The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
The conventional wisdom is that US President Joe Biden is ending an “era of small government” and unfettered free market capitalism that dates to Ronald Reagan and Margaret Thatcher in the 1980s. But that era is a myth.
Since 1980, government spending has held steady, and even risen slightly as a share of gross domestic product in the US, the UK and other developed economies. Deficits have gone from rare to routine, in good years and bad. Public debt in developed countries has soared — in the US to more than 120 per cent of GDP last year. Government is just as big and more interventionist than ever.
The expanding economic role of government goes well beyond deficits and debt. US welfare spending, including Medicaid, Medicare and social security, rose gradually from under 10 per cent to more than 17 per cent of GDP between 1980 and late 2020. The welfare state has grown steadily.
So has the regulatory state. Spending by US regulatory agencies rose under every president after Reagan. The federal handbook of regulations grew bit by bit in size, before Donald Trump. The same basic trend holds for the UK.
Corporate bailouts have become standard procedure. Once reserved for single companies, bailouts were extended to an entire industry during the savings and loans crisis of the 80s and 90s. After 2008, they were extended to big banks and auto companies. During the pandemic, bailouts have been on offer to almost any company that applied.
In developed nations, governments have rolled out more fiscal stimulus as a share of GDP in each successive crisis. In the US, fiscal stimulus reached a new post-second world war record of 4 per cent of GDP after the dotcom bust, 7 per cent after the financial crisis, and 13 per cent last year.
It is also difficult to maintain the fiction that central banks are not part of big government. They are joined at the hip. Governments cannot run up deficits and debt so sharply without central bank support. And central banks have grown aggressively supportive, both in keeping borrowing costs low and as buyers in debt markets. I calculate that last year combined fiscal and monetary stimulus reached a record 28 per cent of GDP in the US, and 40 per cent in developed economies on average.
So why does the myth of small government thrive, when these facts do not support it?
The story is typically told as a history of ideas, starting with deregulation, tax cuts and other anti-state policies under Reagan and Thatcher. Their centrist successors, from Tony Blair and Bill Clinton to Barack Obama, are cast as followers of these free market orthodoxies, who helped spread “neoliberal” ideology worldwide. By weaving together the many episodes in which neoliberal thinking did shape policy, commentators create a picture of steady government retreat.
But free market ideas did not downsize the ship of state, except for some privatisation of state-owned companies. Much of the rest was just talk. Many Republicans have echoed Reagan’s view that “government is the problem,” but their main solution has been to cut tax, rarely matched by spending cuts. Since 1980 every Republican president ran deficits, every year, and so did every Democrat, except Clinton.
The impression that governments retreated, leaving markets to run wild, is also influenced by runaway stock and bond prices. Worth $12tn in 1980, global stocks and bonds are now worth nearly $370tn. But that rise may be less a result of government retreat, in the form of deregulation, than of state support, particularly bailouts and easy money from central banks.
Finally, free market ideology did transform the formerly socialist states of China, India and eastern Europe, where the state now plays a much smaller economic role than 40 years ago. This reality, drawn from the emerging world, may have encouraged a misperception that governments were pulling back everywhere. Biden’s progressive supporters may praise him for ending small government, but that did not happen in the US.
Debate about where Biden is leading America and the world needs to start with a clear understanding of where he is coming from. His plans — for multiple multitrillion dollar spending packages, new regulations, and more — are accurately described as the most radical from any president in decades. But they do not mark an end. They signal the latest escalation of big government.
Source: Economy - ft.com
