inequality among
families—especially between households with two high-earning workers
and those with a single median- or minimum-wage earner. For historical
comparison, the average family income between the end of World War II
and 1973 doubled, in inflation-adjusted terms. Since then, the gain
among two-parent families has risen only slightly (and almost entirely
during Clinton's second term). After George Bush took office, there
were modest gains only for families with two workers; for families
with one earner, there was no gain whatsoever. As Madrick bluntly

Families now work longer hours—about two and a half or three
months a year more of work on average. They often live farther from
work, thus spending more time commuting. Kids must take longer to
finish college, and borrow much more to pay their way. Two-worker
families have new expenses that are rarely included in the data, such
as a good second car, baby-sitters, take-out food, and cleaning help.
Good full-time infant care can cost $2,000 per month in major urban
areas. People have to move to expensive neighborhoods because the
schools are better, and they take on large mortgages. Debt is way up
as a result....

Are we now jeopardizing the equality of opportunity because people
cannot afford...good education, good health care and...good access to
jobs and careers? Is the broad, positive definition of freedom, as
discussed by Wilson, Roosevelt, and Johnson, and I would argue
Jefferson and Lincoln, under assault? In the process, are individual
rights under assault as well?

In the final part of The Case for Big Government, Madrick outlines
what he believes should come next. It is not merely a matter of policy
reform, or shifting leadership from one party to another. Instead, he
argues, we need to rediscover Americans' capacities for
transformational change and the way "big government" can help achieve
that end:

How did the wealthiest nation in history come to believe it is not

America has no free and high-quality day care or pre-K
institutions to nourish and comfort two-worker families.... College
has become far more expensive and attendance is now bifurcated by
class.... Transportation infrastructure has been notoriously
neglected, is decaying, and has not been adequately modernized to meet
energy-efficient standards or global competition. America has not
responded to a new world of high energy costs and global warming in
general. America has a health care system that is simply out of
control, providing on balance inadequate quality at very high
prices.... The financial system, progressively deregulated since the
1970s, broke free of government oversight entirely in the 1990s and
early 2000s and speculation reminiscent of the 1800s was the result
with potentially equal levels of damage.... These facts amount to
about as conclusive a proof as history ever provides that the ideology
applied in this generation has failed.

Madrick calls for new spending programs and new ways to raise revenue
to reverse the consequences of failed ideology over the past three
decades. These recommendations provide a useful benchmark by which to
assess the Obama administration's current and coming proposals,
although the financial crisis has already redrawn the landscape of the

For example, Madrick argues cautiously for an annual $400 billion
increase in public spending overall. This would roughly increase
government's GDP share by a modest 3 percent, close to the original
stimulus package Obama submitted to Congress (since the $800 billion
the President proposed is designed to be spent over the next two to
three years, not one). The full implications of the House–Senate
compromise on the President's spending and tax- cut program remain to
be examined, as do other administration proposals. But comparison with
Madrick's recommendations is illuminating.

In the case of health care, for example, it seems unlikely that Obama
will support the kind of single-payer system advocated by Madrick. Nor
should we expect anytime soon the new president to advocate, as
Madrick does, public financing of elections, in view of the
extraordinary fund-raising prowess he showed in reaching the White
House. Unlike the stimulus package, Madrick also does not advocate
major new tax cuts (although he might now, as a temporary
counter-cyclical measure).

When it comes to public spending on infrastructure, however, Obama has
already announced an ambitious plan that echos Madrick's emphasis on a
"green," jobs-creating investment strategy (although important details
may be very different, reflecting the legislative alliances he needs
and the persuasive power of lobbyists). Likewise, Madrick's and
Obama's proposals for reregulation of finance, a more progressive tax
system, increased funding of education at all levels, and large
funding for transportation reform all have much in common. It isn't
yet clear whether the policies Obama gets through Congress on trade,
globalization more generally, and ways to reequalize income and wealth
will converge with Madrick's. The full shape of the President's own
proposals, and what politics makes of them, remains to be seen.

The book's largest flaw is that it is not as careful and clear-eyed
politically as it is economically. The Case for Big Government
usefully takes aim at the ideological consensus that emerged among
many academics, journalists, policy advisers, and politicians in both
parties. But it devotes little attention to the rise of religious
fundamentalism that coincided with America's industrial decline, and
how the departure from the Democratic Party by millions of white
Southern evangelicals and Northern, mostly Catholic, industrial
workers—twin pillars of the New Deal—contributed to the world we face
today. In many ways this shift may have been more consequential to the
spread of "small government" ideology than the intellectual
realignment of academics, journalists, policy advisers, and

The book also ignores the effects of American foreign and military
policies on economic growth. Between 1945 and 1975—the period Madrick
cites so approvingly in contrast to the decades that followed—half of
all federal spending was for the military, and significant parts of
the rest (including for education, roads, science, and technology)
were justified as military preparedness. One cannot know when and how
the situation in Iraq will end, or whether the war in Afghanistan will
grow far larger and more costly—but analysts such as Madrick might
consider the effects of the Vietnam War in helping to destroy the New
Deal consensus.

Still, Madrick is correct to argue that most Americans—congressional
Republicans and broadcasters such as Rush Limbaugh
notwithstanding—seem ready to move past the thirty years of
conservative domination that resulted from increasing distrust of
government. The dismal failure of deregulated financial markets has
now—just as in the 1930s—forced upon the US the most fundamental and
costly sorts of public interventions in markets. The extent to which
Madrick's insightful and persuasive arguments will be taken up in US
policy now rests to a large degree on whether President Obama and the
Democrats can restore America's basic financial health. For the time
being that means concentrating on government's ability first to save
Wall Street and restore credit, and then to begin rebuilding the
devastation Wall Street's failure has left behind. The challenge of
creating a new era for government as long-term guarantor of our
security and well-being lies ahead.

—February 12, 2009


[1]Government—federal, state, and local —still controls nearly 40
percent of all the land in the country. See

[2]Morton Keller's Regulating a New Economy: Public Policy and
Economic Change in America, 1900–1933 (Harvard University Press, 1990)
and Regulating a New Society: Public Policy and Social Change in
America, 1900–1933 (Harvard University Press, 1994) provide an

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