Be that as it may, I long ago debunked the Cato paper in question, as well as a later, more detailed analysis along the same lines. My take:
There is a very strong -- almost perfect -- relationship between real nondefense spending and the unemployment rate for the years 1969 through 2001, that is, from the Nixon-Ford administration through the years of Carter, Reagan, Bush I, and Clinton. Using a linear regression with five pairs of observations, one pair for each administration, I find that the percentage change in real nondefense spending is a linear function of the change in the unemployment rate....
In words, the work of the New Deal and Fair Deal had been capped by the enactment of the Great Society in the Kennedy-Johnson era. The war over domestic spending was finished, and the big spenders had won. Real nondefense spending continued to grow, but more systematically than it had from 1933 to 1969. From 1969 through 2001, each administration (abetted or led by Congress, of course) increased real nondefense spending according to an implicit formula that reflects the outcome of political-bureaucratic bargaining. It enabled the beast to grow, but at a rate that wouldn't invoke images of a new New Deal or Great Society.
Divided government certainly hampered the ability of Republican administrations (Nixon-Ford, Reagan, Bush I) to strangle the beast, had they wanted to. But it's not clear that they wanted to very badly. Nixon was, above all, a pragmatist. Moreover, he was preoccupied by foreign affairs (including the extrication of the U.S. from Vietnam), and then by Watergate. Ford was only a caretaker president, and too "nice" into the bargain. Reagan talked a good game, but he had to swallow increases in nondefense spending as the price of his defense buildup. Bush I simply lacked the will and the power to strangle the beast.
Bureaucratic politics also enters the picture. It's hard to strangle a domestic agency once it has been established. Most domestic agencies have vocal and influential constituencies, in Congress and amongst the populace. Then there are the presidential appointees who run the bureaucracies. Even Republican appointees usually come to feel "ownership" of the bureaucracies they're tapped to lead.
What happened before 1969?
The beast -- a creature of the New Deal -- grew prodigiously through 1940, when preparations for war, and war itself, brought an end to the Great Depression. Real nondefense spending grew by a factor of 3.6 during 1933-40. If the relationship for 1969-2001 had been in effect then, real nondefense spending would have increased by only 10 percent.
Truman and the Democrats in control of Congress were still under the spell of their Depression-inspired belief in the efficacy of big government and counter-cyclical fiscal policy. The post-war recession helped their cause, because most Americans feared a return of the Great Depression, which was still a vivid memory. Real nondefense spending increased 2.8 times during the Truman years. If the relationship for 1969-2001 had been in effect, real nondefense spending would have increased by only 20 percent.
The excesses of the Truman years caused a backlash against "big government" that the popular Eisenhower was able to exploit, to a degree, in spite of divided government. Even though the unemployment rate more than doubled during Ike's presidency, real domestic spending went up by only 9 percent. That increase would have been 28 percent if the relationship for 1969-2001 had been in effect. But even Ike couldn't resist temptation. After four years of real cuts in nondefense spending, he gave us the interstate highway program: another bureaucracy -- and one with a nationwide constituency.
The last burst of the New Deal came in the emotional aftermath of Kennedy's assassination and Lyndon Johnson's subsequent landslide victory. Real nondefense spending in the Kennedy-Nixon years rose by 56 percent, even though the unemployment rate dropped by 48 percent during those years. The 56 percent increase in real spending would have been only 8 percent if the 1969-2001 relationship had applied.
As for Bush II, through the end of 2003 he was doing a bit better than average, by the standards of 1969-2001 -- but not significantly better. He now seems to have become part of the problem instead of being the solution. In any event, the presence of the federal government has become so pervasive, and so important to so many constituencies, that any real effort to strangle the beast would invoke loud cries of "meanie, meanie" -- cries that a self-styled "compassionate conservative" couldn't endure.
Events since 1969 merely illustrate the fact that the nation and its politicians have moved a long way toward symbiosis with big government. The beast that frightened conservatives in the 1930s, 1940s, and 1950s has become a household pet, albeit one with sharp teeth. Hell, we've even been trained to increase his rations every year.
Tax cuts won't starve the beast -- Friedman, Becker, and other eminent economists to the contrary. But tax increases, on the other hand, would only stimulate the beast's appetite.
The lesson of history, in this case, is that only a major war -- on the scale of World War II -- might cause us to cut the beast's rations. And who wants that?