How Did We Get Here--A Recap
Big Government Goes Viral
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Government big enough to supply everything you need is big enough to take everything you have ... The course of history shows that as a government grows, liberty decreases. - Thomas Jefferson
Back in the late 1700’s when our independence from Britain was declared, the colonies had some idea of what they didn’t want in a ruling government. They envisioned a limited government that would protect individual rights and liberty and that would rule by majority. Since then, the federal bureaucracy has evolved from its creation as a protector of liberty and individual rights to securing our welfare and economic well-being. Today the governments’ involvement in our daily lives is ubiquitous. Just a few days ago it was announced that the Compensation Czar would order pay cuts for the recently bailed out firms; 90% pay cuts for the 25 most highly compensated persons in each firm. In the past year we have witnessed the administration asking for the resignation of Rick Wagoner, CEO of General Motors and choosing his replacement, an unprecedented event usually left for the boards of directors. The nearly 2,000 page health care bill being debated today makes the choice for us as to whether or not we elect to insure ourselves for health care and highly regulates employers’ options for insuring their employees. It may be the biggest single power grab ever. The current administration’s proliferation of czars has taken the bureaucracy to a whole new level as the utilization of these czars ostensibly amounts to a usurpation of power by the executive branch unchecked by congress and therefore beyond accountability. There has been a fundamental shift from thinking that private enterprise can create wealth and solve problems more efficiently than the bureaucracy to the reverse; anything the private sector can do, the government can do better. This flies in the face of the beliefs of the authors of the Constitution as eloquently stated by one of the most influential of those authors:
James Madison: “If industry and labor are left to take their own course, they will generally be directed to those objects which are the most productive, and this in a more certain and direct manner than the wisdom of the most enlightened legislature could point out.”
The First Major Event in the Expansion of the Federal Government
The original intent of governments’ role in our lives was set forth in the Articles of Confederation agreed to by Congress in 1777 and in force from 1781 until being replaced by the Constitution ratified in 1788. The role of government was envisioned to insure cooperation among the states and protection of individual rights. The Articles of Confederation, Article III states: “The said States hereby severally enter into a firm league of friendship with each other, for their common defense, the security of their liberties, and their mutual and general welfare, binding themselves to assist each other, against all force offered to, or attacks made upon them or any of them, on account of religion, sovereignty, trade or any other pretense whatever.” One of the key architects of the Constitution, James Madison believed that the confederacies of the independent states as framed in the Articles of Confederation were inadequate and that the central government lacked the power to regulate commerce and set commercial policy. It didn’t have the power to tax, support a war effort or settle disputes between states. He and other attendees of the Constitutional Convention believed the answer was a strong central government with three branches structured with checks and balances over the others. This highly centralized government would be given veto power of laws enacted by state legislature. There was a dissenting opinion among the Anti-Federalists who worried that the Constitution gave the federal government too much power and could result in monarchy. The Federalists prevailed and the Constitution became the first major milestone in the expansion of the federal government
Regulation of Commerce and Trade, the Federal Reserve and the IRS
In 1789 there were only four cabinet departments: The Department of State, The Department of the Treasury, The Department of Justice and the Department of Defense (called the Department of War until 1949 when the Department of Defense was officially created). In 100 years only two more cabinet departments were added, The Department of the Interior and the Department of Agriculture in 1849 and 1889, respectively.
In the late 1800s/early 1900’s saw a substantial increase in federal regulations. The Interstate Commerce Commission (ICC), a former independent agency of the U.S. government was established in 1887; it was charged with regulating the economics and services of specified carriers engaged in transportation between states. Surface transportation under the ICC’s jurisdiction included railroads, trucking companies, bus lines, freight forwarders, water carriers, oil pipelines, transportation brokers, and express agencies. The Sherman Antitrust Act was passed in 1890. The major purpose of the Sherman Antitrust Act was to prohibit monopolies and sustain competition so as to protect companies from each other and to protect consumers from unfair business practices.. The Food and Drug Administration was created in 1906 through the Food and Drug Act signed by President Theodore Roosevelt. The FDA prohibited interstate transport of illegal food and drugs, prohibited the addition of specific ingredients, regulated product labeling and generally brought about widespread consumer protection in the U.S. The Federal Trade Commission was established in 1914 for the purpose of preventing unfair methods of competition, to seek relief for injured consumers, regulate trade, conduct investigations of commerce and make reports and legislative recommendations to Congress.
In 1913 two very significant events took place with enormous and permanent economic consequences on individual’s lives: The creation of the Federal Reserve and the IRS. The Federal Reserve Act was adopted in 1913 and created the Federal Reserve System or the central bank that controls the Country’s monetary policies using three major tools:
- The buying and selling of U.S. Treasury and federal agency securities in the open market
- Lending to depository institutions directly from their Federal Reserve Bank’s lending facility (the discount window), at rates set by the Reserve Banks and approved by the Board of Governors
- Requirements regarding the amount of funds that depository institutions must hold in reserve against deposits made by their customers.
The roots of IRS go back to the Civil War when President Lincoln and Congress, in 1862, created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. The income tax was repealed 10 years later, revived in 1894, and ruled unconstitutional by the Supreme Court in the following year. In 1913, Wyoming ratified the 16th Amendment, providing the three-quarter majority of states necessary to amend the Constitution to enact an income tax. In 1913, the first Form 1040 appeared, only four pages in length, after Congress levied a 1 percent tax on net personal incomes above $3,000 with a 6 percent surtax on incomes of more than $500,000. In the 1950s, the Bureau of Internal Revenue name was changed to the Internal Revenue Service and today, the tax code exceeds 67,000 pages.
Another Major Spurt in the Bureaucracy’s Growth: The New Deal
When FDR took office as a result of his landslide victory in 1932 he acted swiftly and aggressively to combat the Great Depression that the country was suffering. While opinions on his results are divided, the growth of the federal government under FDR is undeniable. He created over 100 government agencies in what are known as the “Alphabet Agencies”. This era saw the federal bureaucracy’s significant expansion in influence over our lives.
The delegation of legislative power to agencies, and the removal of presidential control over these new institutions were achieved before and during the New Deal, with the creation of “independent regulatory commissions” which were not located within the executive branch. Outside of the traditional branches of government they were not directly accountable to any of those traditional branches. This was noteworthy because the expansion of administrative agencies appeared to involve an expansion of executive power, but instead the reverse occurred. There was actually a decline of executive control and responsibility for administrative policy.
The Federal Communications Commission was created in 1934 with broad, far-reaching consequences. The FCC is “charged with regulating all non-federal government use of the radio spectrum (including radio and television broadcasting), and all interstate telecommunications (wire, satellite and cable) as well as all international communications that originate or terminate in the United States”. There has been controversy and litigation concerning the First Amendment protection of the freedom of speech versus censorship and regulation by the FCC.
The Securities and Exchange Commission was also created in 1934. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The SEC formed in 1934 and resulted from the Securities Act of 1933 that has two basic objectives:
- require that investors receive financial and other significant information concerning securities being offered for public sale; and
- prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The Social Security Act
Perhaps the most significant increase in government’s role in social welfare came from the Social Security Act. President FDR proposed to congress economic security legislation that led to the passage of the SSA on August 14, 1935. The law established two social insurance programs on a national scale to help meet the risks of old age and unemployment: A Federal system of old-age benefits for retired workers who had been employed in industry and commerce and a federal-state system of unemployment insurance. The Social Security Number (SSN) was created in 1936 as a nine-digit account number assigned by the Secretary of Health and Human Services for the purpose of administering the Social Security laws. SSNs were first intended for use exclusively by the federal government as a means of tracking earnings to determine the amount of Social Security taxes to credit to each worker’s account. In 1961 Congress authorized the Internal Revenue Service to use SSNs as taxpayer identification numbers and it has been adopted by a number of institutions, both private and governmental, as a personal identification number.
Expansion as a Result of 9/11 and Fighting Terrorism
The Patriot Act was signed into law on October 26, 2001 in the wake of the 9/11 attacks and increased law enforcement agencies surveillance options by allowing searching of telephone, e-mail communications, medical, financial, and other records. It also reduced restrictions on foreign intelligence gathering within the United States and expanded the Secretary of the Treasury’s authority to regulate financial transactions, especially those involving foreign individuals and entities. It enhanced the discretion of law enforcement and immigration authorities in detaining and deporting immigrants suspected of terrorism-related acts. Finally, it expanded the definition of terrorism to include domestic terrorism, thereby enlarging the number of activities to which the act’s expanded law enforcement powers can be applied.
The Department of Homeland Security was created and became a cabinet level department in 2002, one of 16 cabinets in existence.The creation of DHS involved the largest restructuring of the executive branch of the federal government since the Defense Department was established (1947-49). Before the establishment of the Department of Homeland Security, homeland security activities were spread across more than 40 federal agencies and an estimated 2,000 separate Congressional appropriation accounts. The department is structured around four major organizations and encompasses 22 agencies:
- Border and Transportation Security - Control the borders and prevent terrorists and explosives from entering the country.
- Emergency Preparedness and Response - Work with state and local authorities to respond quickly and effectively to emergencies.
- Information Analysis and Infrastructure Protection - Review intelligence and law enforcement information from all agencies of government, and produce a single daily picture of threats against the homeland.
- Science and Technology -Chemical, Biological, Radiological, and Nuclear Countermeasures. Bring together the country’s best scientists to develop technologies that detect biological, chemical, and nuclear weapons to best protect citizens.
Federal Bailouts to Private Industry
In the last 18 months the term Federal Bailout has become a household word along with “too big to fail” as a blanket justification. The Federal government has gotten directly involved in the finances of private businesses on an ever-increasing scope by allocating billions of dollars, funded by taxpayers, to troubled companies. The federal government channeling taxpayer funds into private businesses clearly does not meet the definition of a free market economy. Economic socialism is defined as an economic system of state ownership and/or worker ownership of the means of production and nationalization as the act of taking an industry or assets into the public ownership of a national government or state. The following are some of the more noteworthy bailouts:
|Penn Central Railroad||1970||$3.2 Billion|
|Franklin National Bank||1974||$7.8 Billion|
|New York City||1975||$9.4 Billion|
|Continental Illinois National Bank & Trust||1984||$9.5 Billion|
|Savings and Loan Crisis||1989||$293.3 Billion|
|Airline Industry (post 9/11)||2001||$18.6 Billion|
|Bear Stearns||2008||$30.0 Billion|
|Fannie Mae/Freddie Mac (includes reserves for future)||2008||$400.0 Billion|
|TARP, various financial institutions||2008||$700.0 Billion|
Quantifying the Growth in Government
The most common method of quantifying the growth of the federal government is by looking at spending as a percentage of GDP. In 1929, 9.1% of total GDP was represented by government spending. During the “New Deal” era it registered in the mid-teens and first popped over 20% in 1941 during WWII. It peaked at 47.9% in 1944 and has been mostly in the high teens and low twenties ever since with 2008 reported at 20%. Year-to-date through September 30, 2009 government spending represents 20.6% of total GDP. Another way to measure the increase in government spending is to put it on a per capita basis. Federal government spending per capita averaged $125 per person from 1792 until 1929 with no significant trend increase. Beginning in 1930 spending per person rose from $250 in 1930 to over $7,500 in 2007 (in 2000 dollars).Year-to-date through September 30, 2009 spending per capita, in current dollars, rose to $9,617 (based on a population of over 307 million).
The federal bureaucracy’s unchecked expansion is dramatically represented by the growth in government agencies and executive cabinet departments. In 1789 there were four cabinets and only two were added by the end of the 19th century. Nine cabinet departments were added in the 20th century and the department of homeland security was added as a cabinet department in 2002. To get some sense of the number of government departments and agencies today, the complete A-Z list from USA.gov fills 11 single-spaced typewritten pages.
The appropriate scope and role of the federal government and its involvement in the private sector is subject to debate, but what is undeniable is the inexorable growth of its reach and influence. By all measures, government spending, the number of agencies and cabinets, or the amount of regulation and legislation, the federal bureaucracy has steadily expanded its reach and influence in our lives. The Federal Reserve Bank of St. Louis in a 2008 working paper set forth a theory that the intractability of government entitlement programs could be described by path dependency. Path dependency is defined as “tendency of a past or traditional practice or preference to continue even if better alternatives are available”. The Fed’s working paper says: “Theories of path dependency state that there is auto-correlation in government spending and that removal of programs is very difficult once a government agency or program is in place. Government spending has considerable inertia, and changes in the level of real government spending from year to year are more likely to be increases as opposed to decreases. Path dependency explains why government spending continues to grow seemingly independent of the state of the economy”. Based on our own history and the history of other civilizations, it doesn’t seem plausible that the federal bureaucracy, or government’s role, will decrease. It’s truly frightening to extrapolate past trends to estimate future growth. Perhaps the key question we should ask ourselves is, at what point does government intervention decrease productivity, innovation, invention and advancement?
- Testimony Before the US Senate Committee on the Judiciary, October 6, 2009 (Examining the History and Legality of Executive Branch Czars)—provided by Heritage.Org
- Research Division of the Federal Reserve Bank of St. Louis Working Paper Series
- Federal Growth Before the New Deal—Randall G. Holcombe
- The US National Archives and Records Administration
- ProPublica.Org—History of US Government Bailouts
- USA.Gov- A-Z Index of U.S. Government Departments and Agencies
- Department of Homeland Security
- Social Security Administration
- The New Deal - Wikipedia
Dennis Jones resides in Orange County, California with his wife and two children and has made his living as Chief Financial Officer in the Restaurant Industry for the past 30 years. He received his MBA from Long Beach State University and has a BS degree in Finance from the same institution.