The Economist - USA (2020-03-28)

The EconomistMarch 28th 2020 BriefingThe pandemic and the state 19

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paring it favourably with Wall Street bail-

outs a decade ago.

To that end, governments across the

rich world are channelling vast sums to

firms, providing them with grants and

cheap loans in an attempt to preserve jobs

and prevent them from going bust. In some

cases the government is paying the wages

of people who cannot work safely: the euin

particular has embraced this policy, while

the British state will pay up to 80% of the

wages of furloughed workers. The Ameri-

can package includes loans to small busi-

nesses that will be forgiven if workers are

not laid off. Households across the rich

world are being given temporary relief on

mortgages, other debts, rent and utility

bills. In America people will also be sent

cheques worth up to $1,200.

The vast majority of economists sup-

port these measures. Nominally they are

temporary, designed to hold the economy

in an induced coma until the pandemic

passes, at which point the world is sup-

posed to revert to the status quo ante. But

history suggests that a return to pre-covid

days is unlikely. Two lessons stand out. The

first is that governmental control over the

economy takes a large step up during peri-

ods of crisis—and in particular war. The

second is that the forces encouraging gov-

ernments to retain and expand economic

control are stronger than the forces en-

couraging them to relinquish it, meaning

that a “temporary” expansion of state pow-

er tends to become permanent.

The sinews of power

In recent centuries government spending

across the capitalist world has leapt. In the

1600s the outlays of the entire English state

accounted for about 5% of gdp, with practi-

cally no spending on public health or edu-

cation, nor much regulation of economic

life, save for crude contract enforcement

(see chart 2). That began to change in the

18th century, and from the end of the 19th

century Britain and other capitalist coun-

tries saw increased state intervention, with

more government resources being devoted

to public goods such as welfare and educa-

tion and commensurate increases in taxes

(see chart 3 on next page).

Governments have had some lean peri-

ods. In Victorian Britain state spending fell

as a share of gdp—though that was largely

because economic growth was so rapid,

and the measure in chart 2 excludes spend-

ing by local governments, which became

exceptionally powerful over the period. In

the 1980s Ronald Reagan succeeded in sta-

bilising America’s day-to-day federal

spending. His reforms, as well as those of

Margaret Thatcher in Britain, reduced the

role of government in fixing prices; privati-

sations encouraged profit-making firms to

provide formerly state-run services such as

power and transport. Yet even during Rea-

gan’s presidency the number of pages of

federal regulations rose by 14%.

A back-of-the-envelope calculation

finds that, of the more than 50 countries

for which there are long-run fiscal data,

two-thirds saw their government-spend-

ing-to-gdpratio increase between 1988 and

2018. America’s ratio of day-to-day public
      spending to gdpis eight percentage points
      higher than it was in 1962, when Milton
      Friedman wrote “Capitalism and Free-
      dom”, a book which warned of the dangers
      of socialism.
      Historians argue over why the public
      sector has a tendency to expand. In the 19th
      century Adolph Wagner, a German econo-
      mist, suggested that as places got richer,
      demands on government grew. An increas-
      ingly complex production process needed
      more regulation and contractual enforce-
      ment. Wealthier people would also de-
      mand more public welfare provision, the
      theory goes, perhaps because they worried
      less about their own material situation and
      could thus turn their attention to others.
      Wagner’s theories also pointed to what
      economists call “hysteresis” in fiscal poli-
      cy. Governments may intend to boost
      spending only for a short while. But then
      expectations change, making such expan-
      sionism hard to undo. It is now common
      sense that the state should provide educa-
      tion to children at no cost to parents, or
      support people who are out of work. Amer-
      ican governments have in recent decades
      cut the share of public spending devoted to
      welfare. However, it remains politically
      impossible to bring it down to anywhere
      near its level in the mid-1960s, before Presi-
      dent Lyndon Johnson’s “war on poverty”
      was launched. The upshot is that while it is
      easy to ratchet state spending up, it is much
      harder to push it down.
      Perhaps the most important lesson of
      500 years of history, however, is that noth-
      ing has helped boost state power in Europe
      and America more than crises. Historians
      broadly agree that the growing fiscal capac-

ity of capitalist countries from the 1700s

onwards was linked to the need to fight in-

creasingly sprawling and expensive wars,

especially those using navies and where

the field of battle was far from home. (The

Seven Years War of 1756-63 is widely con-

sidered to be the first global war because it

involved a large number of countries, often

fighting in foreign theatres.)

To win, countries required increasingly

complex, well-resourced administrations

which could supply fighters with weapons

that worked and food that had not rotted.

They also needed the money to pay for it,

whether by levying more taxes or by be-

coming a reliable borrower in markets—

which called for yet more bureaucracy.

Growing state capacity, in turn, allowed for

the emergence of the capitalism we know

today, with properly regulated markets, ef-

ficient telecoms and transport, and healthy

and educated citizens.

The winners of those wars also seized

control of resources, from sugar and spices

to linens, which proved integral to indus-

trialisation. So it is no surprise that histori-

ans contend that wars and other crises have

been an engine of economic development.

It is no coincidence that the Netherlands,

the first country to embrace capitalism, in

the 17th century, was also at the time the

world’s pre-eminent naval power, fighting

and winning numerous wars over the per-

iod; or that Britain, which came to domi-

nate the seas in the 18th century, then be-

came the world’s largest economy.

According to Larry Neal of the University of

Illinois at Urbana-Champaign, the Indus-

trial Revolution “occurred precisely during

and because of the Napoleonic wars” of the

late 18th and early 19th centuries.

The responses to crises since then have

further consolidated the power of the state.

France’s top rate of income tax was zero in

1914; a year after the end of the first world

war it was 50%. Canada introduced income

tax in 1917 as a “temporary” measure to fi-

nance the war. During the second world

war income tax in America turned from a

“class tax” to a “mass tax”, with the number

Booster juice

Changeinfiscalbalance*,%ofworldGDP

Source:UBS

*Cyclicallyadjusted,primary

†Excl.ChinaandIndia ‡March26thforecast

1

2.

2.

1.

1.

0.

0

-0.

-1.

20‡

Restofworld UnitedStates

China Euroarea Emergingmarkets†

World

↑Expansion

Contraction ↓

Death and taxes

Britain*, central-government expenditure

% of GDP

Source:BankofEngland *England’sGDPpre-

2

80

60

40

20

0

1689 5019005018001750 2016

French

Revolutionary

& Napoleonic

wars

WW

WW

Seven

Years War