Ratcheting Up the Panic
Oscar Wilde once wrote, “The bureaucracy is expanding to meet the needs of the expanding bureaucracy.” This statement is only partially true. The government has expanded due to bureaucracy, but more importantly due to demand. When everything is going well the demand is low; however, the moment something goes awry the demands of the people kick in. Each 20th and 21st century economic crisis faced by America has led to dismay and anger from the people. The reward for their pleas has been a “bigger and better” government.
Robert Higgs spoke on the growth of government. He calls it “ratcheting up” in times of crisis. He notes how many modern governments are always expanding, little by little until a situation which arises which require a governmental solution. Higgs stated, “In the minds and hearts of the people who passed through the crisis and experienced the expanded governmental powers that is, at the ultimate source of behavioral response to future exigencies the underlying structure had indeed changed.”[1] The expansion of governmental power usually derives from some specific catalyst i.e. 2008 Banking Crisis, Covid-19, war, or in this specific case the Great Depression.
Higgs argued, “If, however, the government mobilizes for war not simply by increasing the scale of its traditional activities but also by widening the scope of its effective authority over economic decision-making…there is a shift towards Big Government.”[2] Most people are emotional thinkers rather than rational and logical thinkers. When a problem occurs many people panic. This can be seen in daily life e.g. a car accident happens because someone becomes frantic over being late and speeds recklessly causing a crash. The reason this concept of panic is important in a macroeconomic situation, is because people in great numbers acting irrationally create bigger difficulties than were initially warranted. The stock market crash in 1929 did not have to be so dire. Stock owners were margin called. This required them to liquidate assets at ludicrously low prices. This created a financial vortex, sucking up all the good feeling from the market. In turn this caused other stock owners to work themselves up into a lather and sell their stocks to avoid losing all their money. If these investors had kept their money in the market, they would have made significant profit. People forget that there are only two ways one loses money in the markets: the company goes bankrupt or the stock owner sells below the price paid. This same type of panic happened in March of 2020 with Home Depot stock, as one example.[3] Those who sold, lost a great deal of money. Those who did not freak out have been rewarded.
Higgs claimed, “20th-century Americans have both expected and desired the government to “do something,” and do it immediately.”[4] Americans due to near immediate communication with the rest of the nation and even the world have grown increasingly impatient. Americans want the optimum solution and it had better happen “on the double.” Word spread that banks were in trouble and so the people, in their fear, ran on the banks. If the common man, had thought through his action rationally instead of panicking the near fatal blow to the economy would never have happened. Edwin Gay said of the problems of the Great Depression, “In such a depression as this the problem is infinitely complex, decisions are beset by doubt, action seems always too late or has effects contrary to what were expected, and disunion and disruption have spread as each centrifugal force, seeking to strengthen itself, weakens the whole.”[5] Thrown into the incendiary mix, people looking to fix their immediate situation did not think logically or for their own country. Instead they tried to squeeze out what money they could. This lack of rationalism was because they allowed their feelings to get in the way of their thinking. They were thinking about their current paycheck, not the next sixty. They were so desperate to be made whole financially (at least whole as possible) immediately, they triggered a financial cataclysm.
The legendary investor Phillip Fischer argued, “However, prior to 1932 there would have been serious question from the responsible leadership of either party as to whether there was any moral justification or even political wisdom in deliberately running a huge deficit to buttress ailing segments of business.”[6] Neither Democrats nor Republicans, would have supported steps taken by the government to create a “quick fix.” Americans became hooked on the idea of the government as being an economic savior to the common man. The government has expanded in order to meet that perception and “ratcheted up” demand.
Bibliography
Fischer, Phillip. Common Stocks and Uncommon Profits. Hoboken: John Wiley and Sons, 1958 and 1996.
Gay, Edwin F. “The Great Depression.” Foreign Affairs 10, no. 4 (1932): 529–40. Accessed April 21, 2021. doi:10.2307/20030459.
Higgs, Robert. Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon,
Explorations in Economic History,Volume 22, Issue 1,1985,Pages 1–28, ISSN 0014–4983, https://doi.org/10.1016/0014-4983(85)90019-1.(https://www.sciencedirect.com/science/article/pii/0014498385900191).
Footnotes
[1] The argument he makes is “bigger government” increased scale of what the government normally does. “Bigger Government” is an increase in dimension of government.
Robert Higgs, Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon,
Explorations in Economic History,Volume 22, Issue 1,1985, 2. https://doi.org/10.1016/0014-4983(85)90019-1.
(https://www.sciencedirect.com/science/article/pii/0014498385900191).
[2] Ibid., 7.
[3] Home Depot fell from a high of $245.34 on February 20th, 2020 to a March 20th, 2020 low of $152.15, its lowest price since September of 2017. By May 29th, 2020 Home Depot reached an all-time high of $248.28. Currently it sits at $325.45 as of April 21st, 2021.
[4] Robert Higgs, Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon,
Explorations in Economic History,Volume 22, Issue 1,1985 8. https://doi.org/10.1016/0014-4983(85)90019-1.
(https://www.sciencedirect.com/science/article/pii/0014498385900191).
[5] Edwin F. Gay. “The Great Depression.” Foreign Affairs 10, no. 4 (1932): 529. Accessed April 21, 2021. doi:10.2307/20030459.
[6] Phillip Fischer. Common Stocks and Uncommon Profits. (Hoboken, New Jersey: John Wiley and Sons, 1958 and 1996), 38–39.
