G. Governmental Growth i. Develop an economic and political explanation, or a co
ID: 2697523 • Letter: G
Question
G. Governmental Growth
i. Develop an economic and political explanation, or a collection of explanations, for the rapid growth of all levels of government throughout the West during much of the twentieth century.
ii. What new services or taxes, if any, account for most of this growth?
iii. Discuss political institutions (and incentives) that create a bias toward growth (if any exists). How can such incentives be reduced.
H. Social Insurance
i. Former President Bush and many republicans in the Congress favored "privatizing" a small part of the Social Security Program.
a How would this work? Will "we" borrow to do so? How much?
b What would be the economic effects of this reform in the short run and long run?
c Have other countries adopted similar reforms?
ii. President Obama favors expanding several social insurance programs by expanding existing programs and introducing new ones.
a Pick one such program and analyze its short run and long run effects.
b Identify the winners and losers of the program of interest.
c Does the distribution of winners and losers explain the basis of political support for the programs? Why or why not?
Explanation / Answer
The first scholar to recognize a positive correlation between the level of economic development and the size of the public sector was Adolph Wagner, German economist and Kathedersozialist.2 In Finanzwissenschaft (1883) and Grundlegung der politischen Wissenschaft (1893) he contended that an increase in public spending was a natural consequence of economic growth. Several processes accounted for this. First of all, the costs of defence would go up as all nations invested in more sophisticated weapons. Secondly, domestic protection would also become more expensive through industrialization. The density of modern living would lead to more social frictions, and the complexity of an advanced economy would require new forms of public control.
A third reason for more public expenditures was the greater ability of the government to meet certain income-elastic demands. Education and culture were fields where collective producers were by and large more efficient than private ones. Hence, the public sector would grow as basic needs were satisfied and the consumption pattern shifted in this direction. In some other areas - e.g., railroads - the capital required for investment would become so large that it could hardly be provided through private accumulation.
The modern discussion has dealt less with Wagner's original propositions than with the general trend he predicted. An Italian economist, F. S. Nitti, made an early survey of public expenditure trends in various nations. Among the chief causes of expansion in the last part of the nineteenth century, he listed: (a) the continued increase in military expenditure, (b) the beginning of great public works connected with the use of steam and electricity, (c) the growth of public debts, (d) the development of all forms of social prevention, and (e) the increasing participation of all the people in public affairs. When the control of the government rested with the people, wrote Nitti, they did not look upon taxation as a loss. Hence democracy was one important determinant of government growth. But it could not be the principal cause, since despotic and oligarchical regimes such as that of Tsarist Russia appeared to be spending as much as the democratic governments
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