Lesson 14: The Rise of Big Government

KEY FORCES IN AMERICAN HISTORY

1.  A key to understanding people’s behavior is figuring out the incentives they face.

2.  Economic freedom, rule of law, and well-defined property rights promote growth and prosperity.

6.  Government is the arena of competition among interest groups. 

ECONOMIC CONCEPTS that support the historical analysis:

Taxes

Regulations

Externalities

Rent Seeking

Special Interest Groups

CONTENT STANDARDS

History Standards (from National Standards for History by the National Center for History in the Schools)

Era 7 – 1: The student understands how Progressives and others addressed problems of industrial capitalism, urbanization, and political corruption

Era 7 – 2:  The student understands the changing role of the United States in world affairs through World War I

Era 7 – 3:  The student understands how the United States changed from the end of World War I to the eve of the Great Depression

Era 8 – 2:  The student understands how the New Deal addressed the Great Depression, transformed American federalism, and initiated the welfare state

Era 9 – 1:  The student understands the economic boom and social transformation of postwar United States

Era 9 – 3:  The student understands domestic policies after World War II

Era 10 – 1:  The student understands recent developments in foreign and domestic politics

Era 10 – 2: The student understands economic, social, and cultural developments in contemporary United States

Economics Standards (from Voluntary National Content Standards in Economics)

Standard 15: Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.

Standard 16: There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

Standard 17: Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.

Standard 18: A nation’s overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy.

KEY IDEAS

•  We have always had government but until the 20^th century the role of government was greater at the state and local levels.  Some government is necessary to provide the institutions to protect property rights and establish the “rules of the game” for economic and political activity.
• Rise of big government at the federal level is a 20^th century phenomenon.  Increases have been in both scope and scale of activities, regulations, and taxes.
• The growth of government resulted from both demand side (special interests; externalities; and changes in ideology) and supply side (crises; structure of government, e.g. seniority and committee system; ideological changes in the Supreme Court) forces.  Crises have historically led to increases in the scope of government activities.
• The incentive structure embedded in the principal-agent relationships of government suggests that citizens will not get what they desire from government.  Citizens are “rationally ignorant”; committees composed of preference outliers; seniority allows legislators to exercise some of their ideological preferences; laws are administered through bureaucracies.

• _______1_______Number of citizens

  Special interests have a greater incentive to lobby than citizens because they receive the full benefit from participation while informed citizens who would act in the “public” interest only receive

of the benefit from their participation.

• Committees matter because politicians self-select to committees and citizens know more about the benefits that they receive than the costs that they pay, for benefits of others.
• Political Competition and Competition among the media limit opportunistic behavior of politicians