And the Winner Is…

At the beginning of Bill Clinton's first term, three economists made a bet: Would the overall scope of government be larger or smaller at the end of the term than it was when George Bush left office? Benjamin Zycher, now the vice president for research at the Milken Institute for Job and Capital Formation, bet that the government--federal, state, and local--would grow as a percentage of gross domestic product; Richard McKenzie of the University of California, Irvine, and Dwight Lee of the University of Georgia, said it would shrink. Both sides made their cases in REASON, staking the honoraria they would receive for writing their articles. (See "White House Wager," February 1993.)

McKenzie and Lee argued that global market forces would preclude the type of government activism that the Clinton administration would try to impose. Restating the case they made in their 1991 book Quicksilver Capital, they said investment capital can now rapidly seek the highest rates of return anywhere on the planet. Countries can no longer increase taxes and regulations without being penalized on international capital markets. Clinton might try to ratchet government upward, but global forces would check him.

Zycher countered by saying that the fundamental strength of the American economy--just emerging from the 1990 recession--would allow Clinton to engage in regulatory mischief, and that the many debts he owed to Democratic interest groups would be repaid with new government programs.

McKenzie and Lee won. As a percentage of gross domestic product, the federal government is indeed smaller now than it was at the end of 1992. Federal spending absorbed about 22 percent of GDP in 1992; it's below 21 percent now.

Adding the estimated costs of regulations, along with state and local taxes, overall government burdens appear to be shrinking as well. Americans for Tax Reform's Cost of Government Day, the date on which the typical American has earned enough income to pay off the obligations imposed by governments, has moved up on the calendar, from July 18 in 1992 to July 3 last year.

"Things turned out precisely as we predicted," quips McKenzie. "In spite of Ben's scurrilous attack on our manhood and the weak defense of his position, we have once again shown quicksilver capital at work."

Zycher remains unconvinced. "I think I was right," says Zycher, "but I still owe them the money, and I intend to pay it."