Never Waste an Emergency to Expand the Size of Government?

by Ray Keating

The Keating Files – August 4, 2020

It’s hard to find anyone these days not on board with the federal government shoveling big bucks out the door, given that government, reacting to the COVID-19 pandemic, has shut down large swathes of the economy. But that doesn’t mean the consequences of such actions will magically fail to materialize.

Make no mistake, whether or not you’re okay with staggering levels of federal spending, aid and loan programs, the bill will come due. And it will be huge. Actually, we’re already paying through lost output, lost businesses, lost investment, lost entrepreneurship and lost jobs. That’s what happens anytime government sucks massive amounts of resources out of the private sector – whether via taxes or borrowing – and then reallocates those dollars according to politics. Again, whether the current federal spending binge is justified or not, the costs are unavoidable.

Unfortunately, the ills could linger long into the future if politicians do what they usually do after major emergencies.

Consider some key examples from the past century-plus. 

Before World War I, from 1901 to 1916, for example, federal government outlays ran, on average, at just less than 2 percent of the economy. During U.S. participation in World War I and its immediate aftermath, federal outlays jumped to 3.2 percent of the economy in 1917, 16.6 percent in 1918, and 23.4 percent in 1919.

The economic growth – largely driven by major tax relief – and spending restraint that came in the 1920s during the administrations of Presidents Warren G. Harding and Calvin Coolidge, resulted in a reduction of the federal government’s take. Federal government outlays had declined to about 3 percent of the economy in the late 1920s. While that was an impressive reduction in the size of government, federal outlays as a share of the economy still stood at a third higher than prior to World War I.

Government failing to return to its pre-emergency levels would be the rule, rather than the exception, for the coming century.

Consider the Great Depression and World War II. Presidents Herbert Hoover and Franklin D. Roosevelt sought to fight economic woes with more government, that is, with unprecedented levels of taxes, regulation and spending (along with Hoover and Congress’ protectionism on trade). By doing so, these two presidents and Members of Congress created the Great Depression. They all failed to grasp that it was government causing the pain. And then came fighting the scourges of the Nazis and Japanese imperialism.

Consider a couple of moments during and after this period. After the Depression had dragged on for about a decade, federal outlays stood at 10.1 percent of GDP in 1939. That was more than three times the pre-Depression level. 

During World War II, spending naturally skyrocketed, with outlays climbing to a peak of 42.7 percent of GDP in 1944, and then declining to 14 percent at the end of the forties. That 14 percent level was markedly higher than where it was just before the war.

By the end of the Korean War in 1953, outlays once again had climbed, hitting 19.9 percent of GDP. Subsequently, federal spending backed off some, running around 18 percent of the economy at the end of the 1950s and into the mid-1960s. Again, that was down from the Korean War peak, but still notably above the pre-war level.

The Sixties eventually saw the War on Poverty and the Vietnam War. Federal outlays were pushed up to the 19 percent range, and then there was no effort to pare things back. Instead, federal outlays topped 20 percent of GDP, and staying around the 21 percent to 22 percent range (once more, give or take in years here and there) into the mid-1990s.

Economic growth and reductions in defense outlays actually brought federal spending down for a few years, coming in below 18 percent in 2000 and 2001.  That was noteworthy given where spending had been for more than three decades.

After the attacks on 9-11, however, federal outlays again grew as a share of the economy, exceeding 19 percent of GDP.

The 2008-09 mortgage and economic mess saw federal spending spike to 24.4 percent of GDP in 2009. The subsequent, gradual decline brought outlays as a share of GDP down to 20.2 percent in 2018 and 21 percent in 2019. So, outlays persisted above that 20 percent mark – again, federal spending seemed to reach a new, higher level. 

And now we have the enormous increase in federal spending tied to the pandemic. For example, the Congressional Budget Office reported last month that through the first nine months of fiscal year 2020 (covering October 2019 to June 2020), federal outlays increased by breathtaking 49 percent compared to same period last year.

Through the first nine months of FY2020, outlays came in at more than $5 trillion. For all of FY2019, federal outlays registered $4.4 trillion. Considering that further large increases in federal spending no doubt will be registered during the final three months of the 2020 budget year, and given the shrinking of the economy, it’s within reason that federal spending as a share of GDP could top 30 percent this year.

As vaccines and therapeutics make it to the market and the economy starts to seriously recover, what will happen to the size of government in this country? Initially, we can expect spending to fall from unprecedented heights. But where will it settle? 

Do politicians stay true to form, with spending persisting at levels higher than where it was prior to the pandemic? Cynical advocates of big government might ask, “Why waste an emergency by failing to expand the size of government?” If such sentiments prevail, the economy will suffer from slower economic, income and job growth.

Or, will some economic sanity take hold, with government spending retreating to levels perhaps experienced prior to 9-11, and thereby, leaving more resources in the private sector where they will be used more productively, with the economy then growing more robustly? Of course, for such sanity to prevail, it will require that politicians, and many voters, actually learn from history and economics. That sounds like a tall order, but there’s always hope.

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Ray Keating is a columnist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York from Amazon or signed books  at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?

Keating also is a novelist. His latest novel is  The Traitor: A Pastor Stephen Grant Novel, which is the 12^th  book in the series. The Kindle price has been cut to $2.99 for each book. Big sale on signed books and sets at https://raykeatingonline.com/t/book-of-the-month.

Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcast  and the Free Enterprise in Three Minutes Podcast  

The COVID-19 Crisis, Part II: A Bastiat Moment

Part II of a Projected Three-Part Series

(Read Part I Here)
by Ray Keating

The Keating Files – May 21, 2020

The COVID-19 crisis turns out to be a moment to consider a 19^th-century French economist.

Frederic Bastiat (1801-1850) was a leading economic and political thinker. One of Bastiat’s most important insights has popped up among those who have been arguing strongly against any kind of government restrictions during the COVID-19 crisis. What is this point? Bastiat opened his famous essay “What Is Seen and What Is Not Seen” this way:

In the economic sphere an action, a habit, an institution, or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause; it is seen. The other merely occur successively; they are not seen; we are lucky if we foresee them.

The entire difference between a bad and a good economist is apparent here. A bad relies on the visible effect, while the good one takes account both of the effect one can seeand of those one must foresee.

Bastiat actually comes in handy for all of us when looking at the economic and health costs of this crisis.

First, we are seeing a wide array of economic costs due to the governmental restrictions and shutdowns implemented in response to the virus, including declining economic output and investment, lost jobs, diminished trade, and falling income and consumption. There’s no missing this grim fallout.

But there is, indeed, more. Assorted economists are right to point out that there are unseen costs. Politicians and many in the media refer to trillions of dollars being spent by the federal government to aid individuals, families and businesses – in response to government having shutdown large parts of the economy – as “stimulus.” They see dollars and loans helping certain people and firms. Unseen, though, is the fact that those resources must come from somewhere, that is, being diverted from other endeavors, and resulting in real and substantial costs. Also, unseen are the future costs of this spending, in terms of burdens placed on taxpayers not too far down the road. Those unseen costs promise to be significant and lasting.

But Bastiat’s unseen effects go beyond this as well. For example, at the time of this writing (early morning on May 21), according to the Johns Hopkins Coronavirus Resource Center, global coronavirus cases registered 5.02 million, including 1.55 million in the United States, and worldwide deaths stood at 328,471, and at 93,439 in the U.S.

As tragic as these deaths are, the actual numbers likely are worse. Unseen are a rise in unexpected deaths not assigned to the coronavirus but likely tied to the pandemic by either being undiagnosed coronavirus cases, or dying due to other causes untreated because of the COVID-19 outbreak. (See, for example, a Tampa Bay Times analysis for Florida, and a Wall Street Journal article.)

And then there are the unseen lives saved. Critics of stay-at-home orders, social distancing and even wearing masks like to look at the latest number of deaths and rather callously proclaim that this hasn’t been as bad as was predicted, and therefore, the actions taken have meant little to nothing. In reality, the death toll not only keeps rising – soon to pass 100,000 in the U.S. – but it should be obvious that staying at home, social distancing and other efforts have avoided unseen deaths, that is, it has saved many lives. After all, that was and is the point of such actions. Duh.

The New York Times has reported on work done by researchers at Columbia University that estimates that 36,000 fewer people would have died if social distancing efforts had gone into effect a week earlier in March, and if lockdowns had gone into effect on March 1, some 83 percent of the nation’s deaths could have been avoided. Now, there always are major problems with such modeling, but the directional aspect is undeniable. 

Yes, I’m comfortable in assuming that the number of unseen deaths in the U.S. would have been markedly higher (double or more than double?) without social distancing undertakings. In turn, a strikingly higher number of deaths, of course, would have come with a wide array of additional, unseen economic costs.

Indeed, this is a Bastiat moment, and yes, it is untidy in terms of nailing down exact numbers and estimates, and arguments promise to labor on as to the costs and benefits of what’s been done, and what would have happened under other scenarios. And these kinds of discussions and analyses will need to be done so that we can learn, and be better able to address future pandemics.

But throughout, let’s have compassion and regret for those who have fallen ill and died; let’s deal soberly with the real and brutal economic costs; let’s show some humility in terms of what we know and what we don’t; and let’s assume that, while we disagree, we’re all trying to do what’s best.

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Ray Keating is a columnist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York  from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. Keating also is a novelist. His latest novels are  The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?

Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcastand the Free Enterprise in Three Minutes Podcast 

The COVID-19 Crisis: Our Crushed Economy

Part I of a Projected Three-Part Series

by Ray Keating

The Keating Files – May 15, 2020

Make no mistake, the coronavirus pandemic and resulting government shutdowns of large parts of economy have had devastating effects across our economy, and the impact will not be quickly reversed. In fact, with misguided policymaking after COVID-19 has come under control (hopefully via vaccines and/or therapeutics), our economic ills could be further extended.

It pays to keep in mind that whenever the economy goes seriously off the rails, some kind of government action usually can be identified that either caused the mess or made it worse. In our current situation, the rapid spread of this virus, the threat to the lives of individuals, and the actual resulting deaths had their own negative consequences for the economy, and then governmental efforts – largely necessary though far from perfect (anyone who expects something even close to efficiency from government in anything doesn’t understand government) – have resulted in harsh economic consequences.

This column is not meant as an argument against what the government has done, nor as some kind of support for all that government has implemented. It’s also not meant to align with those arguing irresponsibly for an immediate, mask-less reopening of the economy with little concern, it seems, for ongoing efforts against spreading this virus. What follows is a look at key indicators describing our grim state of economic affairs.

First, real GDP (i.e., inflation-adjusted gross domestic product) in the first quarter plunged by 4.8 percent, with all major categories of economic activity declining dramatically, including consumer spending, business investment and trade. During the post-World-War-II era, there were only seven quarters when the economy declined by larger percentages.

Second, information coming in about the start of the second quarter points to an even larger drop in GDP. For example, retail sales plunged by 16.4 percent in April. That was the biggest monthly decline in a dataset going back to 1992. Industrial production – that is, the real output of the manufacturing, mining, and electric and gas utilities – tumbled by 11.2 percent in April. That was the largest monthly decline on record in an index that dates back 101 years. The drop in manufacturing production was even larger at 13.7 percent – again, biggest decline on record.

Third, jobs are disappearing at a frightening pace. Initial weekly unemployment claims over the first eight weeks of the COVID-19 crisis tallied up to 36.5 million. The story from the April employment report arguably was even worse. Perhaps most distressing was the fact that the employment-population ratio in April fell to the lowest level ever recorded in a dataset going back to 1948, plummeting from 61.1 percent in February to 60 percent in March, and then to 51.3 percent in April. 

Fourth, entrepreneurship is suffering as well. For example, the number of unincorporated self-employed individuals – an important measure of small business and startup activity – declined in April to its lowest level since January 1980. 

For good measure, the Census Bureau recently reported that business applications for tax IDs – one measure of business formation (though far from complete) – took a dive of 4.5 percent in the first quarter of this year. In addition, high-propensity business applications – which are businesses with a high likelihood to turn into businesses with payrolls – fell by 5.4 percent in April. These measures of entrepreneurial activity promise to fall further in the second quarter of this year.

Indeed, there’s nothing positive going on in the U.S. economy currently. We’re likely to see the steepest decline in economic activity during the second quarter of this year (that is, the current quarter) since the Great Depression.

After reviewing these grim numbers and trends, it’s critical to understand that these aren’t just some cold statistics detached from reality. Instead, they quantify reality. These numbers reflect or communicate real economic hardship for tens of millions of Americans across the nation. At the same time, these numbers do not negate the realities of mounting coronavirus deaths, and the understanding that the number of deaths could have been much worse, and still threaten to get worse. More on that in Part II in this series.

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Ray Keating is a columnist, economist, podcaster and entrepreneur.  You can order his new book Behind Enemy Lines: Conservative Communiques from Left-Wing New York  from Amazon or signed books at RayKeatingOnline.com. His other recent nonfiction book is Free Trade Rocks! 10 Points on International Trade Everyone Should Know. Keating also is a novelist. His latest novels are  The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction. The views expressed here are his own – after all, no one else should be held responsible for this stuff, right?

Also, tune in to Ray Keating’s podcasts – the PRESS CLUB C Podcastand the Free Enterprise in Three Minutes Podcast