For years, it has been an article of faith in American politics that more government is bad for the economy. Candidates for office run against Washington and condemn the overreach and toxicity of government, with hardly anyone batting an eye.
But the conventional wisdom that government has only negative effects on markets forgets the invaluable role that government played in creating our national wealth in the past. Re-learning this history and its lessons is critical to fostering widespread prosperity in the twenty-first century.
Government has had few defenders in politics over the last 35 years. On the right, beating up on government has been a sure-fire way to gain approval on the right. In the 1980s, Ronald Reagan issued a clarion call that government was the source of our problems, not its solution. In the 1990s, House Speaker Newt Gingrich declared open warfare on government. And in the Obama years, Senate Majority Leader Mitch McConnell ground the legislative process to a halt to breed frustration with government and reap electoral gains for his anti-government party.
Liberals have let the right’s government bashing go unchallenged, and at times have actively acquiesced to it. Bill Clinton essentially conceded conservatives’ point when he pronounced the era of Big Government over in 1996. The center-liberal position was that government needed to get smarter, more effective, and more efficient—not grow larger. We see this today in Hillary Clinton’s campaign. Though her policy platform implicitly recognizes that government can intervene constructively in the economy, she has criticized Bernie Sanders for wanting to grow the size of government. And while Sanders unabashedly favors expanding government programs, he also sees our current government as overrun with special interests and big money. This too darkens our confidence in our governing institutions.
The net effect has been a steady cultural decline in our collective faith in the capabilities of government. The right has attacked government as inherently destructive; the left has ceded the point outright or through silence, while bemoaning government as hopelessly corrupted.
But what if this widespread cynicism about government has it all wrong? That’s the message of Jacob Hacker and Paul Pierson’s important new book, American Amnesia. According to the two political scientists, the American experience shows that “government and markets, working in tandem, have steadily increased human welfare.”
Hacker and Pierson demonstrate just how indispensable government was in creating twentieth-century prosperity in the United States. Beginning just after the turn of the century, government interventions vastly improved public health, extended lifespans, stabilized financial markets, and laid the groundwork for robust economic growth. Government fronted the research and development that led to revolutionary technologies years later, laying the platform upon which companies like Apple, Google, and countless others would later thrive
The result was a century of phenomenal improvement in human wellbeing. Because government interceded to craft a mixed economy, Americans became wealthier, healthier, lived longer, and enjoyed the fruits of innovation and technology.
For much of the twentieth century, government and markets worked in happy (if at times begrudging) harmony. The heavy thumb of government stepped in when the market failed to account for harmful externalities like pollution. Government produced public goods like roads, infrastructure, education, and scientific research that markets wouldn’t. This laid the groundwork for the dexterity of markets to build off of public investment to innovate and improve quality of life.
The mixed economy became so institutionalized that we eventually lost sight of the role government played in providing these crucial market supports. By the end of the century, government had become widely demonized while entrepreneurs were lionized. Yet during this same period, the mixed economy stopped functioning as well as it once had. Inequality steadily rose, wages stagnated, our financial sector once again periodically jeopardized the economy, growth and recovery slowed, and wealth flowed more and more to the highest earners.
The solution is for government to reclaim its place in creating healthy conditions for the mixed economy to operate. The deterioration of the mixed economy has left “money on the table just waiting to be picked up,” write Hacker and Pierson. Government action can create positive-sum outcomes, making “our already prosperous society much more prosperous.”
Two of the main ways government can cultivate a thriving twenty-first century mixed economy are to invest in public goods and to insure against common risks. When government invests in physical and intellectual infrastructure that is collectively useful but no one firm would invest in on its own, our markets are made better off by this government intervention. And when government protects us against risk, it greases the wheels of markets by giving entrepreneurs and workers the security to take chances.
Sometimes the social insurance and public good functions of government dovetail together. Take our child poverty crisis, where one in five children live in poverty today. A decent safety net would protect children from the ravages of poverty on humanitarian grounds alone. But high childhood poverty is also a market failure that is bad for our mixed economy. Growing up in poverty stunts lifetime academic and professional achievement. By one count, child poverty costs our economy some $672 billion annually. It is impossible to know how many would-be innovators and leaders we have lost amid the squandered potential of children suffering in deprivation. Investing in children to protect them from poverty is thus also a public good—and one that pays off handsomely in the long run.
Moreover, the absence of government action can often impose burdens on the private sector. In the void left by government inaction to address the student loan and college tuition crisis, private firms are increasingly shouldering the burden of helping young workers repay their burdensome debts as another fringe benefit. But when government tackles common social problems and provides access to benefits, like health care and pensions in old age, firms are relieved of some of the obligation to manage these extraneous benefit programs. Government actions to take on the social insurance responsibilities that have traditionally (and bizarrely) been grafted on to our employers encourage a dynamic, nimble future for the American economy.
For too long, the virtues of government have gone unheralded in our politics. To make the mixed economy work again, we re-learn a tried and proven method to success that has largely been forgotten: that in the story of American prosperity, government has always been an integral force.