In the comments on last week’s column, there was an interesting exchange over just how big President Hoover’s expansion of government really was after the 1929 stock market crash and the onset of the Great Depression. One commenter criticized my measuring expenditures and the budget deficit according to their percentage of GDP. Since GDP was falling, the critic wrote, those percentages may exaggerate the growth in expenditures and the deficit.
There are several responses to that criticism, the first being that the growth in government expenditures might have been part of the cause of the fall in GDP (by reducing investment more than government grew), which would bolster the point that government was growing in a harmful way. However, the deeper and related response is that measures of the impact of government that focus only on the scale of government are an incomplete way of understanding the full effect that government can have on an economy.
Scale and Scope
To see that larger impact, we need to adopt a distinction that Robert Higgs effectively uses in his book Crisis and Leviathan. Higgs differentiates between the scale of government and the scope of government. Scale simply refers to the kinds of measures noted above. Higgs points out that we would expect there to be a strong correlation between, say, population and the size of government. Even in a world of very limited government and economies of scale, a larger population will require more police and a larger legal apparatus. A larger, more complex economy might also require a somewhat larger scale of government, even if it is strictly limited in its powers. The scale of government is indicated by the size of total expenditures and other traditional measures.
By contrast scope refers to the range of government powers. The important point is that giving government more power need not mean a significant increase in expenditures. For example, the Federal Reserve System is not even on the map in terms of the expensive things the federal government does, yet giving the Fed the various powers, especially the monopoly powers, it possesses has had a significant — and damaging — effect on the economy. One might say the same thing about laws like the minimum wage or occupational licensure. They don’t necessarily cost much to implement or enforce, but they can have highly significant consequences.
Thus the ability of government to inflict economic harm by being “big” is a matter of both scale and scope, and we often forget to recognize the latter.
This point is nicely illustrated by the Great Depression. In arguing that Hoover was no friend of laissez faire last week, I used quantitative measures to emphasize questions of scale, but my list of interventions contains both scale and scope items. Public works and government loan programs certainly expand government budgets and thus scale, as well as increasing the scope of its powers.
Other items, however, are not very costly but still very damaging. The big three here would be Hoover’s attempt to keep wages from falling, the Smoot-Hawley Tariff, and his stricter enforcement of antitrust laws. None of these involved significant increases in government expenditures, yet all three were damaging to employment and the business environment, especially the first two, and thereby substantially worsened the Great Depression.
The same could be said of many policies of the Roosevelt administration, as well as its antibusiness rhetoric, which is one major source of the regime uncertainty that Higgs argues extended the depression.
The scale versus scope distinction is relevant in our own time as well. The recently passed health care “reform” will certainly increase the scale of government, but it will also increase its scope, as government will have more power over individual decision-making. Business leaders are already reporting that uncertainty about its effects, and not its impact on the federal budget, is a major reason they are not hiring.
The Dodd-Frank financial “reform” law probably won’t add that much to the federal budget, but the increased scope of intervention it creates is already making life miserable for the financial sector, and the damage it causes will be well out of proportion to its cost. And in a repeat of the 1930s, the Obama administration’s frequent antibusiness, or at least anticorporate, rhetoric has been a cheap but effective cause of reduced private-sector investment.
The scale of government matters, but we cannot get so tangled up in debates about the size of federal government expenditures that we overlook the effects of changes in the scope of government power. Changes in scope are often more damaging to economic growth — and individual freedom — than are changes in scale. We forget about them at our peril.