The pandemic as a new foundation for the expansion of the modern state

Degree in Economics (UBA, 2002), Master in Economics and Business Administration (ESEADE, 2004) and Doctor of Applied Economics from the King Juan Carlos University of Madrid (URJC, 2009).

Regular Professor of Introduction to Economics at the Faculty of Economic and Legal Sciences of the National University of La Pampa (UNLPam).

Contributes to the blog Punto de Vista Económico y en Libertad y Progreso.

ECONOMIC POINT OF VIEW – Various authors have studied the historical, political, ideological, and economic foundations by which the size of the state expands throughout the 20th century. Together with Stefany Bolaños we summarize the findings in an essay. Among the most exposed arguments we find these: 1) the wealth of nations; 2) the Welfare State; 3) democracy; 4) the abandonment of the gold standard; 5) Keynesianism; 6) the ratchet effect, with the two world wars and the great economic crises. (Bolaños and Ravier, 2013)

In this article we intend to show that a pandemic offers a new foundation for the expansion of the modern state, an aspect that, although it had not been characterized in the commented article, it may be related to other indicated foundations.

The Wealth of Nations

A prerequisite for having modern states that represent 30 to 60% of GDP is that nations have expanded their productive capacities. Without market economies that boost production – as has happened in the last 200 years – any discussion to increase the size of the state would be sterile. No unionism would have achieved “social conquests” before the first industrial revolution.

Applied to our context, richer countries like Germany were able to expand aid packages and subsidies more than poorer countries.

The Welfare State and paternalism

A certain paternalistic culture that we observe to varying degrees but that is present throughout the world, allowed us to identify a Welfare State that extended its visible hand over the market to try to offer relief in a complex year. The ideological burden present at high levels in society is a challenge for those of us who work on ideas, since it does not allow us to observe that state aid is overestimated and the market reaction is underestimated, present in millions of entrepreneurial actions, with its characteristics creativity and innovation . Higher degrees of freedom and responsibility could have been used to deal with the pandemic at much lower costs than universal quarantine. On the contrary, it has been allowed, and in many cases it has been asked, that the State be present in unconventional ways, advancing on individual freedoms and constitutional rights.

Democracy and the image of leaders

Although the universal quarantine health measures had a negative impact on economic activity and employment, it is surprising that the image of governments in the first months after the covid has increased the levels of confidence in the leaders. The majority ask governments to apply tough measures in the face of a pandemic, forcing people to stay in their homes to avoid contagion and death. They ask for more spending, more subsidy, more aid packages for companies and individuals. Governments respond based on surveys, but of course the economy sets a limit that the majority have never paid attention to.

The abandonment of the gold standard and the modern monetary system

The modern monetary system, based on central banks with “unlimited” capacity to monetize fiscal imbalances, have flooded the credit balloon, leaving a situation of potential stock, real estate and commodity bubbles for the post-covid scenario.

Keynesianism and fiscal and monetary policy

The ideas of John Maynard Keynes, so controversial in the 1970s due to the stagflation processes that it generated, return before the great recession of 2008 and in the following years, but are even more potent in a scenario of idle resources such as the one visualized in 2020. All governments without exception face this context of global recession with demand policies, combining fiscal and monetary measures, which will leave us with a higher level of spending and deficits, which will clearly leave a context of complex fiscal and monetary imbalances for the challenge of later recovery.

The ratchet effect and the pandemic

Robert Higgs precisely showed in his book on the Leviathan crisis that in the face of the two world wars and the great depression of the 1930s, governments expanded the size of the state, but after the events they did not return to previous levels. This is precisely what I fear will happen in the face of the global pandemic. Once people latch on to the state boob, it takes a lot for them to stop sucking. The acquired rights are extended and it is no longer possible to return the previous level of expenditure.

Final reflection

I am afraid that the universal quarantine applied to COVID-19 will enhance all the fundamentals that explain the expansion of the modern state. From an academic point of view, I think we are dealing with a variant of the “ratchet effect” outlined by Robert Higgs. Its application included war conflicts and depressions. Today we must add epidemics and pandemics.