Beneath these changing ideological tides a number of historians and economists have pointed to economic forces that determine the size of government. Writing in the 1880s, German economist and economic historian Adolph Wagner wrote that the growth of modern industry would produce increasing political “pressure for social progress” and thereby continuous expansion of the public sector. In part, this would happen because competitive nation-states would find it in their interest to appease labor and to meet, at least partially, its demands for social justice. Wagner’s prediction has proved accurate in many cases, and the idea that the public sector will inevitably expand relative to the private sector has come to be known as Wagner’s Law. A number of American economists have accepted Wagner’s Law but emphasized a different underlying force: the increase of real per capital income. Government programs that help the disadvantaged, protect the environment, and the like may be luxury goods: We buy disproportionately more of them when our income rises. Other long-term trends may also
Influence the demand for government. Global warming, for example, has increased the demand for programs to preserve the environment and minimize carbon emissions.
What about pure transfer payments? A poor person could be expected to vote for heavy taxes on the rich. We might expect, therefore, that in a democracy in which the rule of one-adult-one-vote was followed, income tax rates would be highly progressive, and after-tax incomes would tend toward equality. Indeed, the surprising thing about most industrial democracies is not that they have progressive income taxes, but that those taxes are not even more progressive.
Economists Allan H. Meltzer and Scott F. Richard (1978 and 1981) devised a rational theory of transfer payments. In their model, people vote for programs that redistribute income in their favor but take into account the disincentive effects of higher taxes—the tendency of high marginal tax rates to discourage work and savings. The poor do not automatically vote for “soak-the-rich” taxes because they think that, as a result, the whole economy will be less productive and that they will end up with less than they had before. Economist Sam Peltzman (1980) developed a related theory. Based on international comparisons, he argued that a more equal distribution of income generated by the market, paradoxically, accelerates the growth of government because it increases the political strength of the group that favors further redistribution through the government. When the poor are very poor, they are not able to produce political pressures that advance their interests. Economic growth empowers the poor and makes them a political force to be reckoned with.
It is common for an academic writer to push his or her own theory as if it were the one and only cause of the trends observed. Product differentiation is as useful to academics as it is to producers of automobiles or insurance policies. The theories of the growth of government that we have examined, however, seem to complement one another. Schlesinger’s emphasis on the allegiance of political leaders for the ideologies of their youth; the Friedmans’ emphasis on the iron triangle of bureaucrats, legislators, and interest groups; Higgs’s emphasis on the role of crises; and the other theories we have examined; all contribute to our understanding of the complex process that produced first an expansion and later a (limited) retrenchment in the role of government in the economy during the postwar era.
World History
