. . . that government spending makes things worse, not better?
You can, perhaps, forgive the policy makers of the early 20th century for not knowing this. Throughout the Western world, big government was in. Technology was allowing government to get bigger, and to do more, and people figured, "Well, why shouldn't it do more?" There are problems in society that need to get fixed, and maybe it's government's role to fix them. After all, government could do big things. Government could build great dams. Government could electrify country farms previously lit by candle and kerosene. All it needed to do was tax enough money, or borrow it or print it, and—with its monopoly of force and law—arrogate the resources and land it needed, and government could do just about anything.
Herbert Hoover, the great engineer, had done great things prior to becoming president. Through force of will, organization, and careful planning, Hoover believed that great things could be done. And he did great things, including feeding millions of starving people. He took this mentality and his many successes with him to the White House and, through his policies, helped cause the Great Depression. Franklin Roosevelt took over, Hoover's name was blackened, and then Roosevelt and his gang proceeded to make most of the same mistakes Hoover did, only worse, more, and bigger.
Of course, during this moment of history where big government was in vogue, fascism was as well, with open fascisms in Europe and more than a whiff of it here at home. But ignoring that, for the time being . . . on strictly economic grounds, the people of that day may perhaps be forgiven. A bigger government, taking greater control over the economy, had never really been tried before. The theories were new. This was a modern era, and it was time for new ideas to be tried, people believed.
That said, we now have a century of data, and the data are clear: The ideas failed.
More economic freedom means more prosperity. Less economic freedom correlates to less prosperity. Large government, spending large amounts, tends to hinder, not help economic growth. The body of evidence is, at this point, so overwhelming on the subject that in a completely rational world, we would no longer even be having the discussion. This is not, however, a completely rational world, and we'll probably need a century of intellectual combat to completely undo a century of ideological errors (though I am hopeful that we may be able to speed up the process).
The 2011 Index of Economic Freedom has fired another salvo in that struggle—and a fairly convincing one. Ambassador Terry Miller, in Chapter 1 of The Limits of Government, provides some compelling charts data and charts on these issues.
The firtst is on government spending levels and how they correlate to growth. The trend and correlation are unmistakable:
Miller acompanies that chart with, in part, this text:
"The 2011 Index results demonstrate clearly that for many of the countries of the world, particularly those that experienced the inevitable results of state economic control under Communist systems in the past, policy solutions that would re-regulate economic activity or undo the integration of economies in a globalized trade and investment market hold little attraction.
Their skepticism is justified. Countries that reduced government spending had economic growth rates almost two percentage points higher in 2009 than countries whose government spending scores worsened, and countries with the highest rates of government spending had gross domestic product (GDP) growth rates 4.5 percentage points lower on average than countries where government spending was best contained. (See Chart 1.)"
The evidence is not just that economically freer countries enjoy more prosperity, higher standards of living, more political freedom and tolerance, etc., though the evidence is out there for those factors as well. But it's also very specifically that more government spending correlates with less growth. Stimulus spending, for example, appears not only to fail to do what it sets out to do (stimulate), it also appears to have the opposite effect. Needless to say, though the situation is always more complex than a single chart can report, with trendlines like that, correlation is almost surely causation, at least in part.
Miller goes on to provide several other charts in this chapter, including this striking one:
There are deviations, obviously. The one outlier on the Y axis (GDP per person) is not the economically freest. The economically freest (X axis) does not have the absolute highest GDP/person. But again, the trendline is unmistakable.
The trend also appears to be geometric as you move along the X axis. In other words, each "investment" a country makes in economic freedom (moving further right on the x axis) produces not only an increase in per person GDP, it produces a greater "rate of return" on that "investment" for each move further down the line towards the freest end.
With data like these, I keep going back to the question, "Why are we even still having the discussion?"
And then I remind myself, once again, that we do not live in a fully rational world.