Emergency Measures Are Temporary. Then They Are Not
By the BrainSnail editorial team. How these articles are written and checked, and how to tell us when one is wrong.
Spending, taxes, prices and expectations rise readily in response to a shock and come back down slowly or not at all, which is a general asymmetry with several separate causes.
The pattern being described
A variable moves up in response to a change in conditions and does not return when those conditions reverse, so the level after the shock exceeds the level before it. Repeating the cycle produces a staircase rather than an oscillation. The name comes from the mechanical device that permits motion in one direction and blocks it in the other, and the essential claim is that some process is acting as the pawl, making the upward movement easy and the downward movement difficult.
Where it is observed
The pattern appears in several unrelated areas:
- •Government spending, which rises in a crisis and rarely returns
- •Taxation, introduced as temporary and then retained
- •Household consumption, which resists falling when income falls
- •Retail prices, which follow costs up faster than down
- •Wages, which are strongly resistant to being cut
- •Regulation, which accumulates far faster than it is repealed
The causes are different each time
Treating these as one phenomenon obscures that the mechanisms differ entirely, which matters for what to do about them. Public spending persists because programmes create beneficiaries and administrators who defend them. Household consumption resists falling because people form habits and judge their position against their own past rather than against an absolute level. Wages resist cuts because reductions destroy morale and productivity more than they save. Prices fall slowly because a firm that cuts first loses margin while rivals wait. Each is a real mechanism and none of them is the same as the others.
Where it runs downwards instead
The same asymmetry appears in the opposite direction in a few places and noticing them keeps the idea honest. Once a price has been discounted, customers resist returning to the old level, so a promotion can be difficult to withdraw. Once a service level has been established, reducing it provokes far more complaint than never offering it would have. Once a safety standard has been raised, lowering it is politically impossible whatever the cost. In each case the ratchet is working against the party who moved first, which is why experienced negotiators avoid making the first concession.
The original argument about the state
The best known version concerns the size of government and was set out by Alan Peacock and Jack Wiseman in 1961, studying British public spending across the nineteenth and twentieth centuries. Their observation was that spending rose in steps at wars and crises rather than smoothly, and that after each crisis it settled at a permanently higher share than before. Their explanation was that a crisis raises what the public will tolerate in taxation, and once that tolerance has been established it does not revert, so the new level becomes the baseline for the next emergency.
The takeaway
Variables that rise in response to a shock and fail to return produce a staircase rather than a cycle, which is observed in public spending, taxes, consumption, prices and wages. The mechanisms behind each are entirely different, from defended beneficiaries to habit to competitive timing. Peacock and Wiseman argued in 1961 that crises permanently raise what taxpayers will tolerate.