Big Government Isn't Always Bad for You

With the Tea Parties on Main Street and pitchforks on Wall Street, it seems to be a populist moment. But if you look at US policy, Washington appears to be moving toward more consolidation and centralization.

That's Ross Douthat's argument in this elegant and thought-provoking op-ed for the New York Times. The broader theory is right on: governments often respond to crises by giving themselves more power. For example, the Great Depression was a bank run epidemic followed by economic collapse and widespread poverty. Respectively, those emergencies gave FDR grounds to create the FDIC, the alphabet soup agencies, and Social Security.

It's the same in 2010. The Great Recession nearly brought down the financial sector and hurt home sales, and those emergencies gave Bush/Obama grounds to create TARP, pursue financial regulation and provide significant support for housing through credits and Federal Reserve relief efforts.

But Douthat also claims that these fixes make us more vulnerable to future crises:

The C.I.A. and F.B.I. didn't stop 9/11, so now we have the Department of Homeland Security. Decades of government subsidies for homebuyers helped create the housing crash, so now the government is subsidizing the auto industry, the green-energy industry, the health care sector ...

Maybe the problem with the bold sentence is merely parallelism, but is Douthat really suggesting that cap-and-trade, green energy subsidies and health care reform are responses to the housing crash the same way DHS was a response to 9/11? That can't be right. Elected Democrats would probably pursued those policies with 5% unemployment. What's more, our energy industry and health care sector are already heavily subsidized for reasons that have less to do with the crisis-consolidation cycle, and more to do with people liking cheap gas and affordable health care. He goes on:

But their fixes tend to make the system even more complex and centralized, and more vulnerable to the next national-security surprise, the next natural disaster, the next economic crisis.

This sentence is where the trouble creeps in. Are we more vulnerable to national-security attacks in May, 2010, than in August, 2001, because of the Department of Homeland Security? That's a pretty controversial claim, if he's making it. Is the next natural disaster more likely with greater government control over energy policy and regulations? The BP oil spill was partially permitted by lax regulation under the Bush administration rather than centralized government.

In the last economic crisis, I won't pretend that the government's role in federal housing policy didn't implicitly permit the housing bubble, encourage massive leverage at Fannie/Freddie and foster an era of too-cheap credit. But how is the growing centralization of government making the economic system more vulnerable to economic crises over time? The boom-bust cycle of the more decentralized 1800s and early 1900s was significantly more volatile than the relative moderation of the last 30 years. In fact the shadow banking industry, ground-zero of the financial crisis, enjoyed a heyday of de-regulation in the decade before its catastrophe.

To sum up, Douthat is right about noting the crisis-consolidation cycle. But I'm interested in reading more about why he thinks consolidation inherently makes us more vulnerable to the crises it's designed to mitigate.