Wednesday, December 17, 2008

Crises and Government

Click on the figure to enlarge.

The above figure (reprinted from my favorite textbook) shows government revenue as a percent of GDP. The most noteworthy feature of these data is the substantial growth of government from 1929 to 1945. It is easy to understand why the size of government grew so much during this period: The nation was responding to the crises of the Great Depression and, especially, World War II. But what is noteworthy is that while these crises were transitory, the increase in the scope of government was permanent.

This historical episode is one reason why advocates of limited government are rightly worried about the fiscal stimulus package that the incoming administration is going to propose. Rahm Emanuel, the new White House chief of staff, is reported to have said, "You don't ever want to let a crisis go to waste: It's an opportunity to do important things that you would otherwise avoid." It is not entirely clear what he meant by this. But one interpretation is that he wants to use a temporary crisis as a pretense to engineer a permanent increase in the size of government.

Here is one question reporters should focus on when evaluating the proposed plan: Five or ten years from now, when the economy is presumably at some normal level of employment and growth, what will the federal budget look like, as evaluated by the budget deficit and tax revenue as a share of GDP?

Update: Russ Roberts emails me that "Robert Higgs's Crisis and Leviathan is devoted to the relationship between the size of government and crisis." Thanks, Russ, for the reference.