Crises and government: Some empirical evidence

Governments often intervene in markets and implement policies intended to halt or mitigate crises. Recent interventions include the UK’s 2008 bank rescue package, the 2009 American Recovery and Reinvestment Act, and the European Union’s 2008 Stimulus Plan. The chapter estimates the relationship between crises and changes in the size and scope of government over both five-year and ten-year horizons. Endogeneity may also arise from the simultaneity of government size/scope and other dimensions of institutional quality. Currency crises are associated with increases in the size of government over the five-year horizon, but a larger increase over the ten-year horizon. Higgs argues that crises weaken beliefs in the efficacy of markets, opening the opportunity for government to increase its expenditures and expand its interventions. Recent interventions include the UK’s 2008 bank rescue package, the 2009 American Recovery and Reinvestment Act (ARRA), and the European Union’s 2008 Stimulus Plan.