The EconomistMarch 28th 2020 BriefingThe pandemic and the state 192
1paring 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- 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 numberBooster juice
Change in fiscal balance*, % of world GDPSource: UBS*Cyclically adjusted, primary
†Excl. China and India ‡March 26th forecast12.2.1.
1.
0.
0
-0.
-1.
20‡Rest of world United StatesChina Euro area Emerging markets†World↑ ExpansionContraction ↓Death and taxes
Britain*, central-government expenditure
% of GDPSource: Bank of England *England’s GDP pre-2806040200
1689 5019005018001750 2016French
Revolutionary
& Napoleonic
warsWW
WW
Seven
Years War