That’s one of the questions Douglas Carswell MP attempts to answer in his new book ‘The End of Politics and the Birth of iDemocracy’.
To many people the answer is simple: democracy. This view was most recently expressed by Ron Paul in the aftermath of Mitt Romney’s defeat to President Obama on Tuesday night. Echoing Romney’s earlier ’47 per cent’ sentiments, Paul said:
"If you look at the numbers and if you look at the way pure democracy works, pure democracy is dangerous…The majority dictates against the minority. So, right now the majority are receiving a check...That is why people were sort of surprised with these conditions that this president can get reelected. That is a bad sign in that there are more on the receiving end. People do not want anything cut. They want all the bailouts to come. They want the Fed to keep printing money."
In other words, democracy enables the majority to demand services paid for primarily by a minority of the population.
Carswell disagrees with this analysis, for the simple reason that the chronology of the democracy = bigger government argument does not work. For example, almost every adult male in the US had the vote from the era of Jacksonian democracy in the 1830s and 1840s, yet federal spending remained around 3 per cent of GDP during peacetime in the 19th century. Even in the catastrophic recession in the 1890s the enfranchised masses didn’t vote for redistributive policies. Similar stories in France and Britain.
Yet in the much less democratic Prussia, big government was the norm. Even in the 1930s, when government did start growing bigger, it grew even bigger in non-democratic countries like Germany and Italy than in democratic states.
So democracy is clearly not a sufficient or necessary condition for the growth of government. But if not democracy, then what?
Well, Douglas’s thesis is that the growth of government can be directly linked to the introduction of unequal (progressive) taxation. Without facing the direct or the proportionate costs of an expansion of government, a majority of people opt for more expensive government. It means that the goose can be plucked to obtain the largest amount of feathers with the smallest amount of hissing. The People’s Budget of 1909, for example, promised not to cost the average working man. Over time the tax burden was then increased incrementally.
Wars also had an impact, of course. They eliminate the constraints of government. But these, Carswell argues, tell us how government grew, not why it was able to.
It’s certainly an interesting line of argument – and Douglas does provide some evidence that countries with bigger income tax rate ranges also tend to have bigger governments (i.e. where taxes are most ‘progressive’). But this doesn’t necessarily mean that Paul is wrong – it might be that the growth of government was facilitated by progressive taxation but yet having apparently benefited from the growth of government, a large proportion are unwilling to vote to eliminate those benefits.
As advocates of smaller government our challenge is therefore to set out to people that there is no such thing as a free lunch, and voting for sustained high government spending or transfers will make everyone worse off in the long-run.
The UK government is currently running a deficit well in excess of £100 billion, and even if the government took 100% of the income of the top 1% of income earners in income tax, there would still be a very large Budget deficit, especially once you account for the loss of other tax revenues (NICs, VAT etc). So continued high government spending is inevitably going to mean higher taxes on the middle classes or lower further down the track.
And this is what makes the debate on, say, child benefit so frustrating. As a population we’ve become accustomed to government spending beyond the tax base by borrowing. People are now complaining that child benefit is being removed from better off families. But given the budget needs to be balanced at some stage, it will probably be the case that these people will be no worse off in the medium-term, because taxes would have to be raised on them to churn through government and be returned to them in the form of child benefit anyway.
In other words, despite the calls for the wealthy to ‘pay their fair share’, we are reaching the stage where more and more of the population will have to face higher tax burdens if all existing government functions and transfers are to exist. These will be deeply damaging to our growth prospects.
Now, Douglas is an optimist. He thinks the scale of our fiscal challenge and the erosion of the traditional tax base due to the increasing importance of technology and intellectual property will force governments to get smaller, to the benefit of us all. Perhaps we're all one step closer to realising what Frederic Bastiat once said is true: "Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”
This certainly seems possible in the medium term, though I doubt any transition would be smooth. After all, we’re already seeing attempts to grab wealth as a means of keeping the party going a bit longer.