The Forecast is Grim – So What Are We Going to Do About It?

Like David, I am very pessimistic about the prospects for conservative/libertarian reform. He is exactly right that demographically-driven federal spending is rising rapidly as the baby boom generation nears retirement, and the best political opportunity for restructuring Social Security and Medicare has passed. As the percentage of voters benefiting from these programs in their current form rises, it is unrealistic to think that spending for them can be reduced except marginally.

David is also right that the Republican Party has become deeply corrupt and appears to lack any leaders with the potential for pushing it back in a more conservative direction. It is going to have to suffer a defeat of Nixonian proportions in order to cleanse the party and create opportunities for new leaders to emerge that may be able to right its course.

From this, David concludes that small government-types should just suck it up, try to slow the rate of growth of spending and do their best to shame the Republicans into behaving more responsibly. He dismisses the prospects for a third party that would embody a more libertarian/conservative philosophy.

In many ways, this is my perspective as well. Because of it, I concluded that conservatives and libertarians need to think seriously about how best to finance the government spending that is in the pipeline. Given the magnitude of that spending growth—on the order of 10 percent of the gross domestic product over the next generation even if no new government programs are enacted or current ones expanded—I have suggested that it is time to think about a value-added tax for the U.S.

The VAT is the most efficient form of taxation ever devised, in the sense that it discourages less economic growth per dollar of revenue raised than any other tax—what economists call the dead-weight cost of taxation. The alternative, I believe, will be to increase tax rates or raise revenue in other ways far more burdensome to the economy and liberty than the equivalent amount of VAT.

This suggestion has been anathema to conservatives and libertarians alike. They view it as surrender to Big Government. Many also believe that a VAT is a “money machine” that will raise revenue so easily it will fuel an even greater increase in spending than would otherwise take place. Some see the inefficiency of alternative revenue-raising options as a virtue—by making the economic cost of taxation as burdensome as possible, it will slow the growth of taxation and spending, they hope.

If government spending were dominated by discretionary programs—those requiring annual appropriations—then I would be more likely to agree. Under such circumstances, the idea that one can “starve the beast” and hold down spending by denying government the revenue that feeds it has some validity. It is supported by the theoretical work of James Buchanan and others. [1]

However, today government spending is totally dominated by interest on the debt that is impossible to cut, entitlements that are almost impossible to cut, and national defense, which is unlikely to be cut for the foreseeable future. This means that more than 80 percent of the budget is effectively off limits. Even if domestic discretionary programs could be cut back to Reagan era levels, it would reduce total federal spending by just 2.4 percent—not nearly enough to offset rising entitlements. To offset the entire projected rise in entitlement spending would require the abolition of virtually every other thing the government does, as documented in numerous studies from the Congressional Budget Office and Government Accountability Office. This may be fine to extreme libertarians, but it hardly constitutes a realistic political strategy for reducing government.

At this point, my friends must think I have totally thrown in the towel on bigger government. This is not so. What I have discussed thus far is simply a forecast of what I see coming. It doesn’t imply anything about my desired outcome. Just because I might predict that a recession is coming, based on my analysis of economic data, it doesn’t mean that I want a recession to happen. And if I predict that a recession will cause the deficit to grow, because recessions automatically raise spending and reduce revenues, it doesn’t mean that I like budget deficits.

In other words, the first thing that libertarian or conservative small government advocates need is a clear-eyed understanding of where we are and where we are going, absent drastic and unlikely changes in law and policy. In my observation, many—even most—tend to be ignorant of the actual fiscal facts and excessively optimistic about what it would take to change current trends. And because many of them hate the federal government and view all those who serve in it as crooks, imbeciles and fools, they tend to know almost nothing about the legislative process or the actual operation of the political system.

Implicitly, many in the small government community put themselves in the position of the world’s most powerful dictator, able to simply slash government programs willy-nilly, without regard to programmatic details, the real world consequences for those who depend on such programs, and without having to worry about where the votes will come from to achieve their goals. I often hear libertarians says things like just cut spending across the board, eliminate X department, or abolish this or that program, as if slashing government is as easy as waving a magic wand.

When they come to realize the extreme difficulty of making even minuscule changes in the growth path of federal spending and the inherent contradiction of their implicit position—needing non-libertarian means to achieve libertarian goals—many libertarians and conservatives withdraw from the political process altogether, refusing even to vote because they see it as lending credibility to a system they find abhorrent. The result of this disengagement is to leave the forces in favor of bigger government with even less resistance to their goals.

Occasionally, a third party effort such as Ross Perot’s in 1992 will tempt the politically alienated small government constituency. But the result of all third party efforts is to undermine the major party closest to it ideologically, often delivering victory to the greater threat from its own point of view. Thus, Ralph Nader’s quixotic campaigns only had the effect of helping George W. Bush—certainly a greater danger from Nader’s perspective on the issues than either Al Gore or John Kerry.

I would add that the net effect of the Libertarian Party over its history has been to drain political activists with a libertarian bent away from the two major parties, thus reducing the ranks of those with such a bent in the major parties and strengthening the hand of the statists. In my opinion, libertarian goals would be much better advanced by abolition of the Libertarian Party and its replacement by an organized libertarian interest group along the lines of the National Rifle Association or the pro and con abortion groups that could mobilize libertarian voters, contributions, and other resources within the existing two-party structure, instead of outside where it is and always will be impotent. The constitutional requirement that a president receive an absolute majority of votes in the Electoral College effectively means that we can never have more than two viable political parties.

Theoretically, a third party could supplant one of the major parties, as the Republicans did with the Whigs. While this sort of thing happens fairly often in other countries such as Canada, it has only happened in the U.S. when one party found itself incapable of dealing with an issue of overriding importance, such as slavery, which is what doomed the Whigs. It is not inconceivable that the ongoing redistribution of income and wealth from relatively poor young people to the relatively wealthy elderly, which will accelerate in coming years, could be the sort of issue that will give rise to a party readjustment like that which saw the Republicans replace the Whigs.

The problem with this theory is that those who must pay for the promised Social Security and Medicare benefits, the youth, are the most politically alienated group in society. Very few of them bother to vote or participate substantively in the political process. This allows politicians to easily ignore them and concentrate instead on the elderly, the age group most likely to vote and the one that is most politically engaged. So until the youth become politically activated and motivated to work for change, it is hard to see where meaningful support for political reform will come from, thus leaving us on the path of least resistance, which is to raise taxes gradually to pay for higher spending programmed in current law.

Another problem is that we all expect to join the ranks of the elderly eventually and thus become the beneficiaries of the government’s largess. Thus young people in France recently revolted against changes in labor law designed to make it easier for young people to get jobs. They preferred the current system, where jobs are very hard to get but almost impossible to lose if you have one. Therefore, one cannot assume that the logical reaction of young people to the unfairness of the current fiscal system will be to overthrow it. They may become even more determined to make sure that they get theirs, too.

I would welcome a serious debate among libertarians and small government-types on a realistic political strategy for achieving their goals. Simply damning the existing system and withdrawing from it is just a prescription for accelerating the trend toward bigger government.

Notes

[1] Geoffrey Brennan and James M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (New York: Cambridge University Press, 1980).

Also from This Issue

Lead Essay

  • Republicans and the Flight of Opportunity by David Frum

    In this month’s provocative lead essay, bestselling author and former Bush speechwriter David Frum considers whether the time has come and gone for the small government heirs of Goldwater, Reagan, and Gingrich. His answer: “the day in which we could look to the GOP to have an affirmative small-government vision of its own has I think definitively passed.” Government slashing types have never been more than an active minority in the GOP, Frum argues, and there is little chance that Republicans going forward will repudiate the spirit of the big-government Bush agenda. The small-government conservative’s best hope is that, like the defunct Whigs and Progressives, elements of their ideas and ideals will survive as a part of the political consensus.

Response Essays

  • Renewing the Mandate by Ross Douthat and Reihan Salam

    Ross Douthat and Reihan Salam argue that although a renewed push for smaller government isn’t in the cards, Republicans can realistically hope to win reforms that promote “freedom, self-reliance, and individual initiative”—values at the core of the small-government movement. In the current climate, Douthat and Salam write, “simply calling for the rollback of government appeals only to those already in the winner’s circle of American life…” So, they argue, Republicans “need to accept that government will remain large in the short run … while pursuing long-range strategies that will produce a more opportunity-friendly, less statist America.”

  • Where There Is No Vision, the People Perish by David Boaz

    Cato executive vice president David Boaz argues that the Republicans have failed Reagan’s vision, offering their own brand of meddlesome statism as an alternative to the Democrats’. Although there is in the U.S. a constituency for limited government, Boaz argues, it needs a leader. The task for “advocates of liberty and limited government” is to “make ready the ideas, the platform, the networks that could serve a political leader who wanted to take on the task of clearing away the late 20th century’s accumulated burden of bureaucratic systems, unfunded liabilities, overextended military commitments, and usurpations of the responsibilities of free citizens.”

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