According to the Congressional Budget Office, today, our debt-to-GDP ratio is about 100 percent. The nonpartisan Congressional Budget Office estimates that by 2015 federal debt will reach 113 percent of GDP. By 2030, debt will be 194 percent of GDP.33
Social democracies cater to the voters by lavishing government services on them—that’s their lure. Naturally this means focusing on the current generation’s wants with little regard for future generations, because future generations’ voters and politicians are voiceless. The inevitable result is that governments can and do begin to borrow from the future—creating the debt we see all across Europe, and increasingly right here at home.
This is not just unsustainable, foolish, and a sign of irresponsibility and poor national impulse control. It is theft from our children, and it is immoral.
Figure 5.5. Federal debt is rising quickly as a percentage of GDP. (Source: Author’s calculation using Congressional Budget Office 2001 Long-Term Budget Outlook Alternative Fiscal Scenario, http://www.cbo.gov/doc.cfm?index=1221)
FACT #5. ECONOMIC GROWTH HAS BEEN IN GENERAL DECLINE FOR 50 YEARS.
Social democracies sacrifice robust economic growth for a strong welfare state and income equality. This statement is not controversial. Every serious economist—left or right—knows it to be true. According to an economist with the United Nations’ International Labour Organization (ILO), there is a “tradeoff” that people experience “when a society has to sacrifice economic growth to achieve a reduction in inequality.”34
Swedish economists Andreas Bergh and Magnus Henrekson have measured the negative relationship between government spending and economic growth. In a large survey of the economics literature, they found that a 10 percent increase in government spending corresponds to a decrease in economic growth of between 0.5 and 1 percentage point. In other words, if the U.S. is now growing at 2 percent per year and the federal government spends an extra $400 billion—a 10 percent increase in federal spending—expect to see economic growth move from two percent to about 1.5 percent, or even lower.35
Some say that it is necessary to grow government for the sake of creating jobs. But this is the reverse of the truth, according to most economists who have studied what happens to the private sector when the public sector grows. Studies vary in their conclusions, finding that every government job created eliminates between 1 and 2.2 private sector jobs. In other words, the labor effect of government growth is in the best case neutral, and in the worst case hugely destructive.36
Given the evidence about increases in the size of government, regulatory growth, and ballooning debt, lower economic growth over time in America is fairly predictable—and clearly present. During the 1950s and ’60s, average annual growth was more than 4 percent. In the 1970s, ’80s, and ’90s, it was a bit over 3 percent. In the first decade of the twenty-first century, the average was 1.6 percent. The average over the last three years has been 0.1 percent.37
We all hope the weak growth from 2008 to the present is an historical outlier because of the recession. But we can’t dismiss a broader trend: For at least fifty years, when we smooth out all the ups and downs over the business cycle, America’s growth has been generally falling.38
Few if any economists, no matter their political views, dispute these basic trends; the data are the data. Differences in opinion only come in when we ask, “Who cares?” The social democratic position is that low growth is a cost of a comfortable, enlightened society. Basically, America is rich enough. Why go crazy trying to grow at high rates? Leave the rat race behind. Invest in social welfare. Live a little.
Figure 5.4. Economic growth in America has fallen for five decades. (Source: “National Economic Accounts: Gross Domestic Product,” Bureau of Economic Analysis, data, http://www.bea.gov/national/index.htm#gdp.)
I encourage you to reject this viewpoint—not because you or I necessarily need to get richer, but because there are still plenty of people in our midst who do not share properly in the economy’s bounty. Only strong growth will create the ecosystem to lift up whole nations and future generations. Chapter 4 showed that free enterprise’s unparalleled ability to create wealth ended poverty for many millions of our own citizens and billions more around the world. This would not have occurred had we imposed policies that limited U.S. economic growth to 1 or 2 percent. It’s not about us. It’s about the poor. Social democracy pulls the economic ladder up behind us.
ADDED up, the evidence is clear: America has already effectively slipped into a big government social democracy. About 40 cents of every dollar Americans earn goes to the state. The government has spent a good chunk of future generations’ income too, equivalent to an entire year’s GDP that they will have to pay back in the future. What about all the talk of the U.S. being “different” than the European countries? It may be true on a philosophical level, but it’s not accurate when based on what the U.S. government is actually doing today.
All this is great news for those who have a European view of the role of government and do not believe free enterprise is the best system to support the U.S. culture and economy. But massive debt, stagnant growth, and high unemployment are not the American Dream for most. So it’s the job of free enterprise advocates to propose an alternative model to the status quo. That starts with a practical philosophy of government, which I turn to now.
6
THE GOVERNMENT WE WANT: UNCLE SAM, OR UNCLE SUGAR?
I once took a private tour of the National Palace Museum in Taiwan. This museum contains some of the most exquisite works of Chinese art in the world, transported out of mainland China in 1949 just before the country’s fall to Mao Tse-tung’s communists.
Almost everybody recognizes big visual differences between Western and Eastern art. I always wondered if these differences went beyond materials and technique, though—whether there was some fundamental philosophical distinction between the Western art I had been surrounded with all my life and the artistic treasures of the East. I used the opportunity that day in the museum to ask my guide what this distinction might be.
In the West, he told me, we see a blank canvas as empty, and ready to be filled up through the artist’s inspiration. A painting does not exist until the artist loads the canvas with color and images.
In the East, artists don’t think of creating something from nothing. They start with the belief that the finished work already exists, and simply needs the excess parts stripped away. The easiest way to understand this is not by thinking of an artist’s canvas, but rather a block of stone to be sculpted. Before the artist begins, the finished sculpture exists within the block. The artist’s job is to chisel away the parts that are not part of the sculpture.
The Eastern approach is useful when it comes to how we see our government.
America is a work of art, an expression of the vision of our Founders. The vision was audacious, creative, and revolutionary. But our Founders intended the work as an ongoing project. Benjamin Franklin famously promised us a republic, “If you can keep it.” Every generation, the Founders knew, must work to preserve what they left us, and make it beautiful for our current generation.
For many years we have been pursuing something like the Western artistic strategy for government. We build our system up to attain what citizens and politicians demand in the moment. Every generation, we slosh more paint onto the canvas. We search for a better system by adding laws, regulations, taxes, and social engineering. The result today is garish and ugly; it bears little resemblance to the work of our Founders.
We need the art of taking things away to reveal the American Experiment within: the constitutionally limited government that allows America to be its best self. The project we need today is not a destructive one, simply tearing down the state. It is a creative one, to chisel away the statist dross that obscures our system of liberty, individual opportunity, entrepreneurship, and self-reliance.
This chapter is a description of what I think the sculpture inside the block looks lik
e.
•••
LEFT ON THEIR OWN, governments tend to grow. Politicians get attention—and applause—for doing things. When things are going poorly, people never call their congressman and scream, “Don’t just do something, sit there!”
As we have seen, both Democrats and Republicans have contributed, over the decades, to the explosive expansion of the U.S. government. In order to reverse this trend, Americans need to lay out clear principles describing what the proper role of government is, and isn’t. Advocating limited, constitutional government requires nerves of steel, a willingness to weather knee-jerk resistance (“You are cutting my Medicare!”), and—above all—an actual philosophy. It requires a way to answer the question of what exactly needs to be limited, reformed, and cut—and why.
So, as believers in the free enterprise system, what kind of government should we work toward? What does a government look like that is fair, allows people to earn success, and lifts up the downtrodden?
In his first inaugural address, Thomas Jefferson laid out his vision of “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”1
President Obama’s vision of government is, to understate the point, a bit more expansive than Jefferson’s. The U.S. government, in his view, should be judged on whether or not “it helps families find jobs at a decent wage, health care they can afford, a retirement that is dignified.”2 In a bit over 200 years, we have moved from a president who believes the purpose of government is to leave you free to live your life as you see fit, to a president who thinks that the state is included in finding you a job, getting you a doctor, ensuring you save for your retirement, and a long list of other things.
What philosophy of government preserves Jefferson’s ethos, while recognizing that the world has changed in dramatic ways? In my view, America would do well to turn to the wisdom of German-born economist and Nobel laureate Friedrich Hayek. Hayek’s classic book The Road to Serfdom, written in 1944, is obligatory reading for all advocates of free enterprise—and still provides an excellent guide to the role of government.
Conservatives admire and quote Hayek incessantly. What’s surprising to some is that he taught that the government, for moral as well as efficiency reasons, can and should provide a minimum basic safety net for citizens. And like most other economists, he also believed it should address “market failures.” But that’s all—and that is dramatically less than what the government currently does.
LET’S BEGIN WITH the idea of the minimum safety net, since the easiest—and most frequently cited—criticism of the free enterprise movement is that its proponents want to instate a purely Darwinian society, in which the weakest members are left on their own, without any support from the government. In 2011, President Obama said this of his political opponents: “Their philosophy is simple: we are better off when everyone is left to fend for themselves and play by their own rules.”3
I have almost never heard conservatives and free enterprise advocates make such a preposterous claim. Most believe that it is appropriate for the government to provide some safety net for its citizens. Most are very comfortable providing some minimal standard of living in terms of food, shelter, and medical care. Even hardline conservatives don’t object to minimum basic protections for poor people, provided publicly, in some cases (and, in others, by private charities). Demagogues who accuse the political right of wanting to throw the poor out into the snow are not just exaggerating: they’re simply wrong.
Still, most free enterprise advocates—and most Americans in general—believe that the government has gone too far and is mollycoddling the citizenry. A February 2009 Fox News poll shows that 76 percent of Americans believe that we now rely too much on the government and not enough on ourselves. Only 20 percent disagree with that sentiment.4
The basic problem is that America’s minimum “safety net” has become appallingly broad. It has little to do with helping the poor, and a lot to do with passing out favors to voters and smoothing the risks out of ordinary life. For example, we often hear that Social Security is part of a basic safety net. But as currently configured, the program is in large part a benefit to middle-class people, especially the majorities that have taken more out of the system than they ever put into it. Similarly, Medicare Part D (subsidizing prescription drugs to seniors) is not part of the safety net for the poor per se; it is a $62 billion benefit that is consumed by a group that is made up primarily of middle-class Americans.5
The job of a social safety net starts with an answer to this question: What is an unacceptable standard of living in America? In my view, it is unacceptable for someone in America’s wealthy society to go without access to basic medical care, sufficient food, and basic shelter. Pretty uncontroversial, I think.
But the safety net is not a means to increase material equality, a way to take any but the most grievous risks out of life, a way to pass out rewards to groups based on demographics or political clout, or a source of benefits to the middle class.
So Medicaid for people below poverty is an appropriate function of the safety net: We can and should find a way to cap its costs and preserve it, as the next chapter will detail. But the government subsidizing prescription drugs for all seniors (not just the poorest) is simply a favor to a key voting bloc, and European-style health coverage is a move toward social democracy. Food aid programs for the indigent are part of the safety net, but agricultural subsidies to prop up farmers’ incomes are not. Homeless shelters are part of the safety net, but housing programs that serve the middle class like rent control and government flood insurance are not. A guaranteed minimum Social Security benefit that lifts seniors to the poverty line is part of the safety net, but paying anyone who is not poor any more than they paid in (plus a reasonable rate of return) is not.
The true safety net includes programs like food stamps so the poor can eat, Temporary Assistance for Needy Families (TANF) for low-income families with small children, Medicaid, and Supplemental Security Income (SSI) for the indigent and disabled. These federal programs are not cheap—together, family support, food assistance, Medicaid, and SSI totaled $432 billion in 2010 (a bit less than 3 percent of the GDP and 8.5 percent of the 2010 federal budget)—but they are a defensible safety net for the disadvantaged.6
The government could eliminate waste from these programs and spend less than it currently does. Moreover, welfare reform in the 1990s showed that these programs should never be designed as a permanent source of support, because that hurts the poor and their children. But few people, including few conservatives and free marketeers, really want to kill these programs and substitute nothing for them. The safety net—continuously improved and reformed—should continue to be there for the neediest of citizens.
Clearly, reasonable people can disagree on what “poor” means and what an “acceptable standard” for them is. But I believe that is the debate we should have, not a debate about whether the current out-of-control entitlement system—which largely benefits the nonpoor—should continue.
THE SECOND AREA of legitimate government activity is “market failure”—specific cases in which free markets don’t function on their own to create efficient outcomes. Since Adam Smith published The Wealth of Nations, nearly all economists have agreed that such circumstances can justify some degree of state intervention in the system—not to weaken free enterprise, but to strengthen it.
There are four sources of market failure: monopolies, externalities, public goods, and information asymmetries.
MONOPOLIES
A monopoly is, literally, “one seller.” Monopolies are all around us. The corner bakery is technically one, as the only seller of bread on that corner, but its monopoly status poses no problem because there are other bakers on other blocks. A more worrisome monopoly is the only seller of
an entire product. For example, until 1983, the phone company in America, AT&T—known back then as “Ma Bell”—was the only provider of long-distance phone service. It was horrendously expensive. (When I was a child, I remember my father sweating bullets because my mother was on a long-distance call to my aunt who lived in the next state for nearly an hour. Today, my kids don’t even know what a “longdistance call” is.)
There are several problems with monopolies. In general, the lack of competition means prices tend to be high, service tends to be poor, entrepreneurs are unable to deliver innovation to consumers, and companies spend an inordinate amount of money lobbying government to maintain the one-seller privilege.
Monopolies like Ma Bell are a threat to economic prosperity and the good of citizens. When a company can establish a monopoly by forming barriers to competition, the company may prosper, but the citizenry won’t; thus the government’s interest in this market failure. The famous case of Standard Oil’s monopoly pricing schemes of the 1880s led to the Sherman Antitrust Act of 1890, which most economists still today regard as beneficial and prudent regulation.
A related phenomenon is price fixing through the collusion of competitors, which makes an effective joint monopoly. Adam Smith wryly explained: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”7 Manipulating a competitive market through collusion is a legitimate area of attention for government regulators. That is why it is illegal for the CEO of United Airlines to call his counterpart at Delta to talk about the prices they should charge.
The Road to Freedom Page 10