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In this present crisis, government is not the solution to our problem; government is the problem.… It is my intention to curb the size and influence of the Federal establishment.2

He not only curbed the government’s steering of the economy but also, wittingly or not, turned the levers of power over to the highest bidder. Fifteen years after Reagan came to power, Democratic President Bill Clinton made the handover of power to the corporate sector a bipartisan reality when he declared, “The era of big government is over.”3 Clinton was especially the enabler of Wall Street power, which gained enough leeway to win tens of billions of dollars per year of bonuses and cost the world tens of trillions of dollars of financial losses in the great crash of 2008. After Clinton, the United States no longer had a center-right Republican Party and a center-left Democratic Party, but rather two center-right parties whose heated differences on the surface mask a common agenda at the core. Washington’s obeisance to the rich while squeezing the poor has so far proved to be bipartisan and durable. Yet the results are so meager for the broad public that its death knell will also toll.4

The Rise of Public Spending

The rise of the federal government’s economic role from the New Deal onward is well captured by a single key statistic: the size of civilian (nondefense) federal spending relative to national income (Figure 4.1). From around 3 percent of GDP in 1930, the civilian budget rose to 8 percent of GDP by 1940 under the aegis of the New Deal.5 By 1950, the share of federal civilian spending had reached 10 percent of GDP. Civilian spending gradually ascended to around 12 percent of GDP by 1970 and 16 percent of GDP by 1980, where it stayed roughly unchanged until the 2008 financial crisis. (The 2008 crisis ushered in a spike in spending that may or may not prove to be temporary, depending on the budgetary choices we make.) The long-term rise in spending occurred in every high-income country in the world, in fact more in Europe than in America. The long-term rise in public spending relative to GDP reflects the deep need of every modern society for a mixed economy rather than any specific twists and turns of U.S. politics.

Figure 4.1: Civilian Federal Spending as a Percentage of GDP, 1930–2010

Source: Data from Office of Management and Budget Historical Tables.

Figure 4.2 displays the allocation of civilian spending between “mandatory” programs such as Social Security and Medicare, where the benefits are written into law, and “discretionary” programs such as NASA’s space missions and U.S. energy research, where the spending has to be approved annually by Congress.6 Up until 1980, both the mandatory and the discretionary parts of the budget had an upward ascent. Since 1980, the mandatory spending has risen slightly while the discretionary spending has been cut as a share of GDP. Therein lie many of the crises of poor governance today.

The federal programs brought in by the New Deal and then extended during the 1940s to 1960s include several kinds of activities: construction of physical infrastructure (roads, bridges, electricity, dams), regional development (such as in the Tennessee Valley), increased provision of public services (health and education), retirement and disability pensions (Social Security), support for science and technology, public administration, income security (unemployment insurance), transfers to the poor (food stamps), and others. Almost none of those programs existed before 1933, when Roosevelt assumed the presidency in the depths of the Depression.

Figure 4.2: The Trajectory of Civilian Spending as a Percentage of GDP, 1962–2010

Source: Data from Office of Management and Budget Historical Tables.

Roosevelt’s New Deal policies generated enormous controversies in their day, with many of Roosevelt’s fervent opponents decrying the rising role of government in the economy, much as libertarians call for a scaling back of government today. Nonetheless, after the United