Government and the Economy - A History Lesson

Something from The New York Review of Books that is well worth repeating. Too much has been made that America was made without government intervention. That the federal government increased its investment in the country during the last century is true but that the Nineteenth Century saw no government intervention or subsidy in support of economic development. Indiana saw its share and the failure of one big venture brought the state to bankruptcy. Take a run down to Metamora and see the remnants. Now, about that New York Review of Books essay.

Government Beyond Obama?:

"'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."

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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 founded.

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.