For the last century, American government has only been moving in one direction—bigger, more centralized, more intrusive and more bureaucratic.
It has grown not gradually and continuously, but in fits and starts, usually in response to foreign and domestic crises — the World Wars and the Cold War, the Great Depression and the 2008 financial crisis. There have been hiatuses between the growth spurts, but they never undo or roll back any of the earlier advances. Historian Robert Higgs calls this “the ratchet effect.”
It works something like this: Politicians identify a “problem” and promote a government solution for it. That solution exacerbates the original problem, which leads to calls for further government action. The late journalist M. Stanton Evans called this “the phenomenon of self-generating interventions.”
If President-elect Trump wants to “drain the swamp,” he has to overcome the ratchet effect.
The first federal regulatory agency, the Interstate Commerce Commission, demonstrates the process. The ICC was created to deal with problems caused by federal promotion of railroad-building during the Civil War.
The more power that was given to the Commission, the worse the problem became, until the railroads were driven to collapse on the eve of World War One and the federal government had to take them over.
Congress then radically reorganized transportation regulation in 1920, but the ICC got even more power under that year’s Transportation Act. It later added power over motor carriers and inland waterways. Things got so back that we actually did see some deregulation of railroads and trucks in the late 1970s.
Perhaps the best example of the ratchet effect in in bank regulation. The Federal Reserve System was established in 1913 to deal with the largely imaginary problem that a Wall Street cabal, a “money trust,” was taking over the financial industry.
Once in operation, the Fed not only increased concentration in the banking system, but wreaked havoc with the money supply. It aggravated the depression that followed the First World War, and increasingly economic historians blame it for causing and exacerbating the Great Depression.
But Congress’ reaction was to give the Fed even more power under the Banking Act of 1935. The Fed then fed inflation. (Prices had increased only 176 percent in the century before the Fed. They have increased over 2,000 percent since then.)
Fed-induced inflation led to a “partial deregulation” of the savings and loan industry in the 1980s, which gave “deregulation” a bad name. The Fed was one of the chief governmental regulators responsible for the housing-asset bubble of the 2000s which led to the great crash of 2008. Yet again, Congress’ response was to further empower the Fed and other regulators in the Dodd-Frank Act of 2010.
In Washington, nothing succeeds like failure.
In the midst of the financial panic of 2008, President-elect Obama promised “change.” But what we got was more of the same: enormous additions to the bureaucratic state.
This administration broke all previous records for the volume of rules issued by regulatory agencies, previously held by Jimmy Carter, who added over 80,000 pages to the Federal Register.
Regulations are like lawyers — the more you have, the more you need.
The Affordable Care Act, or Obamacare, is just the latest example of the problem. Before 2010, the healthcare industry was already almost as heavily regulated as banking or transportation.
The process began during World War Two. The federal government prohibited wage increases to limit inflation, but the IRS decided that employers could bid for scarce labor by offering benefits like paid health insurance. Then came Medicare and Medicaid, and health care inflation soon outpaced Fed monetary inflation. (The same thing happened when the feds started subsidizing higher education.)
By 2010 over half of the medical tab was already being picked up by federal or state governments. The ACA law itself was over 900 pages long, and empowered the secretary of Health and Human Services to promulgate all sorts of interpretive rules.
Not surprisingly, the original problem of health care cost has gotten worse in the aggregate after these interventions.
Our Constitution was meant to prevent this chain-reaction. The Founders had already seen it in the states under the Articles of Confederation. As James Madison put it:
“One legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding.”
Thus the Constitution limited Congress to a defined set of enumerated powers, put in place the separation of powers, and left most of the governing power to the states.
President Obama failed to fulfill his promise of “change,” and is now seeing his legacy go down the drain. If President-elect Trump wants to avoid a similar fate, he needs to think outside the box of “self-generating interventions.”
Dr. Paul Moreno, dean of social sciences and professor of history at Hillsdale College, is the author of several books, including “The Bureaucrat Kings: The Origins and Underpinnings of America's Bureaucratic State” (Nov. 2016).
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