What a year it has been for all of us. The pandemic is slowly receding. We still have to exercise great caution but it’s not too early to look back and try to figure out what lessons we can learn from that and also what warning signals there are for the future. We were told a year ago in March 2020 that the lockdowns and the other restrictions on our liberties were going to be a very temporary duration, 15 days to crunch the curve. For many countries which haven’t come out of lockdown, it feels more like 15 months to crunch society.
It is very important that once we recover from this pandemic we don’t transition into a “plandendemic” which means we no longer have the freedoms, the entrepreneurial innovation, the ability to create new and interesting things in our societies because regulation, restrictions, and a general increase in government spending and taxation will make all of that much more difficult. I’m not saying we go back to normal but the “New Normal” has to be something that preserves the essence of our free societies, the civil liberties, the entrepreneurship, the dynamics of the free market, and the free trade and flow of goods that have brought us so much prosperity.
There is a danger though that a different model will take hold. The U.S. and other governments have spent lavishly to boost the economy during the pandemic and many people have grown to like this idea so much in fact that history suggests that high levels of public expenditure will continue to be a norm for a long time to come. People come to benefit from it and when to expect it. That makes it harder to go back to a time of restraint and lower spending.
Let’s look at the New Deal – a period of very intense public expenditure during the Great Depression that gave way to the even greater spending and even greater restrictions on liberties of World War II. U.S. outlays as a share of GDP went from three percent to nine percent by the end of 1933 and then did nearly 10 percent by the end of the 1930s. The World War came in and everything exploded; expenditure was 41 percent by 1944.
It wasn’t just that the government spent on infrastructure or welfare of the military – it was that the government imposed more regulation and taxes as well. The state grew bigger in nearly every possible way and it never permanently came back down. Just after 1945, the government stopped spending on fighting the war so a sharp dip ensued. But then spending began to climb again very quickly as welfare state spending took the place of military spending. By the time Ronald Reagan became president in the 1980s net outlays were still around 20 percent of GDP in the U.S. Reagan just slowed the growth of big government and his successors began to increase it gradually, running deficits of around four percent or five percent a year, the largest peacetime spike until the pandemic came, just after the Great Recession of 2008 when federal net outlays in the U.S. touched 24 percent. As of now. after COVID-19, the figure has hit 36 percent assuming that all the allocated money that’s been authorized by Congress is spent and President Joe Biden’s proposed four trillion-dollar stimulus. Did you ever think that number would just trip off our tongue? It has not yet been factored in.
That is a pretty substantial number. The GDP in 2019 was 21 trillion so Biden’s spending is close to 20 percent of our entire nation’s gross national product on its own. Indeed, the government grew on the back of emergencies such as the Great Depression and the World Wars as the economist Robert Higgs has found in his famous book Crisis and Leviathan. What Higgs said is that if we analyze the results of these emergencies “Chief among the enduring legacies of emergency governmental programs has been an ideological change, in particular a profound transformation of the typical American’s beliefs about the appropriate role of the federal government in economic affairs.” I fear that we may be living through that again.
It isn’t just the public that comes to prize such expenditures. The political environment, the political opposition to this growth in government reduces too. Republican governments through the second half of the 20th century didn’t always aim to be leaner. In no presidency, republican or democratic, in the U.S. since that of Dwight D. Eisenhower has the U.S. seen a decline in federal outlays as a percentage of the GDP. Eisenhower himself, while expanding social security, building highways, and constructing low-income housing (what we call infrastructure today) only brought spending down from 20.4 percent to 18.4 percent. The pandemic represents another crisis of the kind that Robert Higgs discussed in his book. If his observation is any guide, the size of the state and its expenditure will not shrink in a hurry. It is easy for people to start thinking “yeah, I survived the pandemic only because of this money.” It will open the door for more spending. That is what we have to guard against.
Yes, there are lessons to be learned from the pandemic in public health and in the ability that we have to react to these emergencies but we cannot forget that the ultimate emergency is if the fundamental nature of the free market, the fundamental nature of our economy, and the fundamental nature of our civil liberties are negatively affected by how we react to this pandemic going forward. I believe in a free society. We have to have a robust debate about all of these questions. So far we haven’t had that, possibly for understandable reasons. But now is the time to begin that debate and that is why the Hayek Institute and the Austrian Economic Center are so important in starting this discussion. I am pleased to be a part of this I am always happy to speak on behalf of the Hayek Institute which I believe represents the best and finest of classical liberal values.