In his 1987 book Crisis and Leviathan, economic historian Robert Higgs argued that in the 20th century, the U.S. federal government grew mainly as a result of three crises: World War I, the Great Depression, and World War II. During those crises, the feds raised taxes, introduced more spending programs, and took on more regulatory power. While much of the added government power fell after each of the three crises ended, it never fell back to where it was before the crisis. Higgs called this a “ratchet effect.” In the 21st century, we saw the same ratchet effect with, first, the federal government’s surveillance state after 9/11 and second, the extensive regulatory response to the financial crisis with the Dodd Frank law.
We therefore have grounds for pessimism about the Covid crisis. Large percentages of Republicans and Democrats in the House of Representatives and the Senate have already voted for spending more than $2 trillion above what was planned as recently as early March and may be about to spend at least another trillion dollars. There are even more grounds for pessimism when we look at what the Federal Reserve Board is doing.
On net, I’m pessimistic. But there are grounds for guarded optimism. Something happened during this crisis that did not happen in any of the other crises: deregulation. It’s not just at the federal level. State governments have also lightened up on regulation. We don’t know how much of this deregulation will last: some will, some won’t. But it’s different in kind from what happened in the other crises.
This is from my latest article for Defining Ideas, “Will Government be Permanently After the Pandemic Ends?” July 30.
In the piece, I summarize Higgs’ evidence from World War I, the Great Depression, and World War II, and then go on to consider some of the deregulation that has occurred during the pandemic.
Read the whole thing, especially if you want me to respond to your comment.
READER COMMENTS
Mark Z
Jul 31 2020 at 9:28pm
Hopefully people will get sufficiently accustomed to the new options made by temporary deregulation that politicians will find it inconvenient to undo it; maybe the ratchet effect can be beneficial for once.
I share your pessimism on the size of the state and deficits, especially with what the political landscape looks like for the foreseeable future. Joseph Schumpeter’s predictions about the fate of capitalist societies seem more prescient than ever. I doubt there will be a major backlash unless/until there’s a severe economic crisis easily attributable to the excessive size of the state or its debt.
Bob Hertz
Aug 4 2020 at 11:11am
This article (while excellent) leaves out a key reason why the federal government grew so much during the Depression……..which was the general inadequacy of state and local governments to deal with unemployment, homeless, and hunger of the 1930’s. (Read the books by T.H. Watkins for more detail. In most states, the local governments just ran out of money. In the South, they ran out of money plus were vicious toward poor blacks.)
We are seeing the same thing today in two respects:
a. the flimsiness of most state unemployment insurance systems;
b. the uneven and mainly inadequate public health measures to fight the pandemic.
Even after this pandemic subsides, the collapse of numerous industries — restaurants, airline, et al — will leave millions of workers much more dependent on government,, just to eat and have shelter. I feel that the growth of federal spending is inevitable.
David Seltzer
Aug 4 2020 at 3:38pm
David, After reading Higgs, I’m pessimistic. MMT is the Holy Grail for policy makers. The question of debt being retired is irrelevant. If the Fed decides to issue long dated bonds or consols at 4%, moral hazard looms. Up to 500 trillion in debt could be issued before debt service of 20 trillion would equal current GDP. Given Higgs’ hypothesis, do we trust the policy guys to be responsible? The real fallout lands on future generations. How unfair!
Stremove.com
Aug 7 2020 at 8:43am
In my view, this action would end up being extremely counterproductive, for two reasons. To see why, recall that the behavior of TikTok will be watched closely by the US government, just as Russia’s interference in the 2016 election has led to increased scrutiny over Russia’s use of platforms such as Facebook. So the US government would almost certainly discover their actions. It’s hard to influence 200 million voters in complete secrecy.
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