As the federal election fast approaches, Canadians have a chance and a reason to reflect on the role of government in terms of its size and scope. The current government has run two of the largest deficits in Canadian history (adjusted for inflation) and is spending more per person on federal programs than almost any government before it[i] . These are both part of larger trends that began after World War II and took off in the 70s and 80s. Among the most developed countries in the world, the long-term trend over the course of the past century has been towards an increase in the size of government, and an expansion of its role in the lives of citizens[ii]. Canada is no different, and indeed an exemplar of this[iii].
Many of these expansions are significant departures from the ‘classical’ ideal of political economy expressed most influentially by Adam Smith in The Wealth of Nations. In it, he emphasized that free markets would be most conducive to the creation of wealth and the provision of goods and services, when they were embedded in a government structure that provided the scaffolding needed for them to flourish.
It is important to make a renewed case for the role of government in Canada based on Smith’s insights because they remain as true today as they were then. The argument is that on both principled and consequentialist grounds, the expansion of government beyond certain bounds is unjustified. In the case of the former, it erodes the sphere of rights and freedoms that it is supposed to protect and enable; in the case of the latter, it fails to deliver on the causes that it is most frequently aligned with – reducing material and relative inequality through the provision of public goods and services.
The expansion of government services and spending is much less effective at delivering on these values than the defence/law/essential services model that Smith laid out.
The Phenomenon: the Growth of Government and its Reach – Case study Canada.
The most common measure of government size is to look at public expenditure as a proportion of GDP. The trend among OECD countries over the course of the past century reflects a steady increase in this ratio[iv]. However, this figure does not cover things like tax expenditures, and regulation that affects prices or output. In Canada’s case, the size of government was conventionally measured at 44% of GDP in 2014, but this number balloons to 64% when tax expenditure effects of 10.1%, and regulatory effects of 10.5% are considered[v]. It has not gone down since.
The narrative of growth is not a straightforward, or linear one in which government has expanded in every which way over time. In terms of public sector employment, for example, from 1981-2012 we have witnessed an absolute increase in the number of government employees, from 2.7 – 3.68 million, along with a simultaneous decrease in the proportion relative to the size of the population, which increased from 24.82 – 34.7 million. The ratio has thus declined slightly from 10 – 9.4%[vi].
Though there has been a decrease in spending on crown corporations, a stasis in government employment, and a general trend away from government involvement in the provision of goods and services, there has been an increase in government-funded initiatives. These include things like transfer payments (over 2/3 of federal spending), and subsidies so that governments can sustain an egalitarian, redistributive strategy[vii].
The overall picture is that real government expenditure on programs, subsidies and transfers is increasing in proportion to the size of the population beyond an optimal level.
Here, I’m using ‘optimal’ as a term with a dual sense. One that refers to the diminishing returns that come with increases in size beyond a threshold. The second is a qualitative sense, in which spending is both too great, and of the wrong type, principally because of the effects it has on the behaviour of the beneficiaries of such ‘largesse’. It wasn’t so bad when the state was involved in beginning the development and provision of major goods and services. Yet, as we moved away from government spending on institutions that provide goods or services to a ‘funding’ model, we have turned the citizenry into passive recipients with a mindset of dependency.
The increase in the size and scope of government reach has had the ironic consequence of slowing levels of growth, and increasing the overall cost of living, as well as those goods and services that the government tries to provide ‘freely’. Adam Smith knew this all too well.
The Wealth of Nations and The Theory of Moral Sentiments:
For Smith, a crucial insight that underlies his defence of markets is one pertaining to moral philosophy – that the interests that inform our actions are formed on the basis of a ‘mutual sympathy of sentiments’[viii]. The sentiments that underlie our interests and actions are formed out of a process of learning, whereby we align our own feelings and behaviour with those of others. We both desire things for their ability to satisfy our personal inclinations, but these are formed in light of a concern for the well-being of others, and what they in turn might think of us. The best way to ensure that people achieve their own interests is then to allow them to do so in a way that also benefits others. Market transactions are exemplars of this kind of activity, as both parties have something to gain by it, so long as it something freely undertaken.
The importance of freedom to this recipe for success is not to be downplayed, for it is essential to the way in which Smith thought of the true meaning of wealth and its relationship to our moral sentiments and desires. Contrary to his mercantilist predecessors who thought of wealth as a store of value inhering in bullion or precious metals, Smith thought of it as the ability to pursue one’s interests – both high and low, material and immaterial. Thus, people must be free to engage in whatever kind of transactions that they valued. Not that therefore the result will necessarily be good according to her own or standards or those of others, but that this is a precondition for it to be so in the first place.
People nonetheless require a set of conditions under which they can operate. Smith argued that the government ought to erect a scaffolding of law and order, so that free people could achieve their ends. It is individuals, not governments who should be the decision-makers because no one knows one’s interests better than one’s self. There is an infinitely large number of details pertaining to know-how, preferences, relationships, and so forth that characterize a person’s life, all of which cannot be known in any meaningful way by third parties.
The role of government is thus to ensure the conditions required for people to sustain their interactions in private and public life. It does so principally by guaranteeing peace, law and order, and the provision of a few basic public goods[ix]. This third area is where a great deal of the growth of government has taken place in the past century.
Smith argued that it is thus unjustified, unless a) private enterprise cannot provide a good or service that is essential, where this is determined by asking whether b) the society as a whole benefit substantially, rather than just an interest group. Private enterprise cannot provide it if “the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain”[x]. The institutions that fall under this category “are chiefly those for facilitating the commerce of the society, and those for promoting the instruction of the people”[xi].
In the case of the former, Smith considered joint stock companies that served the public interest. His closing remark is that these entities “which are established for the public-spirited purpose of promoting some particular manufacture…scarce ever fail to do more harm than good”, as the managers and directors are partial to their branch of consideration, yet do not face the discipline of the profit motive or the consequences of failure[xii].
In the case of education, Smith notes that it is almost always the case that schools that face incentives and the discipline of profit and loss perform better than their public counterparts. Nonetheless, there is a case to be made for the government to subsidize primary education because “were there no public institutions for education, no system, no science would be taught for which there was not some demand”[xiii]. He recognized that in some societies, the well-being of individuals will depend more on their having some schooling than free ability to engage in physical labour. In highly developed societies, people can fall considerably far behind if they do not receive a bare minimum of education. The division of labour, new in his time, also threatens to destroy “intellectual, social, and martial virtues” lest the government “take pains to prevent it”[xiv].
Smith thus defends public expenditure in these areas, though in qualified fashion. He argues that there is a general interest in partial government funding or provision by general taxation. Yet, he is quick to point out the many ways in which the expenses can be ‘defrayed’ by various market mechanisms: the expense of justice reduced by ‘fees of court’, local or provincial expenses ‘by local revenue’, roads may be better paid for via toll, and general education expenses ‘defrayed by fees and voluntary contributions’[xv].
Though he advocates for some government intervention here, it is nonetheless true that many of the details pertaining to the delivery of the services should be localized and privatized so as to ensure the highest quality at the lowest overall cost to the society, thereby serving those most in need. The qualitative dimension is also important. Encouraging responsibility in individuals, small communities and organizations makes for better people. More capable of solving their own problems, ennobled by a sense of agency, and fulfilled by the ability to pursue projects with it.
On Principled and Consequentialist grounds, take the Government down a Peg.
Following and building upon Smith’s oft-misunderstood insights, the argument for reducing the size of the government is as follows. The principled case is twofold.
In the first instance, the importance of personal freedom cannot be understated, as it is the precondition of all higher forms of worthwhile action. The sphere of it shrinks insofar as the government grows, tending as it does to a) require more and more from the person in the form of taxes, and b) allowing them fewer options for consumption and for enterprise, as the government expands its monopoly over the provision of goods and services.
Secondly, and more concretely, the expansion of the role of government in taxing and spending reduces the responsibility of individuals and organizations alike. You see this most clearly in public institutions who do not receive their funds on the basis of performance, or whether they are able to provide their good or service in a way that is a net positive to all parties involved up and down the supply chain.
The reasons for this are rooted in our natures. Having the responsibility for the success and failure of one’s own pursuits, and having it tied to remuneration are necessary for the cultivation of good character.
Public institutions must plead for their resources, not earn them. This culture seeps down from the top to the bottom of an institution that, due to the nature of how it procures funds for its maintenance, remains ultimately unmoved by the pressures of failure, as it does not have to face them. What to do when a school board, or the health sector does not have ‘enough’ money but to complain that the problem is that they are underfunded?
And of course, there is not much to be gained for those involved by making major improvements. The corrosiveness of this taking mentality breeds a defensive attitude, wherein any cuts to funding are met with cries of outrage, and condemnations that border on the hysterical.
Thus, the expansion of government diminishes the range of human potential by increasing the rules and constraints on choice and action. It dulls the human spirit by doling out more and more, while expecting less and less. The sense dignity that comes from creative action, and the responsibility for success and failure is harder and harder to come by.
The consequentialist case is also twofold. First, if what we are concerned with is the achievement of better living standards and a fairer, more just society for all, then we would do well to recognize the main driver here – growth. This is not driven by the government provision of goods and services, but with the maintenance of a set of sturdy institutions that allow citizens to produce the goods and services that have made life longer, healthier, and richer for many.
In our current environment, government ‘stimulus’ packages and spending initiatives are not like healthy smoothies, but hits of a drug – temporarily stimulating experiences that eventually lead to a come down that is much worse than the fleeting sense of intoxication they provide.
Second, the purely public delivery of funds, goods and services is woefully inadequate. We need only look to many fellow OECD countries that perform far better than Canada on the education and health care files to see that effective service, equal access, and efficient use of funds are things achieved in systems with public private partnerships, private insurance, user fees, private schools and hospitals, the list goes on.
A large part of the rationale for the expansion of government, and its provision of more and more goods and services is that: these cannot be provided by the private sector, and even if so, they will not be made available on an egalitarian basis. Contrary to popular belief, market mechanisms are suited to many more sectors of society than it is commonly believed, and they have in the past, and continue today to contribute far more to status and material equality in general, and in specific areas of concern, such as health care and education.
This is the essential point – that publicly provided education and health care systems, and redistributive taxation and welfare programs are not as effective as mixed alternatives. Without ties to work and training and a consideration of incentives and the psychological damage of taking vs. making, redistributive initiatives hurt their recipients and create the social problems they ostensibly try to solve. Furthermore, this diverts resources away from how they could be used by firms that, when they do better, have consistently provided better employment, higher wages and salaries. As Ronald Reagan used to say, a job is the best social program.
Policy analysts Sean Speer and Charles Lammam describe the Canadian situation as follows. The 1970s saw the greatest increase in government spending in Canada. In 1992, after 20 years of borrowing, taxing and spending Canada’s government spending to GDP ratio had gone from 36% to 53%. After reductions in spending, taxation reform, and reduction in the size of government, the ratio had fallen to 39% in 2007. During that period, Canada experienced the highest GDP growth of all OECD countries, the job market boomed, and poverty rates declined considerably.
In arguing this way, I do not mean to claim that the picture is so simple. A confluence of factors beyond the narrow policy framework of Canadian political and economic affairs are at work here. The general point should be taken that a concerted effort was made to be more responsible about government and to give daily decision-making power back into the hands of the citizenry. This is good policy, rooted as it is in common sense thinking about the importance of prudence and responsibility and the fruits that they bear.
It will always be the case that if the level of analysis remains confined to specific examples considered in isolation, and within a certain time frame, then it will appear that the government is justified in providing some good, service, or subsidy. It is because of this that the argument for non-intervention is always a difficult one to make, and increasingly so in wealthy societies where an increasing number of our basic needs can be easily provided for.
However, this is really a bit of sleight of hand because analysis cannot be confined to specific examples; trade-offs, opportunity cost, side effects and time scale cannot be ignored in evaluating and comparing policies and the use of public funds.
Due to the fact that government-funded initiatives look attractive when considered in isolation, not just one, or a few, but many of these practices are tried. The cumulative effect is a considerable waste of resources and the creation of a culture of dependency.
In spite of such seemingly rah-rah enthusiasm for some kind of red meat capitalism and privatization, I do hold many reservations. Joseph Schumpeter, a man who understood first-hand the flaws of both capitalism and socialism, rightly pointed out that both had internal logics that could sow the seeds of their own demise. Capitalism’s chief virtue is also its greatest vice – a term that he coined ‘creative destruction’. Market economies engender change at a fast pace, but they leave much wreckage in their wake, running roughshod over norms of decency, the stability of ways of life, and the integrity of communities. That is, if they go unchecked.
It is not as though there isn’t a good deal of greed and one-dimensional pursuit of profit at all costs in the private sector. It is also the case that business is a driver of government growth, as it spends considerable amounts of money on lobbying, which pressures governments to act in narrow ways on behalf of interest groups.
To bring it all back to Adam Smith, these developments were not in his blueprints. Capitalism, privatization, and markets are not about massive corporations that have no attachment to the place in which they operate, or much concern for some of the people they employ. It is about more responsibility and control in the hands of people in the places that they live. In order to have that, you need to reduce the size of the great privilege-granting machine that enables and encourages the growth of corporations to mammoth proportions.
How to avoid this? Though it is somewhat of a platitude – balance. Right now, the balance is too far on the side of government. It may have to get worse before it gets better, but people have achieved such great feats when the odds seem stacked against them time and time again. We will rediscover the virtues and values upon which our society is built if the lights that guide the Western spirit do not go out – the twin pillars of faith and reason. The truth is too powerful a thing to suppress for too long.
[i] Jake Fuss, “Prime Ministers and Government Spending 2019 Edition,” Fraser Institute, 2019, 15; Jake Fuss, “Examining Federal Debt in Canada by Prime Ministers Since Confederation – 2019,” Fraser Institute, 2019, 15.
[iii] Munir A Sheikh, “Estimating the True Size of Government: Adjusting for Tax Expenditures,” Macdonald-Laurier Institute, February 2014, 31; Brian Lee Crowley, “Estimating the Size of Government: Adjusting for Regulation,” Macdonald-Laurier Institute, n.d., 25; Livio Di Matteo, A Federal Fiscal History: Canada, 1867-2017, 2017; Livio Di Matteo, Measuring Government in the Twenty-First Century: An International Overview of the Size and Efficiency of Public Spending (Vancouver, British Columbia: Fraser Institute, 2013).
[iv] Ortiz-Ospina and Roser, “Government Spending.”
[v] Crowley, “Estimating the Size of Government: Adjusting for Regulation,” 2.
[vi] “Public Sector Employment, Wages and Salaries, Seasonally Unadjusted and Adjusted,” Data (Statistics Canada, n.d.), https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1010002501.
[vii] Di Matteo, A Federal Fiscal History, 77.
[viii] “But whatever may be the cause of sympathy, or however it may be excited, nothing pleases us more than to observe in other men a fellow-feeling with all the emotions of our own breast; nor are we ever so much shocked as by the appearance of the contrary”. Adam Smith and Ryan Patrick Hanley, The Theory of Moral Sentiments, 250th anniversary ed, Penguin Classics (New York, N.Y: Penguin Books, 2009), 18.
[ix] The three duties of the sovereign are to defend the country, administer justice, and maintain a select number of public works. Adam Smith and Edwin Cannan, The Wealth of Nations: Adam Smith ; Introduction by Alan B. Krueger ; Edited, with Notes and Marginal Summary, by Edwin Cannan, Bantam classic ed (New York, N.Y: Bantam Classic, 2003), 873–74.
[x] Smith and Cannan, 916.
[xi] Smith and Cannan, 917.
[xii] Smith and Cannan, 962.
[xiii] Smith and Cannan, 985.
[xiv] Smith and Cannan, 987.
[xv] Smith and Cannan, 1029–31.