Are There Ratchets in the Growth of Federal Government Spending?

Abstract

The ratchet theory of government growth hypothesizes that temporary crises cause government spending to rise and to remain permanently higher than if the crises had not occurred. An examination of federal government spending in the United States since 1800 reveals apparent ratchets associated with the Great Depression, the two world wars, and the Civil War. After taking account of war-related spending and serial correlation in the data, however, only the World War I and Great Depression ratchets can be clearly identified, and they are closely associated with a major change in the underlying growth rate of government spending early in the 20th century. This casts doubt on the ratchet theory of government growth and instead raises the question of why the trend growth rate of government was so much greater in the 20th century than in the 19th.