How Much Will Government Expand In Response To COVID-19?

One well-established thesis of modern political science and economic history is that government not only grows bigger in periods of crisis, particularly during wars and economic upheavals, but that any later reversals never reset the dials back to the same level as before. The 1987 book Crisis and Leviathan, by Robert Higgs, provides an extensive historical review and analysis behind this paradigm for the so-called "ratchet effect" behind ever-increasing government power that lives long beyond the periodic crises that help fuel it. The balance between America's civil society, market economy, and federalist system on the one hand and its more centralized, bureaucratized welfare/warfare state on the other hand has been dramatically altered by political upheavals throughout history - including the Civil War, both world wars, and both the Great Depression and Great Recession.

If there are no atheists in foxholes, there also are fewer small-government libertarians among those waging war, facing economic devastation, or enduring a deadly pandemic. The security/freedom balance resets when optimistic self-sufficiency becomes more precarious and harder to forecast confidently. At times, even incompetently posing as a would-be strong-man leader can bypass normal institutional checks and balances.

Recently, former AEI president Christopher DeMuth suggested, in last Saturday's Wall Street Journal, a more optimistic deregulatory climb back out of our COVID-19-driven abyss. His skillful effort at making lemonade out of lemons almost convinced this skeptic. The core argument is that the Trump administration successfully has resisted institutionalization of more permanent new federal government authority (dodging "responsibility" was already a well-established behavioral pattern), dispensed necessary short-term emergency assistance, and actually established new markers of decentralized and deregulatory rollbacks in such areas as FDA product review, national educational testing, medical licensing, and borderless telemedicine.

However, old records for massive federal spending, Federal Reserve magic money creation, and public debt exceeding annual GDP are being shattered. Unwinding the clock and resetting dependency expectations already was hard enough to attempt before COVID-19 fiscal landings overshot previous runways.

In particular, the deregulatory glass looks more half-empty than half-full in health policy. Yes, desperate supply shortages have forced one-time reprieves from longstanding regulatory barnacles that kept potential lifesaving treatments and lower cost - but more accessible - delivery of health care services off the market during business-as-usual times. But these modest areas of incremental progress are likely to be overpowered by broader impulses to throw tens of billions of more dollars in the months ahead at whatever looks like medical treatment, products, and coverage financing as new demand outstrips past supply.

Moreover, the next round of election contests looks far friendlier to an expanded role for government in health care, through simplified government redistribution channels at lower public program reimbursement levels, rather than a reduction of government control, modulated through value-based, competitive market calculations. The price of recent failures to reform the policy mistakes and implementation excesses of Obamacare has risen, and that bill has become overdue with accrued interest.

Destabilizing economic downturns tend to produce top-down political responses that launch new programs that may take decades to reform, if not repeal. A host of New Deal "experiments" live on today as unassailable components of everyday life (others took decades to be revised by technological bypasses or incremental legislative changes).

However, smaller-government advocates might point to some counterexamples in 20th century American history. The end of World War I stimulated political demands for a "Return to Normalcy," lower tax rates, an end to Prohibition, and a resurgence of isolationism. The post-WWII demobilization period proceeded far better economically than predicted by most economists of the time, due to quicker phaseouts of wartime price controls and the stimulus of more than a decade of pent-up consumer demand. Of course, the wartime tax exclusion for employer-financed health insurance lives on more than 75 years later.

We remain in the early chapters of this latest serious challenge to societal cohesion and political equilibrium, so we can still affect the trajectory of this emergency. Already, unanticipated consequences abound. For example, President Trump has remarkably stimulated new discovery and appreciation of the 10th Amendment's limits on federal power among progressive detractors. Deference to state-level decision-making has become more frequent in Washington, even if partly a ploy to dodge responsibility for unpopular but necessary decisions.

Stressful periods of national challenge can be powerful incubators of market innovation and creative destruction, offset by a flight to the illusion of politically promised security. We will need all of our civil society's inherent strengths and time-tested norms to rediscover the best balance on the other side of our latest return to normalcy ahead.

Learn more: Early lessons from COVID-19 we already should have learned | A muted and mooted Affordable Care Act anniversary: What's to celebrate? | Gloomy coronavirus forecasts ignore American innovative genius

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