The idea that the state has been shrinking for 40 years is a myth

The writer, global chief strategist of Morgan Stanley Investment Management, is the author of “ The Ten Rules of Successful Nations ”

Conventional wisdom is that US President Joe Biden is end an “era of small government” and unfettered free market capitalism that dates back to Ronald Reagan and Margaret Thatcher in the 1980s. But that era is a myth.

Since 1980, government spending remained stable and even increased slightly as a percentage of gross domestic product in the United States, the United Kingdom and other developed economies. Deficits have gone from rare to routine, in good and bad years. Public debt of developed countries has skyrocketed – in the United States more than 120 percent of GDP last year. The government is just as big and more interventionist as ever.

The growing economic role of government goes well beyond deficits and debt. American social spending, including Medicaid, Medicare, and Social Security, gradually grew from less than 10 percent to over 17 percent of GDP between 1980 and the end of 2020. The welfare state has grown steadily.

The same goes for the regulation state. Expenses by American regulatory agencies arose under every president after Reagan. the federal manual regulations gradually gained momentum, before Donald Trump. The same basic trend holds for the UK.

Business rescues have become standard procedure. Once reserved for sole proprietorships, the bailouts were extended to an entire industry during the savings and loan crisis of the ’80s and’ 90s. After 2008, they were extended to major banks and automakers. During the pandemic, bailouts were offered to almost every business that requested them.

In developed countries, governments have deployed more fiscal stimulus as a percentage of GDP with each successive crisis. In the United States, fiscal stimulus has hit a new post-world war record of 4% of GDP after the dotcom collapse, 7% after the financial crisis and 13% 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 deficits and debts so sharply without central bank support. And central banks have developed aggressive support, both in keeping borrowing costs low and as buyers in debt markets. I calculate that last year the combined fiscal and monetary stimulus measures hit a record 28% of GDP in the United States and 40% on average in developed economies.

So why does the myth of the small government flourish, when these facts do not support it?

the history is generally told as a story 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 seen as followers of those free market orthodoxies, which have helped spread “neoliberal” ideology around the world. By mixing up the many episodes in which neoliberal thought has shaped politics, commentators create the picture of a constant decline in government.

But free market ideas have not reduced the size of the state ship, except for some privatization of state-owned enterprises. Much of the rest was just conversation. Many Republicans echoed Reagan’s view that “the government is the problem”, but their main solution has been to cut taxes, rarely matched by spending cuts. Since 1980, every Republican president has experienced deficits every year, as have all Democrats except Clinton.

The perception that governments have pulled out, letting the markets run wild, is also being influenced by the surge in stock and bond prices. Worth $ 12 billion in 1980, global stocks and bonds are now worth nearly $ 370 billion. But that rise may be less the result of government withdrawal, in the form of deregulation, than of state support, especially bailouts and easy money from central banks.

Finally, the free market ideology has transformed the former 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 retreating everywhere. Progressive Biden supporters can to rent him for ending the small government, but that did not happen in the United States.

The debate over Biden’s leadership in America and around the world must begin with a clear understanding of where he came from. His plans – for several multi-billion dollar spending programs, new regulations, etc. – are accurately described as the most radical of any president in decades. But they do not mark an end. They signal the latest escalation of great government.

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