America’s Fiscal History: From Liberty to Paternalism

If passed in its proposed forms, the $3.5 trillion of new “entitlement” programs and spending over the next ten years, and the accompanying call for increases in a wide variety of taxes, will represent the largest expansion of the American welfare state since Lyndon Johnson’s Great Society agenda in the second half of the 1960s. It will further envelop the United States in the stranglehold of political paternalism.

Slightly over a century ago, the Austrian-born economist, Joseph A. Schumpeter (1883-1950) wrote about “The Crisis of the Tax State” (1918) as the First World War was drawing to a close. He explained that:

The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which its results are put . . .

The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare – all this and more is written in its fiscal history, stripped of all phrases. He who knows how to listen to its message here discerns the thunder of world history more clearly than anywhere else . . . The public finances are one of the best starting points for an investigation of society, especially though not exclusively of its political life.

How Relatively Small was the American Government

In 1868, all of the expenditures of the federal government came to a little over $301 million (or about $5.8 billion in 2021 inflation-adjusted dollars). That was the first year that the famous World Almanac was published. On page 71, the entire federal government – the names of the president (Andrew Johnson), the seven cabinet department heads (State, Treasury, War, Navy, Interior, Attorney General, and Postmaster-General), plus the names and assigned countries of every American ambassador fit onto one page. The biggest welfare-type expenditures were for pensions, a good part of which was for Civil War veterans, which made up about 28 percent of government spending that year.

But there was no Social Security, no Medicare or Medicaid, no unemployment insurance, no subsidized public housing, no food stamps, no farm price supports, nor any of the programs and activities that we associate with modern political paternalism. The first regulatory agency did not come into existence until 1887, with the Interstate Commerce Commission (ICC).

Looking at The World Almanac a quarter of a century later, in 1893, the federal government had grown, but it only took up two pages out of the volume, and this, seemingly, was mostly due to adding personnel to the same cabinet-level departments, and with the addition of Department of Agriculture (1889). In 1893, government spending came to $465.1 million ($14.1 billion in 2021 inflation-adjusted dollars).

Government Plunder and Privilege Have Always Existed

What guided the fiscal policy of the federal government was a political philosophy of man, society, and government. Even with the growth and centralization of governmental authority during and following the American Civil War from 1861-1865, compared with the period before 1860, the philosophy of individual liberty, mostly unrestrained free enterprise, and constitutional federalism was fairly closely adhered to.

Yes, there was political corruption and favoritism with a variety of state-level subsidies and government privileges for interest groups. At the national level, the “spoils system,” of granting jobs and government contracts to those who had supported the winning party in Congress or in White House, was, seemingly, pervasive and followed the election cycles. And of course, there was the seesaw of higher and lower protective tariffs.

When the British author, Charles Mackay (1814-1889), traveled throughout the United States in the late 1850s, he had the opportunity to meet the then President of the United States, James Buchanan, in the White House. He described this visit in, Life and Liberty in the United States: Sketches of a Tour (1859):

The president] receives, at stated days and periods, ladies and gentlemen who choose to call upon him, either for business or pleasure, or from mere curiosity . . . There is no man in the United States who has such a quantity of hand-shaking to get through as the President . . .

Never was there a place in which office-hunters and place-seekers more assiduously congregate. The antechambers of the President are daily thronged with solicitants – with men who think they helped to make the President, and who are constantly of the opinion that the President should help to make them.

I thought, when presented to Mr. Buchanan, that he seemed relieved to find that I was an Englishman, and had nothing to ask him for – no place for self, no cousin, or friend, or son for which to beg his all-powerful patronage.

The Spirit of Liberty Made for a Productive Voluntary Society

But in spite of this political profit-seeking by those desiring and expecting a quid pro quo for working to place someone in the highest office in the land, America was a land of individual freedom, self-initiative, private enterprise, and voluntary associations of civil society designed to solve the “social problems” of the day.

The idea and reality of this spirit and practice of liberty was explained by Adam Gurowski (1805-1866), a Polish nobleman who ended up in the United States due to his opposition to the autocratic government in Imperial Russia. After several years living and traveling around the U.S. he shared his observations concerning the differences between the new and old worlds in America and Europe (1857). He summarized the nature of the free and self-governing Americans who took matters peacefully and consensually into their own hands, not expecting or waiting for government to take care of them:

Everything great, beneficial, and useful in America, is accomplished without the action of the so-called government, notwithstanding even its popular, self-governing character. Individual impulses, private enterprise, association, free activity, the initiative pouring everlastingly from within the people, are most substantiated here for what in European societies and nations forms the task of governments . . .

By far the larger number of monuments, works and useful establishments, for industry, trade, for facilitating and spreading tuition and mental culture, universities, schools, and scientific establishments, are created and endowed by private enterprise, by private association, and by individual munificence . . .

Neither individuals separately nor the aggregate people look to the government for such creations; private association and enterprise, these corollaries of self-government – untrammeled by government action – have covered the land [with progress] . . .

All this could not have been miraculously carried out, if the American people had been accustomed to look to a government for the initiative, instead of taking it themselves. Without the self-governing impulse, America would be materially and socially a wilderness.

Liberty and Respect for the Spirit of Free Enterprise

This remained the idea behind the American experience even in the second half of the 19^th century, even if other ideas and policies were emerging to challenge it. Thus, as one more example in 1888, Indiana University professor Walter Raleigh Houghton (1845-1929) published Kings of Fortune, an account of notable Americans who were mostly self-made men in the sciences, the arts and literature, or as ministers or philanthropists. But he also gave significant attention to those Americans who as businessmen, innovators and entrepreneurs had demonstrated the same meritorious qualities of character and achievement. America was a land of freedom and opportunity that made it possible:

The chief glory of America is, that it is the country in which genius and industry find their speediest and surest reward. Fame and fortune are here open to all who are willing to work for them. Neither class distinctions nor social prejudices, neither differences of birth, religion, nor ideas, can prevent the man of true merit from winning the just reward of his labors in this favored land. We are emphatically a nation of self-made men, and it is to the labors of this worthy class that our marvelous national prosperity is due . . .

To an American, business is the quintessence of energy, the well-spring of ambition, and the highway to wealth, honor and fame. On it are based the push and the drive which are daily adding millions to the treasures of this nation, as well as giving us reputation and integrity among the peoples of the world.

The fiscal history of the country, therefore, included low taxes, limited government expenditures, balanced budgets or surpluses to pay off earlier wartime debts, and few regulations and restrictions on private enterprise and freedom of association. This included the belief that self-government did not only mean a voting franchise to select those holding political office, but that each person should be viewed as a self-governing individual over his personal, professional, and social affairs. Government paternalism had no place in it.

Slavery and Segregation Ran Counter to American Principles

It is almost gratuitous to emphasize that in the midst of the general spirit and practice of wide individual liberty, the country was deeply scarred and hypocritical with the parallel institution of slavery in the Southern states. There were problems of this sort well past the South’s defeat in the Civil War, stretching through the decades of legalized, post-war discrimination and segregation following the withdrawal of Union armies from this part of the country in 1877.

But both before and after the Civil War, the United States was pulled, slowly but surely, first in ending the institution of slavery and then abolishing unequal treatment before the law, precisely because slavery and legal segregation were so clearly antithetical to the idea and ideal of the country. That each human being should possess the same equal individual rights under the rule of law, and have the same freedom of association became more widely accepted.

Warnings of Socialism Coming to America

The ideological and political winds began to change in the last decades of the 19^th century and the early decades of the 20^th century. The notions of socialism and government guaranteed “social justice” arose to replace the far more individualist, classical liberal tradition in America. There were American economists who saw this new danger to a society founded on liberty. J. Laurence Laughlin (1850-1933), founder of the economics department at the University of Chicago, warned in his Elements of Political Economy (1887):

Socialism, or the reliance on the state for help, stands in antagonism to self-help, or the activity of the individual . . . Whenever a man does a thing for himself he values it infinitely more than if it is done for him, and he is better for having done it . . . If, on the other hand, men constantly hear it said that they are oppressed and downtrodden, deprived of their own, ground down by the rich, and that the state will set things right for them in time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of all self-help?

They begin to think that they can have commodities which they have not helped to produce. They begin to believe that two and two make five. It is for this reason that socialistic teaching strikes at the root of individuality and independent character, and lowers the self-respect of men who ought to be taught self-reliance . . .

The danger of enervating results flowing from dependence on the state for help should cause us to restrict the interference of legislation as far as possible; it should be permitted only when there is an absolute necessity, and even then, it should be undertaken with hesitation . . . The right policy is a matter of supreme importance, and we should not like to see in our country the system of interference as exhibited in the paternal theory of government in France and Germany.

American Progressives the Children of German Paternalists

Many of an entire generation of American historians, economists, political scientists, and philosophers went in those last decades of the 19^th century to Imperial Germany to study with the professors of the German Historical School. These professors formulated and propagandized a new “state socialism.” This brand of socialism rejected the laissez-faire economics of the past, as well as the extreme Marxian socialism that called for revolution and a root-and-branch overthrow of everything in existing society. (See my article, “American Progressives are Bismarck’s Grandchildren”.)

This “enlightened” and paternalistic socialism would follow policies of expediency and pragmatism in intervening with private enterprise when necessary, nationalizing some industries if required, and initiating the institutions of the modern welfare state that would guarantee employment and better work conditions, health care, government-provided pensions, and a slew of other programs based on compulsion, control, and redistribution of wealth.

It was in Imperial Germany that these Americans became imbued with the non-revolutionary variation on the socialist and interventionist theme. They returned to America and assured their fellow citizens that “This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. This freedom is of an economic sort . . . Social legislation directed against the exploitation of the worker and the consumer insures freedom in many other ways,” said Frederic Howe (1867-1940) in Socialized Germany (1915). “The [German] state has its finger on the pulse of the worker from the cradle to the grave,” he went on, through a panoply of interventionist and socialist legislation.

Doing God’s Socialist Work Through Paternalist Elitism

This was a quasi religious calling. The role of these now enlightened American political paternalists was to guide and direct the country to a higher and more socially just utopia. They saw themselves as the ideological and governmental senior partners of a national awakening.

One prominent voice among them was the economist Richard T. Ely (1854-1943), one of the founders of the American Economic Association. Heady with excitement in the years after returning from his graduate studies in Germany, Ely published, Socialism: An Examination of Its Nature, Its Strengths and Its Weaknesses, with Suggestions for Social Reform (1895). He saw a new paternalist promised land coming for America:

Looking into the future, we may contemplate a society with real, not merely, nominal freedom, to pursue the best; a society in which men shall work together for the common purposes, and in which wholesale cooperation shall take place largely through government, but through a government which has become less repressive and has developed its positive side.

We have reason to believe that we shall yet see great national undertakings with the property of the nation, and managed by the nation, through agents who appreciate the glory of true public service, and feel that it is God’s work which they are doing, because church and state are as one. We may look forward to a society in which education, art, and literature shall be fostered by the nation, and in which the federal government, commonwealth, local community, and individual citizens shall heartily cooperate for the advancement of civilization.

We may anticipate an approximation of state and society as men improve, and we may hope that men outside of government will freely and voluntarily act with trained officers and experts in the service of government for the advancement of common interests.

Yet, even in the wake of Progressive era policies and America’s participation in the First World War, the federal government as a percentage of Gross Domestic Product (GDP) was only 5.5 percent in 1920, and with a budget surplus that was more than 4 percent of total government tax receipts that year. Even though the 1920s were not a return to a supposed laissez-faire “normalcy,” as some historians have tried to portray, the government’s take of GDP had decreased to 3.2 percent in 1929 and was 4 percent in 1930.

Political Paternalism and the New Deal

The big change came with the Great Depression and the coming of Franklin Delano Roosevelt’s New Deal. The “alphabet soup” of government programs, bureaus, and agencies exploded as had not been seen before in American history. Now it was government’s “active” responsibility to assure full employment, provide shelter and food, and direct manufacturing and agriculture, even subsidizing art and entertainment. Huge public works projects were to transform the landscape, remake regions of the country, and supply jobs.

Government became responsible for ensuring a “fair wage” (the minimum wage law), something to live on in retirement (Social Security), and even health care, aid to the arts, and a more “robust” foreign policy featuring global paternalism to match the domestic version.

In 1929, federal expenditures came to $3.3 billion ($52.8 billion in 2021 dollars) and rose to $8.9 billion ($175.2 billion in 2021 dollars) in 1939, for a 270 percent increase in government spending. But there was also the start of a pattern that has continued ever since: deficits. In 1929, government revenues equaled $3.9 billion ($62.4 billion in 2021 dollars); in 1939 they were $6.2 billion ($122 billion in 2021 dollars), a 59 percent increase over the decade, compared to the 270 percent increase in expenditures. The age of perpetual deficit spending had arrived.

As Carolyn Webber and Aaron Wildavsky summarized the change in the role of government in the 1930s in A History of Taxation and Expenditure in the Western World (1986): “The enduring legacy of the New Deal was acceptance by the American public of the doctrine that the federal government has ultimate responsibility for the economy. Belief in collective responsibility grew. There might be arguments about how large government should grow, but the era of small government was over.”

Fiscal Socialism and National Defense

In the post-World War II period, the welfare state may have grown, but its form was a sort of defense-spending Keynesianism. In 1960, the largest component of the federal budget was defense spending, at 42 percent. In the new era of government responsibility for full employment, “fair wages,” and economic growth, a good way to rationalize and justify spending huge sums was to wrap it in the flag of national defense and patriotism.

In the first issue of the “conservative” quarterly, Modern Age (Summer 1957), author, Felix Morley (1894-1982), asked, “American Republic or American Empire”?

“The provision of ‘full employment’ has now become part of the settled policy of our national government, accepted by both of the major political parties . . . Both parties accept the underlying responsibility to intervene if, as, and when private employers are unable to offer jobs. Since the Great Depression, the movement in this direction has advanced from spasmodic work-relief to the ambition of a guaranteed annual wage . . .

On top of the guaranteed job is a whole superstructure of further expectations – pensions, hospitalization, minimum wages, vacation pay, free meals and heaven knows what other ‘fringe benefits’ . . .”

What Morley highlighted was that since national defense is generally accepted as the singular responsibility of the central government by virtually everyone, the American people would accept the rationale of government spending on roads, industry, and employment creation, “so long as people believe that the national security is menaced by a foreign power which seems to make such outlay necessary. And as Americans are not naturally a belligerent people, a constant propaganda must be exercised to make it appear that the potential foe is the personification of evil, and a dire threat to everything that we traditionally hold dear . . . It is impossible to spend a hundred million a day on defense without picturing a perfect enemy.

Those like Felix Morley, or a historian like Arthur A. Ekirch in his classic study of The Decline of American Liberalism (1955), were concerned that such goals as government responsibility for employment, “decent” wages, health care, and the like were carrying the United States in the direction of fiscal militarism and imperial outreach to justify the paternalistic policies expected domestically from a growing number in the general population.

Great Society “Wars” and the Growth of the Welfare State

These fears culminated in and were shattered by the Vietnam War. Lyndon Johnson’s presidency was wrecked by a war in southeast Asia, but at the same time the direction of American fiscal history was shifted away from a foreign policy dominance in terms of the share of government spending on defense and adventures abroad to domestic welfare statism. The domestic wars that LBJ wanted to fight were those on “poverty,” “illiteracy,” “racism,” and so on. They comprised the elements of the Great Society agenda. Over the decades, they have come to overshadow the portion of the federal government’s spending on defense. (See my article, “Why the Social Engineers of the 1960s Failed to Make a ‘Great Society.”)

In 1962, military defense spending comprised 47 percent of that year’s government budget. It has decreased ever since. By 1972, defense spending made up 34 percent of the budget. Twenty years later, in 1992, it had declined to 20.7 percent of government spending. In 2012, it had gone down to 18.5 percent, and in the projected budget for fiscal year 2022, it will be only 15 percent of government spending.

This is not to say that the magnitude of U.S. defense spending is anything other than huge. In fiscal 2022, defense expenditures will likely be around $780 billion. This will be greater than the combined defense spending of the 11 next closest countries in the world (China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, South Korea, Italy, and Australia), the total of which is estimated to be about $760 billion in 2022.

But it is domestic spending that has taken over government spending. When Johnson left the White House in 1969, “entitlement spending” came to 21 percent of all government spending. In 2001, it had reached 41 percent of federal expenditures. And in 2021, it was more than 51.5 percent of federal outlays.

It has not mattered who has been in the White House, or which major political party has held majority control in Congress over the decades. With Joe Biden’s $3.5 trillion expansion of the welfare state, along with regulatory and central planning of green socialism in the name of saving the planet, the United States government is rapidly swallowing up even more of the autonomy and freedom of the private sector. The proposed tax increases on “the rich” and American corporations will weaken the financial ability and willingness of the private sector to undertake the savings, investment, capital formation, and creative innovation without which the economy will only slow down.

The country will be even more suffocated by this threatened growth in the new chapter of American fiscal socialism that Biden and his paternalist friends dream of imposing on the rest of the people of the United States. Let us be clear. The end game of this, if successfully implemented and imposed, could be the end to what remains of personal choice and any economic freedom in the U.S.

The Welfare State and Fiscal Socialism’s Insatiable Appetite

It is not as if there have been no insightful warnings of what may come. The famous German free market economist, Wilhelm Röpke (1899-1966), pointed out where this road leads in The Humane Economy (1960):

If the modern state increasingly takes it upon itself to hand out welfare and security on all sides – first to the advantage of one group, then another . . . a policy which robs Peter in order to pay Paul cannot be said to be immediately obvious. But it degenerates into an absurd two-way pumping of money when the state robs nearly everybody and pays nearly everybody, so that no one knows in the end whether he has gained or lost in the game . . .

It is true, of course, that people do not always realize that when they turn to the state for the fulfillment of their wishes their claims can be satisfied only at the expense of others. We have met the underlying sophism before. It rests on the habit of regarding the state as a kind of fourth dimension, without stopping to think that its till has to be filled by the taxpayers as a whole. A money claim on the state is always an indirect claim on somebody else, whose taxes contribute to the sum demanded; it is a mere transfer of purchasing power through the medium of the state and its compulsory powers. It is astonishing for how long this natural and simple fact can be obscured by the modern welfare state . . .

Röpke also pointed out that those who are ideologically or politically committed to this drive for political paternalism must always look for new and more causes and “victims” to rationalize never ending fiscal socialism and for expanding it in any discoverable way:

In the absence of a sufficient number of genuinely needy people, they have to be invented, so that the leveling down of wealth to a normal average, which satisfies social grievances, can be justified by moralistic phrasemaking. The language of the old paternal government is still current and so are its categories, but all this is becoming a screen that hides the new crusade against anything which dares to exceed the average, be it income, wealth, or performance. The aim of this social revolution is not achieved until everything has been reduced to one level, and the remaining small differences give even greater cause for social resentment; on the other hand, it is impossible to imagine a situation in which social resentment finds nothing to fasten on to any more.

In these circumstances, there can be no foreseeable end to this development as long as the fatuous social philosophy which underlies the modern welfare state is not recognized and rejected as one of the great errors of our time.

Ultimately It is About Individual Liberty vs. Collectivism

What is the underlying social philosophy that has created the interventionist-welfare state and its accompanying system of fiscal socialism, along with regulatory and central planning socialism? It is the rejection of the idea upon which the United States was born with the Declaration of Independence: That individuals have rights; that they may peacefully live for themselves; that human relationships should be based on voluntary association and consensual agreement for mutual benefit. Finally, it is the role of any government to secure the liberty of each human being.

The older political paternalists spoke about “helping the poor,” preventing abuses by “greedy capitalists,” and introducing nationwide improvements for all through “shared” expenses, and to assure full employment. But as Röpke warned, no matter how far the paternalist net is widened, or how much income and wealth is siphoned off from the Peter of the society to redistribution through government to the politically selected Paul, there is the insatiable search for new victims of oppression, new inequalities needing to be leveled, new intrusive tasks for the government to undertake under their wise and enlightened compulsory guardianship. (See my articles, “Biden’s Agenda of ‘Democratic’ Paternalism and Planning” and “The Paternalist Instincts of a Central Planner” and “Under Biden Free Enterprise Means Government Control” and “More Government Debt as Far as the Fiscal Eye Can See” and “Infrastructure Bill as Political Plunder and Social Engineering” and “Made in France: Biden’s Fiscal and Regulatory Socialism” and “Identity Politics and Systemic Racism Theory as the New Marxo-Nazism”.)

This is the nature of America’s modern fiscal history of the type to which Joseph Schumpeter referred. Once the ideology of collectivism replaces the political philosophy of individual freedom, free enterprise, impartial rule of law, and constitutionally limited government, the nation faces not only ultimate financial bankruptcy, but cultural and social collapse as well.

As Austrian economist, Ludwig von Mises (1881-1973), argued in, “Trends Can Change” (1951):

Now trends of evolution can change, and hitherto they almost always have changed. But they changed only because they met firm opposition. The prevailing trend toward what Hilaire Belloc called the servile state will certainly not be reversed if nobody has the courage to attack its underlying dogmas.

This article was originally published at The American Institute for Economic Research.

The post America’s Fiscal History: From Liberty to Paternalism appeared first on The Future of Freedom Foundation.