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--- Begin Message --- http://www.mises.org/fullstory.asp?control=834
The Law of the Ratchet

by Steve Hanke &Robert Higgs

[Posted November 29, 2001]

As the U.S. confronts a new crisis, the opportunists are once again
playing the system and exploiting it for their own ends.

Much of the growth of government in the U.S. and elsewhere occurs as a
direct or indirect result of national emergencies such as wars and
economic depressions.

Laws are enacted, bureaux are created, and budgets are enlarged. In many
cases these changes turn out to be permanent. The result is that crises
act as a ratchet, shifting the trend line of government's size and scope
up to a higher level.

It comes as no surprise that governments spend more money and regulate
more actively during crises--wars and economic bailouts are expensive
and complicated. But a more active government also attracts
opportunists, who perceive that a national emergency can serve as a
useful pretext for achieving their own objectives.

The U.S. and other countries seem no more aware of this today than they
were in the past. And yet history has provided many examples to
illustrate how damaging it is.

Take the Great Depression. At that time, the organized farm lobbies,
having sought subsidies for decades, took advantage of the crisis to
pass a sweeping rescue package, the Agricultural Adjustment Act, whose
title declared it to be "an act to relieve the existing national
economic emergency."

Almost 70 years later, farmers are still sucking money from the rest of
society, and agricultural policy has been enlarged to satisfy a variety
of other interest groups, including conservationists, nutritionists, and
friends of the Third World.

Then, during the Second World War, when government accounted for nearly
half the U.S.'s gross domestic product, virtually every interest group
tried to tap into the vastly enlarged government budget. Even bureaux
seemingly remote from the war effort, such as the Department of the
Interior, claimed to be performing "essential war work" and to be
entitled to bigger budgets and more personnel.

Smaller crises have sent the opportunists into feeding frenzies, too.
The ever opportunistic International Monetary Fund is a classic case.
Established as part of the 1944 Bretton Woods agreement, the IMF was
primarily responsible for extending short-term, subsidized credits to
countries experiencing balance-of-payments problems under the postwar
pegged-exchange-rate system. In 1971, however, Richard Nixon, then U.S.
president, closed the gold window, signaling the collapse of the Bretton
Woods agreement and, presumably, the demise of the IMF's original
purpose. But since then, the IMF has used every so-called crisis to
expand its scope and scale.

The oil crises of the 1970s allowed the institution to reinvent itself.
Those shocks required more IMF lending to
facilitate--yes--balance-of-payments adjustments. And more lending there
was: from 1970 to 1975, IMF lending more than doubled in real terms;
from 1975 to 1982, it increased by 58 percent in real terms.

With the election of Ronald Reagan as U.S. president in 1980, it seemed
the IMF's crisis-driven opportunism might be reined in. Yet with the
onset of the Mexican debt crisis, more IMF lending was "required" to
prevent debt crises and bank failures. That rationale was used by none
other than President Ronald Reagan, who personally lobbied 400 out of
435 congressmen to obtain approval for a U.S. quota increase for the
IMF. IMF lending ratcheted up again, increasing 27 percent in real terms
during Mr. Reagan's first term in office.

Not surprisingly, the events of September 11 did not catch the IMF
flat-footed. On September 18, Paul O'Neill, the U.S. Treasury secretary,
had breakfast with Horst Kohler, the IMF's managing director, to discuss
the financial needs of coalition partners. Also on their agenda was the
IMF's denial of funds to countries that failed to toe Washington's line.

Within the U.S. government, the latest emergency has given cover to a
multitude of parochial opportunists, whose proposals range from bailing
out the airlines to nationalizing vaccine production. The resulting
"stimulus package" amounts to about $100 billion.

The ratchet continues to operate on ideology, too. A recent poll
conducted by The Washington Post indicates that 53 percent of Americans
think the government "is run for the benefit of all the people," up from
35 percent last year. Only 37 percent agreed that "the government is
pretty much run by a few big interests looking out for themselves," the
lowest percentage since 1966, when 33 percent embraced that view.

It may be too much to expect a speedy end to the law of the ratchet, but
it is time to acknowledge what is going on. That, at least, may make it
easier to reverse the trend during times of stability.

----------------

Steve Hanke, who serves on the editorial board of the Quarterly Journal
of Austrian Economics, is a professor of applied economics at Johns
Hopkins University and chairman of the Friedberg Mercantile Group in New
York. Send Steve MAIL, and see his Mises.org Articles Archive. Robert
Higgs, adjunct scholar of the Mises Institute, is senior fellow at the
Independent Institute in Oakland, California, and editor of The
Independent Review. Send Robert MAIL, and see his Mises.org Articles
Archive. A version of this article originally appeared in the
Financial
Times.

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