Bryan Caplan  

Red-Handed Ratchet Effect

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Robert Higgs is famous for his analysis of the "ratchet effect." As Higgs explained in his Crisis and Leviathan, governments expand during crises, then conveniently fail to return to their initial size after the crisis ends.

Of course, it's possible that this happens in an unplanned, "spontaneous" way. Keeping the "temporary" measures on a permanent basis is the path of least resistance. But Higgs' analysis would be doubly relevant if we could prove that government officials consciously anticipated and strategically manipulated the ratchet effect. There may be other examples out there, but yesterday I came across one that made my jaw drop.

This is from notes taken from a 1940 interview given to a group of German editors by Robert Ley, head of the German Labour Front:

Dr. Ley explained that the question of an old age pension scheme had been preoccupying him and the Party for many years. But the objection had always been made that it would cost too much money and that it would be impossible to introduce further contributions. Now the war offered a unique opportunity. The costs of the war had to be met by the German people; income tax would be increased to the limit of what was possible and then when the war costs had been gradually covered income tax would be reduced again, which would make people happy, and then one day one would stop reducing it and then income tax would cover what was needed for old age pensions. (from Nazism: A Documentary Reader, vol. 4)

It's striking that even the Nazis were skittish about raising taxes in peacetime. You might think they'd just say "If you don't like it, call the Gestapo." But apparently even one of history's most brutal dictatorships preferred to use the ratchet effect to circumvent public opinion instead of staring it down.


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COMMENTS (2 to date)
rakehell writes:

My Public Economics prof taught us that "the best tax is an old tax." Ley was hoping to exploit that principle. Once people are used to paying a certain tax, they don't complain too much about it. It's the new taxes and tax raises that gall.

jn writes:

Actually, the Nazis were surprisingly reluctant to alienate the general public and always allocated a good part of the economy towards consumption. Some writers have made the plausible argument that minimizing private consumption and pushing production to a full war footing did not fully kick in till after the fall of Stalingrad in 42-43 thus hindering the war effort. None of the writers on WWII econ have done more than document this without actually estimating its relative effectiveness.

It is often argued that the Soviets' "apparent success" in mobilizing for war and the US success in using planning for production contributed enormously to the post WWII perception of the superiority of central planning as a general principle.

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