Leviathan Loves Crisis

Thursday, May 20, 2010
By Paul Martin

Crisis and Leviathan: Observations amid the Current Episode

by Robert Higgs

Since the early twentieth century, periods of real or perceived national emergency have been “critical episodes” in the growth of government’s size, scope, and power in the United States and in many other countries. Hence, the concise conceptualization: Crisis and Leviathan (the main title of my 1987 book on the growth of government in the United States from the late nineteenth century to the late twentieth century).

In the past century, the first five such critical episodes in the United States were: World War I; the Great Depression; World War II; a multi-faceted set of crises associated with the civil-rights revolution and the Vietnam War, roughly coincident with the presidencies of Lyndon B. Johnson and Richard M. Nixon; and the post 9/11 events associated with the so-called War on Terror and the U.S. attacks on and occupations of Afghanistan and Iraq. We are now amid another such critical episode, which springs from the housing bust that began in 2006, the economic recession that began late in 2007, and the financial debacle that reached its climax in September 2008.

The current troubles are complex and raise a multitude of questions. Many books and articles no doubt will be written to analyze these various issues in scholarly depth and detail, and certainly anything we might say today must be regarded as preliminary, at best. I focus here on a few aspects of the present episode that relate closely to my own research on the growth of government, a field of study to which I have returned again and again over the past thirty years.


The current recession has elicited many comparisons with earlier business downturns, especially with the Great Depression. Federal Reserve chairman Ben Bernanke is often described as an expert on the Great Depression who takes its lessons, as he understands them, deeply into account as he formulates and implements Fed policies. Likewise, many other economists have revisited the Great Depression recently in search of lessons applicable to current policy-making. In all of these reflections, the mainstream economics profession in general has distinguished itself by an astonishing superficiality of historical knowledge and lack of theoretical prowess.

The swiftness with which a great many mainstream economists have reverted to the simplistic “vulgar Keynesianism” that had its heyday from the late 1940s to the late 1960s has been nothing short of shocking, given that by the end of the 1970s such old-fashioned Keynesianism seemed to have been completely discredited and superseded in the leading echelons of the mainstream economics profession. Now it has come roaring back. Of course, the general public, whose understanding of such matters is always primitive, and the politicians, who are always looking for plausible intellectual rationales to excuse their insatiable spending, borrowing, and power-grabbing, had never abandoned vulgar Keynesianism, so they were elated to find that the economic “experts” were again confirming their own self-interested inclinations.

From such vulgar Keynesian thinking flowed the succession of “stimulus” spending measures, beginning with the Bush administration’s, carried out in the spring of 2008. Other governments have gone down the same foolish path. Of course, as any competent economist could have testified even fifty years ago, such temporary government-spending surges give people money that, for the most part, they save or use to pay off debts, rather than spending it along the lines envisioned by Keynesian “multiplier” analysis to set in motion an upward spiral of income, expenditure, real output, and employment. Much of the so-called stimulus spending in the United States has served only to bulk up the pay and benefits of government employees (federal, state, and local), effectively transferring income from the private sector to the government sector, and to reward other groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration – past, present, or future.

At the same time, Bernanke and other central bankers, obsessed by an irrational fear of deflation, set in motion liquidity-enhancing measures so vast that no one could reasonably have anticipated them. Excess reserves of depository institutions in the United States now substantially exceed $1 trillion, as the banks have simply absorbed the effusions of dollars the Fed has spent to acquire an unprecedented variety of “securities,” including various “toxic” assets that Fannie Mae, Freddie Mac, and other ill-managed firms had acquired during the housing boom and later.

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