"The natural progress of things is for liberty to yield and government to gain ground." – Thomas Jefferson to Colonel Edward Carrington, from Paris, May 27, 1788.
The New Deal instituted by President Roosevelt in the 1930s changed the structure and function of government, putting it in opposition to the Founder’s constitutional aim that the pursuit of individual liberty required a limited government. The New Deal struck a Faustian bargain with an America wallowing in a depression that promised prosperity and security under government management in return for less individual liberty and, unknown to the citizens of that time, greater future dependency.
Four decades later, as a stagflated economic malaise settled over the US, those promises weren’t being kept. The 1970s saw the US economy perform worse than it had in the previous decade and worse than other nations, causing people to lose confidence in government and ushering in the reform-minded presidency of Ronald Reagan. In his first inaugural address Reagan addressed the nation’s economic malaise arguing: "In this present crisis, government is not the solution to our problems; government is the problem." His rhetoric and his policies sought a return to limited government. Both spending and taxes were reduced. Measured by the government’s take of the national wealth, Reagan was successful.
Following Reagan’s “third term,” Clinton attempted to undo the Reagan Revolution. Two years into his first term, his big government ideas with increased debt, more taxes on the rich, and an attempted takeover of healthcare caused voters to turn against him and led to an electoral debacle for his party in 1994. Fifty-four seats switched parties and Newt Gingrich became the Speaker of the House. As if he were a newly-elected president, Gingrich claimed a mandate and continued the Reagan Revolution. Clinton was forced to the political center and forced to admit in his 1995 State of the Union speech that “the era of big government is over.”
A budget confrontation between Republicans and Clinton led to a government shutdown and assured Clinton’s reelection in 1996. However, the GOP retained control of Congress, and eventually a budget accord was reached with Clinton that reduced spending and taxes and projected an elimination of the deficit by 2002.
With the election of George W. Bush, the Republican party turned away from Reaganite aims of small government and free markets. In his attempt to remake the Republican party as the party of compassionate conservatism, fiscal restraint was tossed to the wind. Bush centralized federal control over education with No Child Left Behind, introduced an expensive Medicare drug benefit, and ended his second presidential term as the majority owner of AIG and Chrysler and the owner of a large part of GM and Citigroup. His big government conservatism nearly destroyed the GOP and led to its loss of both houses in the disastrous election of 2006. Two years later voters gave the heirs of FDR’s New Deal the White House and an absolute majority in Congress, putting them in total control of government. Lacking the political restraint of an opposing party, they have made the last two years ruinous.
The history of elections is the history of political misreads. Assuming the prime mover of politics is to get elected and stay elected, politicians in both parties need to understand what Americans want from government. Their answer doesn’t seem to be obvious.
Government provides benefits to society that must be paid for by society. If the benefits and costs were felt concurrently, governance would be self-correcting. When society got more benefits than it was willing to pay for, or if it was willing to pay more to get more, the variance would be communicated to politicians either directly or through the ballot box.
But that isn’t the way government works. Benefits are given to the many that are paid for by the few, or benefits are given to the few that are paid for by the many – as in the case of special interests groups. The elderly, for example, are a special interest group – well organized, very vocal, and politically active. The minority who pay for benefits enjoyed by the majority are not organized and, by virtue of their minority, are incapable of changing their fate through political action.
Reagan tried to curb government spending by cutting taxes. Deprived of tax revenues, he reasoned, future politicians would have to decide between reducing spending or incurring deficits. They would choose the former because of the political risks of the latter, or so he thought. However, as Clinton and the Democrat Congress showed in 1993, one way around Reagan’s blockade was to raise taxes on the rich to avoid deficits. As it turned out, taxes on the rich didn’t provide enough revenue and deficits occurred. The other way around Reagan’s blockade was to leave taxes alone and borrow the money to pay for spending, which given the global credit markets, was raised to an art form under the Obama administration. Thus, Reagan’s attempt to reduce the size of government failed because spending has not been brought into line with the taxes people are willing to pay.
Another reason why reducing government is difficult is that future generations are taxed to pay for today’s deficit spending. In other words, current deficit spending costs current society nothing. It will be paid for by a future society that will pay higher taxes than justified by its spending while current society enjoys lower taxes than its spending should require. Over a long period, taxing and spending have to balance but politicians have figured out how to shift taxes to voters they don’t represent. Of course, future society and politicians can pull the same trick until the national debt becomes unsustainable. We are on that course now.
Reagan’s strategy, therefore, was flawed in this respect: lower taxes, like lower prices, increases demand for government and therefore increases its spending. And in fact empirical research by the Brookings Institute has shown that reduced taxes do not reduce spending. This suggests that increased taxes would reduce spending because the demand for government would fall, reducing its cost. This seems to have happened when rising taxes through the 1970s brought Reagan and his smaller government reforms to the White House in the 1980s. If high current taxes create resistance to high current spending, then in the long run both the cost of government and taxes would fall. This would cause taxpayers to pay for their own spending because they would stop shifting it to future taxpayers in the form of deficits.
The theory that higher taxes will lower spending, however, holds true only if society is taxed equally, or at least equitably. That isn’t the case. Half of society pays essentially no federal taxes, and the half that does pay taxes does so inequitably. The extreme progressivity of the tax system makes the top 10% of household earnings pay 70% of the tax revenues and the top 1% to pay 40% of the tax revenues. Yet the votes of the both halves of the household income spectrum count equally in determining how government will tax and spend. Since the suppliers of tax revenue and the consumers of government benefits aren’t the same people, and since the suppliers of most of the tax revenue have very little political voice, high taxes don’t bring down spending.
This logically leads to the conclusion that a flat tax on consumption – a tax on what people spend rather than what they earn – would share the tax pain more equitably, although not equally if some spending is exempted from taxes, such as food and healthcare. Shared tax pain would share consciousness of government spending, which should be the aim of a democratic society. A consumption tax would put tax policy beyond the manipulation of politicians who can currently use preferences to influence votes. Special interest spending would fall equitably on all taxpayers and possibly provoke a backlash if taxpayers deemed the spending unfair.
Of course the replacement of our current “income” tax with a “consumption” tax would have to be enacted by the very people who benefit most from the manipulability of the current tax system – politicians, thus assuring that it will likely never happen. We are trapped, therefore, in a device of our own making: a tax system in which politicians aren’t accountable to those who pay most of the taxes and a spending system that shifts repayment of deficits to future generations who don’t elect current politicians. This is why it is difficult, if not impossible, to limit government.
While George Bush was no piker when it came to spending, the 10-year deficit when he left the White House was projected by the CBO to be $4.1 trillion. Now, after only 20 months of Obama’s presidency, the expected deficit has almost doubled, to $7.7 trillion. And, the latest forecast from the White House budget office shows the government is borrowing 41 cents of every dollar it spends – essentially taxing future generations heavily. Since WW II the average level of government spending as a percent of GDP has been 19.6%. It exploded to 24.7% in the first year of the Obama administration, and is estimated to increase further to 25.4% in 2010. Unless we change our expectations of the role of government, we are headed toward national bankruptcy.
Twice in recent decades, Americans seem to have revolted against the incompetence of their government – in 1980 and 1994.
In 1980, Ronald Reagan won the presidency on a promise to check – and reverse – the growth of government. Reagan carried 44 states, winning 489 of the 538 electoral votes and 60% of the popular vote. It was the worst defeat for an incumbent President since Herbert Hoover lost to Franklin D. Roosevelt in 1932 by a margin of 18%. In the Senate, Republicans held every incumbent seat and won 12 more seats to gain control for the first time in 28 years. Democrats lost 35 House seats but managed to retain control.
In 1994, in the middle of Clinton’s first term, the GOP continued the Reagan Revolution by presenting six weeks before the election ideas from Reagan’s 1985 State of the Union speech in a “Contract with America.” It was the first time since 1918 that a mid-term election was nationalized. Democrats lost 54 House seats, giving Republicans control for the first time in 40 years. Even the Democrat Speaker of the House, Tom Foley, lost his reelection bid – an historic event that hadn’t happened since the Civil War. Democrats also lost the Senate, which they had held since 1986. The day after the election, Clinton tried to explain the Republican landslide by saying, the American people “want a smaller government that gives them better value for their dollar … [one] that is not a burden to them, but empowers them.”
Yet after his 2008 election, Barack Obama declared the Reagan Revolution was over – promising not only to restore big government, but to make it bigger and more intrusive than ever. In his inaugural speech, he employed his omnipresent rhetorical straw man, whom he called cynics, and declared, “What the cynics fail to understand is that the ground has shifted beneath them – that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works.” His stimulus spending and a $3.6 trillion budget to fund expansion of government showed how committed he was to ending the Reagan Revolution and restoring government to a central role in the economy. In so doing, Obama and Congress completely misread the message of their election – to roll back the excesses of the Bush administration, not to add to them.
It now appears that voters are poised to revolt against governmental incompetence yet a third time in as many decades in this fall’s elections because polling shows a seismic shift will occur in both houses of Congress. House Republicans, confident that voters will give them control, hopefully have grasped their mandate this time. Reminiscent of 1994, last week they unveiled their "Pledge to America" which promised to "launch a sustained effort to stem the relentless growth in government that has occurred over the past decade."
Will Obama move to the center as Clinton did after the 1994 Democrat debacle? The smart money says no. As Eric Cantor observed in a WSJ editorial this week, the White House will not let go of its leftist ideology and work with a Republican Congress in solving the nation’s problems. “The question is whether the survival instinct overtakes their ideology,” Cantor said. “I don't see that happening."
The next two years should be interesting.
The New Deal instituted by President Roosevelt in the 1930s changed the structure and function of government, putting it in opposition to the Founder’s constitutional aim that the pursuit of individual liberty required a limited government. The New Deal struck a Faustian bargain with an America wallowing in a depression that promised prosperity and security under government management in return for less individual liberty and, unknown to the citizens of that time, greater future dependency.
Four decades later, as a stagflated economic malaise settled over the US, those promises weren’t being kept. The 1970s saw the US economy perform worse than it had in the previous decade and worse than other nations, causing people to lose confidence in government and ushering in the reform-minded presidency of Ronald Reagan. In his first inaugural address Reagan addressed the nation’s economic malaise arguing: "In this present crisis, government is not the solution to our problems; government is the problem." His rhetoric and his policies sought a return to limited government. Both spending and taxes were reduced. Measured by the government’s take of the national wealth, Reagan was successful.
Following Reagan’s “third term,” Clinton attempted to undo the Reagan Revolution. Two years into his first term, his big government ideas with increased debt, more taxes on the rich, and an attempted takeover of healthcare caused voters to turn against him and led to an electoral debacle for his party in 1994. Fifty-four seats switched parties and Newt Gingrich became the Speaker of the House. As if he were a newly-elected president, Gingrich claimed a mandate and continued the Reagan Revolution. Clinton was forced to the political center and forced to admit in his 1995 State of the Union speech that “the era of big government is over.”
A budget confrontation between Republicans and Clinton led to a government shutdown and assured Clinton’s reelection in 1996. However, the GOP retained control of Congress, and eventually a budget accord was reached with Clinton that reduced spending and taxes and projected an elimination of the deficit by 2002.
With the election of George W. Bush, the Republican party turned away from Reaganite aims of small government and free markets. In his attempt to remake the Republican party as the party of compassionate conservatism, fiscal restraint was tossed to the wind. Bush centralized federal control over education with No Child Left Behind, introduced an expensive Medicare drug benefit, and ended his second presidential term as the majority owner of AIG and Chrysler and the owner of a large part of GM and Citigroup. His big government conservatism nearly destroyed the GOP and led to its loss of both houses in the disastrous election of 2006. Two years later voters gave the heirs of FDR’s New Deal the White House and an absolute majority in Congress, putting them in total control of government. Lacking the political restraint of an opposing party, they have made the last two years ruinous.
The history of elections is the history of political misreads. Assuming the prime mover of politics is to get elected and stay elected, politicians in both parties need to understand what Americans want from government. Their answer doesn’t seem to be obvious.
Government provides benefits to society that must be paid for by society. If the benefits and costs were felt concurrently, governance would be self-correcting. When society got more benefits than it was willing to pay for, or if it was willing to pay more to get more, the variance would be communicated to politicians either directly or through the ballot box.
But that isn’t the way government works. Benefits are given to the many that are paid for by the few, or benefits are given to the few that are paid for by the many – as in the case of special interests groups. The elderly, for example, are a special interest group – well organized, very vocal, and politically active. The minority who pay for benefits enjoyed by the majority are not organized and, by virtue of their minority, are incapable of changing their fate through political action.
Reagan tried to curb government spending by cutting taxes. Deprived of tax revenues, he reasoned, future politicians would have to decide between reducing spending or incurring deficits. They would choose the former because of the political risks of the latter, or so he thought. However, as Clinton and the Democrat Congress showed in 1993, one way around Reagan’s blockade was to raise taxes on the rich to avoid deficits. As it turned out, taxes on the rich didn’t provide enough revenue and deficits occurred. The other way around Reagan’s blockade was to leave taxes alone and borrow the money to pay for spending, which given the global credit markets, was raised to an art form under the Obama administration. Thus, Reagan’s attempt to reduce the size of government failed because spending has not been brought into line with the taxes people are willing to pay.
Another reason why reducing government is difficult is that future generations are taxed to pay for today’s deficit spending. In other words, current deficit spending costs current society nothing. It will be paid for by a future society that will pay higher taxes than justified by its spending while current society enjoys lower taxes than its spending should require. Over a long period, taxing and spending have to balance but politicians have figured out how to shift taxes to voters they don’t represent. Of course, future society and politicians can pull the same trick until the national debt becomes unsustainable. We are on that course now.
Reagan’s strategy, therefore, was flawed in this respect: lower taxes, like lower prices, increases demand for government and therefore increases its spending. And in fact empirical research by the Brookings Institute has shown that reduced taxes do not reduce spending. This suggests that increased taxes would reduce spending because the demand for government would fall, reducing its cost. This seems to have happened when rising taxes through the 1970s brought Reagan and his smaller government reforms to the White House in the 1980s. If high current taxes create resistance to high current spending, then in the long run both the cost of government and taxes would fall. This would cause taxpayers to pay for their own spending because they would stop shifting it to future taxpayers in the form of deficits.
The theory that higher taxes will lower spending, however, holds true only if society is taxed equally, or at least equitably. That isn’t the case. Half of society pays essentially no federal taxes, and the half that does pay taxes does so inequitably. The extreme progressivity of the tax system makes the top 10% of household earnings pay 70% of the tax revenues and the top 1% to pay 40% of the tax revenues. Yet the votes of the both halves of the household income spectrum count equally in determining how government will tax and spend. Since the suppliers of tax revenue and the consumers of government benefits aren’t the same people, and since the suppliers of most of the tax revenue have very little political voice, high taxes don’t bring down spending.
This logically leads to the conclusion that a flat tax on consumption – a tax on what people spend rather than what they earn – would share the tax pain more equitably, although not equally if some spending is exempted from taxes, such as food and healthcare. Shared tax pain would share consciousness of government spending, which should be the aim of a democratic society. A consumption tax would put tax policy beyond the manipulation of politicians who can currently use preferences to influence votes. Special interest spending would fall equitably on all taxpayers and possibly provoke a backlash if taxpayers deemed the spending unfair.
Of course the replacement of our current “income” tax with a “consumption” tax would have to be enacted by the very people who benefit most from the manipulability of the current tax system – politicians, thus assuring that it will likely never happen. We are trapped, therefore, in a device of our own making: a tax system in which politicians aren’t accountable to those who pay most of the taxes and a spending system that shifts repayment of deficits to future generations who don’t elect current politicians. This is why it is difficult, if not impossible, to limit government.
While George Bush was no piker when it came to spending, the 10-year deficit when he left the White House was projected by the CBO to be $4.1 trillion. Now, after only 20 months of Obama’s presidency, the expected deficit has almost doubled, to $7.7 trillion. And, the latest forecast from the White House budget office shows the government is borrowing 41 cents of every dollar it spends – essentially taxing future generations heavily. Since WW II the average level of government spending as a percent of GDP has been 19.6%. It exploded to 24.7% in the first year of the Obama administration, and is estimated to increase further to 25.4% in 2010. Unless we change our expectations of the role of government, we are headed toward national bankruptcy.
Twice in recent decades, Americans seem to have revolted against the incompetence of their government – in 1980 and 1994.
In 1980, Ronald Reagan won the presidency on a promise to check – and reverse – the growth of government. Reagan carried 44 states, winning 489 of the 538 electoral votes and 60% of the popular vote. It was the worst defeat for an incumbent President since Herbert Hoover lost to Franklin D. Roosevelt in 1932 by a margin of 18%. In the Senate, Republicans held every incumbent seat and won 12 more seats to gain control for the first time in 28 years. Democrats lost 35 House seats but managed to retain control.
In 1994, in the middle of Clinton’s first term, the GOP continued the Reagan Revolution by presenting six weeks before the election ideas from Reagan’s 1985 State of the Union speech in a “Contract with America.” It was the first time since 1918 that a mid-term election was nationalized. Democrats lost 54 House seats, giving Republicans control for the first time in 40 years. Even the Democrat Speaker of the House, Tom Foley, lost his reelection bid – an historic event that hadn’t happened since the Civil War. Democrats also lost the Senate, which they had held since 1986. The day after the election, Clinton tried to explain the Republican landslide by saying, the American people “want a smaller government that gives them better value for their dollar … [one] that is not a burden to them, but empowers them.”
Yet after his 2008 election, Barack Obama declared the Reagan Revolution was over – promising not only to restore big government, but to make it bigger and more intrusive than ever. In his inaugural speech, he employed his omnipresent rhetorical straw man, whom he called cynics, and declared, “What the cynics fail to understand is that the ground has shifted beneath them – that the stale political arguments that have consumed us for so long no longer apply. The question we ask today is not whether our government is too big or too small, but whether it works.” His stimulus spending and a $3.6 trillion budget to fund expansion of government showed how committed he was to ending the Reagan Revolution and restoring government to a central role in the economy. In so doing, Obama and Congress completely misread the message of their election – to roll back the excesses of the Bush administration, not to add to them.
It now appears that voters are poised to revolt against governmental incompetence yet a third time in as many decades in this fall’s elections because polling shows a seismic shift will occur in both houses of Congress. House Republicans, confident that voters will give them control, hopefully have grasped their mandate this time. Reminiscent of 1994, last week they unveiled their "Pledge to America" which promised to "launch a sustained effort to stem the relentless growth in government that has occurred over the past decade."
Will Obama move to the center as Clinton did after the 1994 Democrat debacle? The smart money says no. As Eric Cantor observed in a WSJ editorial this week, the White House will not let go of its leftist ideology and work with a Republican Congress in solving the nation’s problems. “The question is whether the survival instinct overtakes their ideology,” Cantor said. “I don't see that happening."
The next two years should be interesting.
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