Friday, 7 March 2008

Can governments respond to a global crisis?

My last post pointed out that governments are still quite big, despite the dislike and efforts of many of the politicians who ran them in the last 30 years. I am not sure why as countries get richer, governments often get bigger. Certainly, capacity to collect taxes and control the economy grows as countries get richer, so probably one reason is that they are large because they can be large. Another plausible reason is that increasing government intervention in industry and training becomes more useful as economies grow, or maybe governmental intervention is used by rich countries to stabilise economies and poor countries cannot afford to fund it.

So if countries ever get into really severe difficulties with a collapse of internal demand, could governments increase expenditure further in order to support the demand for goods and stimulate the economy again? In other words, could Keynesian policies be acceptable when governments are already large?

In the event of a major global crisis of demand, there are few options. It would be odd to see government size jump up to 60% or more of GDP in the leading capitalist economies, but it may have to do so.

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