When Temporary Economic and Political Measures Become Permanent

Judging from history, solutions heralded as stopgaps may be around for a while.
Author:
Publish date:

As Republican and Democratic leaders debate the makeup of the U.S. economic stimulus package, measures heralded as temporary fixes for the current crisis may be around for a while.

"The getting is always good during a national security crisis because normal politics gets out of whack," says Robert Higgs, a senior fellow in political economy at the Independent Institute, a public policy research center. "Logjams get shaken up and more government action is taken and a lot is done that has nothing to do with national security."

Typically, interest groups use crises to institute policies that they've wanted for a long time. As a result, so-called emergency measures become permanent, changing the economic landscape for more than the short term. The decisions on spending and tax cuts the government makes during the next few months may shape the success of certain businesses and the standard of living of particular individuals for years to come.

What Was Then Is Now

Let's take a look at history. During World War II, the government began to withhold income taxes from payroll checks to help fund the battle. That way, the government could obtain money at intervals rather than in a lump sum at the end of each year. The American government has been withholding income tax from people's paychecks ever since.

Sometimes the origins of existing policies, programs and agencies are harder to track. In 1918, the U.S. government established the War Finance Corp. to offer loans to munitions manufacturers during World War I, and after the war, to farm product exporters. In 1925, the agency folded only to be revived in 1932 under a new name, the Reconstruction Finance Corp. It provided loans to banks and railroads during the Depression. When World War II began, the government used the RFC to build defense plans and stockpile raw materials. In 1952, the agency changed its name again to the Small Business Administration, an agency that provides programs and services to small businesses.

"At the point of inception, we tend to think of these changes as one-time moves," says Peter Sealey, professor at Haas School of Business at the University of California Berkeley. "But most such changes have legs on them."

What Might Happen Now and Later

In a similar way, the current government's economic stimulus package designed to help the U.S. through the current crisis could change the domestic and international economic landscape in the long term.

Take, for example, the government's $15 billion bailout of the airline industry. Congress allotted $5 billion of the package to compensate airline companies for losses accrued during the month of September due to the unprecedented grounding of planes and reduced revenues from skittish travelers. But the $10 billion loan guarantee, also part of the package, could give faltering companies a second chance. And with money invested in the airline industry, the government might become involved in the companies' operations.

Consider also any tax cuts. "It's easy to cut taxes and not so easy to increase them," says Mario Belotti, professor of economics at Santa Clara University. Indeed, the tax proposals that ultimately will pass have more to do with politics and who has the closest ear of the executive branch than any genuine effort to stimulate the economy.

In fact, some pundits believe that the Republicans and Democrats are using this crisis to trade chips: an elimination of the alternative minimum tax for businesses in exchange for higher minimum wage. If passed, both measures will likely become permanent, experts say.

Spending on infrastructure also will have lasting affects on the economy. Not only will additions like high-speed rails take time to finish, but the government also will need to allot additional funds for repair or upkeep.

Similarly, the new Homeland Security Office is likely to require more funds as it develops over the years, taking on some of the tasks currently allotted to the FBI and the CIA. The new office also could impede business or cost firms money by requiring more access to and communication with overseas employees, clients or partners.

"

For example, the high-tech software industry uses large numbers of foreign workers," says Higgs, "and if it becomes cumbersome and expensive to comply with government rules in checking these people out, it will make it less economically advantageous to hire them."

One difference between economic policy changes during this crisis and those from previous periods, however, is that the current battle might not be definitively won. That would give advocates for certain policies even more power to argue for permanency.