This economic crisis is a challenge to advocates of small government, especially for those who establish their argument based on finance. Even those who ground their position on something more profound like libertarians are being challenged simply out of the practicality of the situation.
The situation is that the cost of borrowing for several governments with debt considered as flight-to-safety grade like the US Treasuries and the German Bunds are very low now. For some, it is more or less zero.
Risk-averse investors really have nowhere to go and the supply for such fixed-income assets is limited. Demand for such assets will continue to outstrip supply in this situation of widespread economic crisis and yields will likely continue to suffer from downward pressure as individuals, firms, central banks and foreign governments bid the prices of these bonds up.
Cases of negative yields in real terms are aplenty. More profoundly, there have been cases of negative yields even in nominal terms. The Danish and the Swiss bonds are two examples where purchasers pay the government to borrow money from the purchasers. This does not happen too often. The market is saying, just take my money and keep it safe; we will pay you to do that.
In such cases, it is probably optimal for governments to borrow so much money and it does not matter if they actually do not need the money. Just borrow and store it somewhere. And if the relevant government has plan that has been delayed due to funding requirement, then this is the time to do it. With zero yields, financing is free. With negative yields, governments get paid to finance the project.
So, the relevant countries, this trend can be used to massively boost government spending and indeed, this can be a Keynesian case for fiscal expansion. There is no cost to it, at least, in the near future. This suspends the crowding out effect that is embedded in mainstream macroeconomic theories.
With the current situation, advocates of small government have to rely on long-run structural argument. The unfortunate thing with long-run argument is that it is describing a situation so far into the future, that it is hard to capture the imagination of enough persons. To most people, what is real is what they see.
And yields on various governments are zero. And judging from the look of it, increased government spending is unlikely to push yields up by a significant margin.
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