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Will Government be Permanently Larger After the Pandemic Ends?

Summary:
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

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Will Government be Permanently Larger After the Pandemic Ends?

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.

David Henderson
David R. Henderson (born November 21, 1950) is a Canadian-born American economist and author who moved to the United States in 1972 and became a U.S. citizen in 1986, serving on President Ronald Reagan's Council of Economic Advisers from 1982 to 1984.[1] A research fellow at Stanford University's Hoover Institution[2] since 1990, he took a teaching position with the Naval Postgraduate School in Monterey, California in 1984, and is now a full professor of economics.[3]

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