Wednesday, March 10, 2010

How does your government grow - Wars or Demons?

There is a lot of economics literature which argues that growth of government happens during wars. A good illustration of that is to the right from the Cato Institute - which charts government expenditures in constant 1990 dollars. Note the big spike during the early 1940s.

But there are some other explanations. I began to think about the White House Chief of Staff's comment “You never want a serious crisis to go to waste.” and whether an alternative could be constructed based on the desires of expansionist politicians. (Note the NYT's Jack Rosenthal actually did a column on the origins of Emmanuel's statement in his On Language - turns out Emmanuel was not even original in his thoughts.)

Amity Shlaes covers the expansion of government under FDR in her excellent book - The Forgotten Man. One of the stories she lays out is the FDR's determined campaign against private power in the south. Wendell Wilkie was the CEO of Commonwealth and Southern which was a large utility holding company. He was a delegate to the democratic convention in 1932. During that time he proposed a significant expansion of capacity in the south. But he soon found that FDR would use him and his company as a demon to propose expansion of public power in the same region. The extension of electric power across the country is a long story. As initial companies began to expand their services their capital requirements increased and they naturally began to consolidate. That process took from around the turn of the century to the mid-1930s. But then came the depression. Solving the economic downturn that began in the late 1920s could have been accomplished without any public expansion of power generation. But FDR recognized the opportunity presented by a) the complexity of the industry and the ability to portray its leaders in a negative light and b) the opportunity to make the case that solving the problem against these "demons" would somehow improve our overall economic situation. In his 1935 State of the Union FDR called the holding companies "evil."

As FDR's campaign increased Wilkie and some of his counterparts tried to negotiate with the administration. But FDR saw the benefit from identifying a demon. Wilkie did not recognize that he was a symbol. As I began to think about that episode, I thought there were many parallels with the current administration and the health care industry. I thought what a novel thought. But as I did some research on the subject I found a couple of interesting predecessors who had handled the issue pretty well. For example Diane McWhorter in a February USA Today Blog gives a good summary of the parallels and strategies used by FDR against the power companies and Obama against the health insurers.

The points here are two. First, there is a pretty good case to be made that in addition to the expansions that happen as a result of war powers can be increased by a demon theory of expansions. But second, it is often hard to tell where ideas come from - at the beginning of the week I thought I had come up with an idea that was a slight improvement in my understanding of the question of government expansion ( I ultimately subscribe to Margaret Thatcher's quote about the problem with socialism ("The problem with socialism is that eventually you run out of other people's money.") - but as I did a little more research I found there were a lot of others who came to the same conclusion earlier.

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