Former Canadian prime minister Stephen Harper wrote an uplifting article in the Wall Street Journal. As the world moves towards even-more-interventionism for the Covid19 response, he thinks that “After Coronavirus, Government Will Have to Shrink“.
His reasons for optimism:
Yes, government intervention in the economy today is without precedent. In early April, the International Monetary Fund estimated that fiscal actions around the world totaled some $3.3 trillion—more than 50% greater than all the stimulus spending of the global financial crisis—with another $4.5 trillion in loans and contingent liabilities. Those numbers have only grown, with leaders making daily television appearances to roll out wheelbarrows more money. Most media lavish praise on governments for these actions.
So why doesn’t this herald a new age of big government? It’s simple: All this intervention has been economically ruinous. No amount of money can fully compensate for social-distancing actions whose effect is to shut down large segments of the economy. … The underlying assumption—that the economy can be restarted later as quickly as an idle automobile—is dubious.
When focus shifts from the pandemic to the economy, it will need to shift from a lot more government action to a lot less.
Plus, “Public-sector balance sheets will be an unholy mess.”
It is refreshing that a politician that had top executive responsibility is eager to put this on paper. Mr Harper may literally be the only leader in the Western world these days betting on government becoming _smaller_.
My impression – thinking of the second US “stimulus” and of a recent initiative of the Italian government which put together a bunch of pork-barrel measures, purportedly aiming to “relaunch” the economy – is that new interventions will be so widespread that distortions will be very difficult to eradicate. At the same time, it is true that, to the extent that our societies react to statism and over-regulation, they do so only in the presence of a very high dose of these, and we are now giving them possibly the greatest dose in the shortest time ever.
READER COMMENTS
Philo
May 15 2020 at 10:04am
Where is Ludwig Erhard?
Thomas Hutcheson
May 15 2020 at 10:24am
The pandemic has thrown many policies that do not pass cost benefit analysis into relief and has created others. It would be a shame if efforts to reform these policies is conceived of as making government “smaller.”
e
In some cases, say free trade, that would be the case, but the numbers of people/budget directed in restricting imports is probably not very big. But many regulations aimed at outcomes (food that does not contain a super-optimum number of pathogens, say) are often framed as specifications of processes. This is sub optimal, but enforceable at low administrative cost. For all I know a truly optimal regulation that minimized total cost of achieving the optimal amount of disease arising from food pathogens would required greater administrative cost, “bigger government.”
Unfortunately, some calls for “smaller government” are not calls for Pareto-improving reforms but really just pleas for lower transfers from higher income to lower income persons.
dede
May 16 2020 at 6:31am
Is this a new concept? Does any example exist in the past?
Thomas Hutcheson
May 16 2020 at 3:11pm
Not since the Fall. 🙂
But what other kind of regulation should we try for, even higher total cost and lower administrative cost?
Mark Z
May 16 2020 at 10:40pm
This seems like question-begging. When people argue for less regulation or less redistribution, they typically are arguing that (in part at least) because they think those are efficiency increasing policies. IOW, the debate is not over whether we should pursue good or bad policies, or optimal or suboptimal levels of regulation or taxation. It’s what the optimal levels are. Some people think that for many a tax or industry the optimal rate or level of regulation is at or near 0.
Thomas Hutcheson
May 17 2020 at 8:32am
I think the same thing about some regulations; that’s why I gave the examples of trade and immigration. But then why not talk about “inefficient regulation” (regulations that have NPV<0)or something like that? “Smaller government” does not seem to the the right term.
Mark Z
May 17 2020 at 4:16pm
If one believes the opportunities for efficiency-increasing regulation at the margin are few and far between, it’s simpler to argue for smaller government in general and point out what occasional exceptions one encounters along the way than to expend the breath necessary to give one’s opinion on each possible regulation in detail.
Fred_in_PA
May 18 2020 at 12:06am
You dismiss “some calls for ‘smaller government'” as “not calls for Pareto-improving reforms but really just pleas for lower transfers from higher income to lower income persons.”
I agree. But I think we need to think a little more deeply about where that “higher income … person” will be getting the money. I submit that, in the groups we’re likely talking about, that money is not a subtraction from their lifestyle expenditures. Cutting back one’s lifestyle is difficult and unpleasant. Rather, the higher taxes will come from their saving less.
But since savings = investments, we’re going to “help” those “lower income persons” by cutting back investment levels in the economy. At modest levels that likely reduces workers’ future productivity (which will reduce any future wage gains). At more drastic levels, we may be shuttering some of the businesses where some of these “lower income persons” used to have a job. I suspect that those already employed will just see slower wage gains. It will be their children who discover that, without business expansion, there’s no place in the lifeboat for them.
Felix
May 15 2020 at 9:20pm
In the very short term, the ease with which $3T or so of “emergency” spending passed, and the possible $3T more coming up, may make politicians even more care-free, like a drunk with a credit card in Vegas. Maybe the hangover and its interest hit on the budget will upset the worst-laid plans, maybe not; if that hint is not taken, inflation will destroy the economy enough to make should-be priorities unavoidable. But I hope the public gets the message sooner and passes it on at elections.
Matthias Görgens
May 15 2020 at 9:24pm
As long as the central banks target inflation, no amount of government borrowing will increase inflation.
The government borrowing won’t be good for the economy. And taxes will have to go up. But inflation is evitable.
Thomas Hutcheson
May 16 2020 at 4:06pm
Especially if they target reducing the rate of inflation as the Fed has
done since the end of February.
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