Saturday, 29 August 2009

Scale and scope of government

There are at least two ways of dealing with failing banks. 1. bail them out 2. let those banks go through the normal bankruptcy and reorganization process. To me the second option seems the best. In the world of the second best, it seems preferable to have a known, predictable process of bankruptcy rather than a new, uncertain, largely political, processes of the bailout. Steven Horwitz writes on this topic,
I think that's exactly right. One can make a Higgsian point here about regime uncertainty: we're always better off (in the world of the second best) by operating under the known and predictable set of government rules than adopting new ones that have never been used before, or giving purely discretionary power to government agencies.
But Horwitz goes further to make a second, Higgsian, point,
We also know from Higgs and public choice theory more generally that once powers are given to government during a crisis, they never totally disappear when the crisis is over. So even if one thinks there was something unique about the situation last fall, it's naive to think that the powers the Fed and other agencies grabbed to fight it would go away in the long run. From a libertarian perspective then, the bailouts look like a really bad idea in the longer view.
Now a possible response to this argument is to say "if you did all of this through the bankruptcy courts, wouldn't that be enlarging government's size as well?" Yes, but with a difference. As Horwitz puts it,
Giving more cases to bankruptcy courts would be an increase in the scale of government, but not in its scope. This scale vs. scope distinction is one Higgs makes at the beginning of Crisis and Leviathan but is often overlooked in quick discussions of its main arguments.
Here "scale" means that government grows not by adding new powers but by having to do more with the powers it already has. Such expansion may be due ot factors like growth in the population or the economy or in other things that would draw more heavily on existing processes. "Scope,"refers to the size of the set of powers governments have. Growth in scope means acquiring new powers. Horwitz notes,
In Higgs's theory of crises and government growth, the key point is that crises lead to expansions of the scope of government that do not ever completely disappear.
Returning to the issue of bailouts Horwitz writes,
[...] the bailouts gave government new powers it never had before, expanding its scope, but using the bankruptcy process would have only expanded the scale of powers it already had. Forced to make that choice, a libertarian perspective would see increasing the scale as the notably lesser of two evils.
The state will be involved in whatever process is used to resolve the problems of the banking system in the US. But it seems better to rely a known and predictable process that only expands government's scale rather than turn to an unknown, unpredictable process that expands the scope of government by granting to it powers it did not previously have. Horwitz concludes,
From a libertarian perspective neither is ideal, but I would argue growth in scale is much less damaging than growth in scope, in the short run and especially the long run.
This may be an unacknowledged benefit of New Zealand's more low key approach to the economic crisis, we have expanded the scope of government less than has been the case in other countries.

1 comment:

Anonymous said...

Perhaps a bit high powered for us mere mortals! Can one be allowed a few uneducated comments?

Maybe the NZ and Oz financial situation is currently much better than it might have been, simply because from Keating onwards, Oz banking policy has been to protect the Big Four from foreign ownership?

Just what would have happened 12 months ago, had Citi et al been owners of CBA, Westpac et al, one shudders to think.

Could have folded RBA and RBNZ into the Fed without a moment's pause - what was the point in continuing?

Another question - with US govt bailout on such a massive scale, why did not the Treasury nationalize the banks it propped up, or at least take big equity stakes?

The cynics who diagnose 'capitalize profits, socialize losses' are usually close to the mark.