One of the phrases circulating in popular discourse as the world endures the hangover from the global financial crisis is "Too Big to Fail," a reference particularly to banks that couldn't be allowed to go bankrupt lest the worldwide network of finance dissolve. In response to this "Too Big to Fail" (TBTF) phenomenon, the United States government first bailed out and then increasingly regulated these banks in an attempt to prevent such concentration of economic power and risk-taking from threatening the global financial system ever again. But lost in all of the worry about what to do about TBTF banks is the growth of another concentration of power that is increasingly becoming too big for society to flourish: the federal government.
The size of large multinational corporations and particularly financial firms is a matter of some legitimate concern. There are issues of accountability, transparency, and governance that become more and more salient as firms grow larger and wealthier, especially when their resources rival those of sovereign nations, including many in the developing world. But in most cases, concern over TBTF institutions remains superficial. There is strong evidence that in at least some cases, banks and other financial firms are larger than ever following the era of bailouts and government recapitalization policy. Relatively healthier banks, aided by federal funds, were in a position to take over overleveraged firms. In some cases this meant a larger firm acquiring a smaller one, but in others it meant a smaller firm taking over a larger, troubled bank. Firms with implicit guarantees of federal support – like Fannie Mae and Freddy Mac but increasingly firms in other areas, as well – have been able to turn that security into greater and greater stakes in various lending markets. The end result of an era of federal intervention in the financial sector is a landscape with fewer, even larger players than before.
One implication of this is that the problem with TBTF banks and other large institutions is at its root and in large part really a symptom of a deeper problem: a government whose size and scope have become so vast as to crowd out civil institutions of various kinds, leaving only those firms that are large enough to influence the political process and solidify their own concentration of power as survivors in a market environment increasingly unfriendly to new and smaller upstarts.
The existence of banks that are too big to fail is in significant ways the result of the actions of a government that is too big to flourish. Even a cursory glance at the federal spending figures over recent decades, and particularly over the last few years, is sobering. For the first time since 2008, the 2013 federal budget deficit is projected to be below $1 trillion, a surge of debt that has ballooned the federal debt to nearly $17 trillion. Even this most recent dip below a deficit of $1 trillion to $680 billion represents a historically high level of additional debt. Federal spending labeled “mandatory,” including outlays like Social Security and interest payments, has increased from roughly six percent in 1963 to nearly 15 percent of GDP 50 years later. These increases in unsustainable patterns of spending are driven largely by increases in entitlements: from 2002 to 2012 spending on Social Security increased by more than 35 percent, while Medicare spending grew by more than 63 percent.
When banks and other financial institutions are too big to fail, and government grows too big for other civil institutions to flourish, the threat of social injustice is grave indeed. The University of Chicago economist Luigi Zingales describes the dangers inherent in such systems: "When a business obtains both market and political power, escape becomes impossible. Under these circumstances, the system starts to resemble a socialist economy instead of a free market. In a socialist economy, the political system controls business; in a crony capitalist system of this kind, business controls the political process. … Either way, competition is absent and freedom shrinks. Without competition, economic life becomes unfair, favoring the connected insider."
A half-century ago the German economist Wilhelm Röpke outlined the dangers of the welfare state, which understands itself as the primary or even sole provider of social goods and services. Pope John Paul II called this model the Social Assistance State, which "by intervening directly and depriving society of its responsibility … leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic ways of thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending." The welfare state enervates civil society.
"The dangers of the welfare state are the more serious because there is nothing in its nature to limit it from within," Röpke observed. "On the contrary, it has the opposite and very vigorous tendency to go on expanding. All the more is it necessary to impose limits from without and to keep a sharp and critical eye on it. By its continuous expansion, the welfare state tries to cover more and more uncertainties of life and ever-wider circles of the population, but it also tends to increase its burdens; and the reason why this is so dangerous is that while expansion is easy and tempting, any repeal of a measure later recognized as hasty is difficult and ultimately politically unfeasible." These words ring true decades later, particularly in the recent developments following attempts to delay, defund, repeal, or replace the Affordable Care Act.
Without significant and substantive reform of our political institutions, which in turn must be grounded on necessary reformation of our moral, cultural, and spiritual institutions, escape from concentrated powers that are too big to flourish often seems hopeless. But there are moral and cultural reserves upon which to draw strength and inspiration, the greatest of which is the personal and social transformational power of the good news of Jesus Christ.
One of the outgrowths of revisiting these sources of social renewal is a rehabilitated emphasis on personal responsibility and solidarity, a preference for direct action to address problems and challenges at the most proximate level possible. Röpke is well-known for advocating a policy of decentrism, which might take the form today of pursuing a policy of devolution: privatization of governmental activity wherever possible, and wherever that is not possible or is "politically unfeasible," pursuing the localization of government functions to the lowest, most proximate levels of civil authority.
There is some helpful discussion today about what pursuing "competent" government, rather than "big" or "small" government, might imply, along with exhortations toward the humility required for the pursuit of "proximate" justice. To figure out what competent government might look like, we first must debunk the myth of the omnicompetent state and realize that there are moral limits on what government ought to do as well as concrete limits on what it can do. We need a government vigorous enough in the spheres of its responsibilities to fulfill its duties, but a government limited in scope to only exercise that power in pursuit of its divinely ordained tasks. The government that views its primary role as the provision of goods and services, rather than the protection of other spheres through which human goods are realized, will inevitably be too big to flourish.