Government: Too Big to Fix?

In 1924, President Calvin Coolidge spoke to a group of business owners.

“Unfortunately the Federal Government has strayed far afield from its legitimate business,” he told them. “It has trespassed upon fields where there should be no trespass.”

If it was trespass then, today it’s grand larceny.

By 1930, government spending at all levels—federal, state, and local—was just 12% of America’s economic output. By 2020, it was 45%.

And it’s not just spending. The Federal Register—the list of all federal regulations—grew from 2,600 pages in 1936 to 90,000 in 2023.

Administration after administration, decade after decade, the U.S. government just keeps getting bigger.

Why?

Proponents of bigger government say that as America’s challenges grow, the only entity that can meet these challenges is the government.

Are they right? 

Let’s consider three major areas of spending: education, healthcare, and social welfare.

Education comprises about 14% of all government spending. From 1966 to 2016, adjusted for inflation, spending per student nearly tripled from $4,700 to almost $14,000.

Has student performance nearly tripled?

Nope.

Math and reading scores have barely budged, and SAT performance hasn’t improved at all.

On a state-by-state basis, it’s even worse.

California spends $24,000 per student, and its K-12 performance is 37th in the nation. Chicago has doubled its school spending since 2012 to $29,000 per student, and test scores have plummeted. Only 1 in 4 students can read or do math at grade level!

Now let’s consider Medicaid—health care for the poor—which cost about $800 billion in 2022, or over 8% of all government expenditures.

That’s a lot of money. Is it making poor Americans healthier?

In a 2013 paper in the New England Journal of Medicine, researchers studied the expansion of Medicaid coverage for low-income adults in Oregon. They found that “Medicaid coverage generated no significant improvements in… physical health outcomes.” 

The results are also disappointing for the federal welfare programs that comprise America’s broad “social safety net.” These programs make up more than 20% of all government spending. In 2022, the federal government spent $9,000 per household on 80 different welfare programs.

But these programs—in addition to mind-blowing costs—have all sorts of unintended consequences. 

For example, Americans have been famous for their mobility—their eagerness to follow opportunity wherever it takes them. But a 2018 Yale Law School study found that welfare programs often discourage low-income people from relocating to find better-paying jobs. Why? Because they don’t want to lose the benefits they are getting in their state.

To recap, 41% of government spending goes to an education system that hasn’t made us smarter, a healthcare system that hasn’t made us healthier, and a welfare system that hasn’t made us more prosperous.

Maybe money isn’t the problem. Maybe government isn’t the answer.

There is one more big factor to consider. All this non-productive government spending has landed us deeply in debt. 

In 2024, the U.S. federal government’s debt surpassed $35 trillion. The interest on that debt will surpass our entire defense budget in 2024.

And that’s not a static number. It keeps growing.

The “big government” crowd that dug this hole has an answer for how to climb out:

“Tax the rich.”

Let’s see what would happen if we did. 

A Cato Institute study considered what would happen if the government taxed 100% of all earnings above $500,000. 

Putting aside the absurdity of such an action, the study found that we would still be $200 billion short of covering the federal budget. And that assumes people wouldn’t change their behavior in response to such confiscatory taxes. Why would anybody try to make a lot of money if they couldn’t keep it?

There is a way out of this mess, but it will take a change of mindset. We don’t have to look as far back as Coolidge to get us on the right path—just to Ronald Reagan. 

Here’s what he said: "Government is not the solution to our problem; government is the problem."

For America’s first 160 years, until President Franklin Roosevelt’s New Deal, the government played a remarkably modest role in Americans’ lives. And the nation prospered. The world had never seen anything like it.

Even as the government has ballooned over the past nine decades, it has not been able to stamp out Americans’ knack for ingenuity and innovation.

But at some point, something will have to give. No great civilization has survived the enormous levels of debt that the U.S. government is now assuming. 

Why would we be different?

I’m Joshua Rauh, professor of finance at Stanford and Senior Fellow at the Hoover Institution, for Prager University.