As countries get richer, the demand for government (particularly fiscal transfers) rises. That in essence is the key message of Will Wilkinson’s October blog that stimulated debate amongst free-market think-tanks. Analysing this ‘law’, Wilkinson challenges the conception that this trend can be fundamentally reversed through education or developing ‘the right policies’, or indeed political strategies such as ‘starving the beast’. Instead, he says, libertarians should accept the demand for a relatively large government as a fact of life, and perhaps concentrate more on how to make government provision more efficient, and prioritise reforms to the regulatory state.

Wilkinson’s blog is depressing and challenging for those of us who believe in the virtues of smaller government and civil society alternatives to state welfare. And he’s surely right on much. Most obviously, there really does seem to be a floor of government spending at around 35 per cent of GDP below which it is both difficult and very politically painful to keep spending for a sustained period of time.

I’ve long thought some libertarians’ focus purely on the ‘size of the state’ as a general variable to be engineered downwards has been a faulty strategy, not least because without an agenda that actually challenges hearts and minds on untouchable areas, government size simply cannot be reduced beyond a certain amount (indeed, that is one reason why we started ‘The Paragon Initiative’). Clearly, the scope of government (as well as its size) matters.

It’s surely true too that primary focus on the size of the state and tax and spending as key aims can distract us from the low hanging fruit of regulatory reform. The biggest UK economic challenge (in my view) is land use planning policy and its associated effects on the housing market, commercial property, labour mobility, and macroeconomic stability. The returns to focusing on areas such as this seem much greater than the economic benefits that could be achieved by reviewing the size of small government departments.

And yet, having acknowledged all that, I think Wilkinson overplays these observations and is too quick to abandon the hope of significantly smaller government.

The first point is to observe that there are still large differences in the overall size of government across western states. Korea, Switzerland and Australia have government spending levels at or below 35 per cent of GDP; France and Finland have spending at around 55 per cent. In short, across countries there seems to be a large proportion of government spending ‘up for grabs’, notwithstanding that the overall floor of spending appears to have been rising across most countries as income goes up. Wilkinson’s point that some small government countries can be economically illiberal in other ways is well-made, but a focus purely on state regulation which ignored the potential for removing government spending activities could cede far too much ground.

Indeed, Wilkinson presents no counter-factual for what might have happened to the size of government had there been no voices and advocacy extolling the virtues of smaller government. It is self-evident that the US, for example, has a stronger history of more resistance to state transfers than, say, France. Were all classical liberals and libertarians simply not to make the case for small government overall, then would US government look a bit more French? In the UK, would we not have even have seen the fall in government spending relative to GDP in the Thatcher period or here since 2010 without the classical liberal-influenced small government policy work? Might it have been the case that we would have seen even higher welfare spending or even greater inter-generational liabilities than already observed? If the IEA, ASI and CPS had never existed in the UK, would government be bigger right now?

We can argue about magnitudes, but the answer is surely ‘yes’. And clearly in the UK case politics does matter: major reductions in the size of the state as a proportion of GDP have been seen under two periods of Conservative government. Whilst the degree of emphasis could change, I do not see why free-market types can’t walk and chew gum on state size and the regulatory state at the same time, and think that there is much that politics can influence.

The main lesson from Wilkinson’s blog appears to me to instead be a more limited one: that talking about the virtues of small government, highlighting of long-term fiscal challenges, and even attempts to constrain government growth through politics fail when it comes to transfer growth. But rather than simply say ‘there’s nothing we can do about that’ and let’s manage it better, it might be that this type of spending requires a different approach.

Peter Lindert’s work seems to suggest that popular demand for state spending on transfers comes when a critical proportion of the population start to be aged 60+ and when there is a large movement of women of childbearing age into the labour market. Even in the supposed period of ‘austerity’, for example, we have seen the state’s role grow in areas such as social care and childcare which affect these groups. The overriding relationship between these two is that they represent a shift of responsibility and social functions away from households and to the state – which explains the paradox of welfare state growth in line with a perceived individualist social ethos.

The policy conclusion of this (presuming smaller government is an aim) might be uncomfortable for some libertarians. But maybe, just maybe, an overt strategy to strengthen households as an alternative to state provision might actually be a means of reducing the size of overall government. This, of course, is something that could unite libertarians with more traditional conservatives.

Another means of ‘reducing demand for government’ approach could seek to circumnavigate politics entirely. Rather than focusing energies on the policy process, libertarians could take more of an interest in the growth of market and voluntary institutions directly – in turn creating a reverse crowding out effect. Most obviously, this could occur in health and education. This is easier said than done, of course, particularly with regulatory restrictions. But the beauty of Wilkinson’s call for more focus on the regulatory state opens up precisely these opportunities for growing markets and civil society. We simply cannot assess whether a strategy of crowding out government could work without fostering the conditions which would allow it to be tried.

Wilkinson’s blog raises some interesting questions about the failures of libertarians’ emphasis on small government and their strategies to achieve it. But whilst his call for greater focus on the regulatory state and scope of government is surely right, his call to give up on making the case for the macro virtues of small government and to abandon the goal of attempting to shift welfare back to market and voluntary institutions seems to me a surrender too far.