Posted on November 22, 2012 by Steven Hayward in Economy, Federal Budget
Obama's Ratchet and the Fiscal Cliff
A great Xmas stocking stuffer
If you follow the news you've no doubt heard of the Higgs boson (named for physicist Peter Higgs), the mysterious subatomic particle that helps explain the Big Bang and the "standard model" of the universe. But there is another important Higgs hypothesis that you should know about—named for economist and historian Robert Higgs—that explains the big bang of endless expansion of modern government. In his pathbreaking 1988 book Crisis and Leviathan: Critical Episodes in the Growth of American Government, Higgs explains what he calls the "ratchet effect," that is, the way in which government expands in size and scope to deal with a crisis, but remains permanently larger after the crisis recedes—a sort of "two steps forward, one step back" phenomenon. The ratchet effect is displayed schematically in the figure below. (Congratulations to Bob, by the way; a 25th anniversary edition of Crisis and Leviathan, with a new preface, is just out, and belongs on your Christmas book list if you don't have it already.)
The ratchet effect should be kept prominently in mind as we watch the unfolding of any compromise (if there is one) to avert the fiscal cliff, for Obama is bidding to cement in place the next major ratchet in the size and reach of government, not simply with Obamacare, but with the overall share of the economy that the federal government will command in perpetuity. Amity Shlaes notes this in her Bloomberg column this week on why 2013 might come to resemble 1937:
In the old days, federal spending amounted to about 19 percent or 19.5 percent of gross domestic product. That ratio was so reliable that economists took it as a given, the American normal, from which divergence was unnatural and temporary. By the old 19 percent rule, federal spending would have dropped back once the worst of the 2008 economic crisis passed.
That didn't happen. Instead the federal government continued to spend. Most important, even in 2012, when the crisis was long past, the government went on a spree, spending the equivalent of 24.3 percent of the economy, more than the 24.1 percent for the year earlier.
In 1936, a similar barrier was breached. Up until 1936, federal spending flowed at smaller levels than the spending by states and towns combined, with wartime being the exception. Roosevelt slowly ratcheted up the outlays, and in 1936, Washington spent more than the states and towns. This shift was dizzying for a country based on the principle of federalism, of strong states.
Bottom line: the Republican grand strategy should be to return federal spending to its postwar historic share of GDP of around 19 or 20 percent, where it was, by the way, at the end of the Clinton Administration, held up as the glory days by liberals today. By all means let's go back to the Clinton era tax rates (which were lower than what will occur under Obama's current position on taxes by the way) if it also means returning to Clinton-era levels of spending as a share of GDP. I continue to argue that perhaps the best means of retracing our steps is through the indirect route of letting all the Bush tax cuts expire at the end of the year, after which everyone, especially middle and lower income taxpayers, will feel the pain of paying for Obama's ratchet. If everyone (not just "the rich") have to pay for all the government they get, they may start wanting less of it. And then the GOP House will have increased leverage to tie any tax reform to serious spending reductions.
Postscript: The Higgs boson is an evanescent particle expiring after nanoseconds, while the Higgs ratchet seems to be a robust phenomenon, which has alternately been identified as "Governmentium" on the periodic table of the elements:
The heaviest chemical element yet known to science. Governmentium (Gv) has 1 neutron, 12 assistant neutrons, 75 deputy neutrons, and 224 assistant deputy neutrons, giving it an atomic mass of 312.
These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called peons. Since Governmentium has no electrons, it is inert. However, it can be detected as it impedes every reaction with which it comes into contact. A minute amount of Governmentium causes one reaction to take over four days to complete when it would normally take less than a second. Governmentium has a normal half-life of three years; it does not decay, but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places.
In fact, Governmentium mass will actually increase over time, since each reorganization will cause some morons to become neutrons, forming isodopes.
When catalyzed with money, Governmentium becomes Administratium–an element which radiates just as much energy as Governmentium since it has half as many peons but twice as many morons.
"Oh my God–Don't touch that!! It's Governmentium. My cousin Sal drank some mixed with Tang when he was a kid, and now he's a lawyer."