Leaders 13“K
eep youreye on one thing and one thing only: how much
government is spending,” Milton Friedman once said. To
day his eyes would be popping. Governments have spent $17trn
on the pandemic, including loans and guarantees, for a com
bined total of 16% of global gdp. On current forecasts, govern
ment spending will be greater as a share of gdpin 2026 than it
was in 2006 in every major advanced economy. America is about
to put $1.8trn into expanding its welfare state; Europe is doling
out a €750bn ($850bn) investment fund; and Japan is promising
a “new capitalism”, with even more government largesse.
In the coming decades the state’s economic footprint will ex
pand yet further. Fourfifths of the world economy is now sub
ject to a netzero emissions target, a goal that in Britain is pro
jected to raise the governmentdebttogdpratio by 21 percent
age points by 2050 as the state subsidises decarbonisation and
growth slows. And many countries have ageing populations that
will demand vastly more spending on health care and pensions.
It would be easy for classical liberals such as this newspaper
to despair at government’s relentless march. As the state has
grown during the pandemic, its failures have been on full dis
play. Early in the crisis America’s publichealth authorities hin
dered private labs developing their own tests for the virus; this
year they took until October to approve rapid tests that could
have been available before the summer. For
months Europe’s vaccine rollout was too slow.
China once celebrated its response to the virus
as a victory for a strongstate model. Now its
zerocovid strategy exemplifies the inflexibility
of unchecked centralised power. One of the
scandals in which British politics is mired is ov
er whether its leaders took advantage of the cri
sis to award lucrative contracts to their pals.
The longterm threat of a big state is that such bureaucracy,
institutional failure and corruption become routine and wide
spread, making people poorer and limiting individual freedom.
But these dangers are mixed with an opportunity. To understand
how, consider why government grows.
As our Briefing this week explains, the state almost always
expands relative to gdpover time. Three forces are at work. The
first is obviously malign. Inertia and mission creep make gov
ernment hard to pare back. Voters and lobbyists who benefit
from a regulation or item of spending have every reason to work
hard at preserving it, whereas the many taxpayers who pay for
pork barrels have better things to do than petition politicians to
get rid of them. The bureaucrats in charge want to defend their
turf and careers. When a programme fails, its supporters say it
could still succeed if only it were given more money.
The second force is a fact of life. Prices of the services welfare
states provide, such as health care and education, grow faster
than the economy because of their high labour intensity and low
rates of productivity increase. Though government inefficiency
can make things worse, this “cost disease” afflicts the private
and public sectors alike. It comes with the territory.
The third force is that governments today have more things
to get done. As voters became richer over the 20th century theydemanded more education and more of the expensive health
care that takes advantage of the latest science. Today, as they age,
they want to keep up spending on the elderly. And, increasingly,
they want governments to do something about climate change.
These three forces are plain to see in the true impact of Mar
garet Thatcher and Ronald Reagan, the antigovernment
freemarketeers who loom largest in the public imagination.
They are often said to have laid the groundwork for the “neolib
eral era”. In fact, they did not leave a sustained legacy of smaller
government. In 2019 America’s federal government spent a high
er share of its gdp than in any of the ten years preceding Reagan’s
presidency. Three decades after Thatcher left office—one of
those decades being defined by austerity—Britain’s Conserva
tive government will soon preside over the highest sustained
spending as a share of the economy since the preThatcher era.
The lasting victory of Reagan and Thatcher—and other re
formers in Sweden, New Zealand and elsewhere—was over the
first of the forces for big government. They realised that the state
is at its worst when it is swollen by the distorted incentives of in
siders to seek ever more control. Governments rightly sold off
nationalised firms, cut back regulations, simplified some taxes
and promoted competition. A consensus emerged about the
limited role of government in liberal societies. Its adherents
welcomed markets in most of the economy, but
permitted redistribution and spending on pub
lic services to make the world fairer.
Today this consensus is under threat just
when it is needed most. As ageing and climate
change irresistibly increase government’s size,
it is vital to recognise what the state can and
cannot do well—and to avoid Leviathan wield
ing its might to the benefit of insiders and cro
nies. The argument for limited government should today be
about the nature of the state’s interventions, not whether limit
ing global warming or providing for the elderly are necessary.
One task is to maximise the role of markets and individual
choice. Climate change should be fought with a price for carbon,
researchanddevelopment subsidies and highly scrutinised
public investments, not by rationing flights, promoting green
national champions or enlisting central banks to distort finan
cial markets. The welfare state should focus on redistributing
cash and letting those in need choose what to do with it, not set
ting up new bureaucracies such as President Joe Biden’s pro
posed federal childcare system. Taxes should be broadbased
and friendly to investment.The supersized state
The state must also seek to be nimble and efficient. Income sup
port for households should be automated where possible as the
financial sector becomes more digitised. Much formfilling can
be eliminated, as Estonia’s war on paperwork has shown. If there
were fewer, betterpaid bureaucrats, the public sector could at
tract more talented staff. And politicians should be willing to
start afresh when tackling new problems, rather than relying on
lacklustre incumbent departments. The biggest successes ofAs the state’s footprint expands, how should classical liberals respond?The triumph of big government