How Liberalism’s Good Impulses Led to Fiscal
Unsustainability
Much of the debate over the role of the federal government
devolves into a shouting match over whether the federal role is too large and
threatens basic freedoms or whether an expansion of that role is vital for
achieving a fairer society and that we should model our society on that of,
say, Sweden.
But framing the debate in that way is not only unhelpful
(it’s unlikely that either side will suddenly experience an epiphany and become
converted to the opposing viewpoint), it lacks historical context and a
balanced analysis of how we got to where we are today.
From the beginning of the nation’s history, the federal
government has played a vital role, as designed by Alexander Hamilton, among
others. Hamilton’s goal, along
with many of his contemporaries, was to increase national power and stature for
the benefit of all citizens, but was not to necessarily make some citizens rich
or to ensure economic equality.
Hamilton’s objectives, therefore, included the long-term
structural development needed to help the nation grow (a strong banking sector,
roads and later railroads, etc.), and was not focused on providing more jobs
during any economic downturn, or even as an ongoing responsibility of the
federal government, and certainly did not contemplate efforts to divide the
country between haves and have nots.
Hamilton’s program (and the prevailing philosophy until
Franklin Roosevelt) was to emphasize opportunity, rather than specific economic
outcomes, equal or otherwise, and the resulting political actions focused on
innovation and education, rather than economic security. As a result, the federal government’s
role in the economy historically averaged about 4% of GDP, and even during the
Depression was less than 10%.
But this approach has been largely abandoned, often for what
seemed like good reasons at the time.
First came the Progressive era, where laws and regulations
were properly enacted to protect workers and consumers, but in connection with
these fine impulses a philosophy took placed great faith in the government’s
ability to effectively use it’s powers to “rationalize” the market and design
appropriate outcomes without unintended consequences.
Second was the New Deal, where Roosevelt very wisely reacted
to economic distress with pro-active government programs. What that lead to, unfortunately, was a
political system where politicians paid less attention to long-term structural
improvements and more to jobs created in any one month.
Whether or not government can meaningfully create jobs in
the long-term, the reality is that politicians of both parties have since
become wedded to debt, thereby sacrificing the interests of the next
generation, who will be burdened with that debt, all for the sake of politically
popular spending (largely on the middle class) and tax cuts. In effect, public funds were used to
buy votes and ensure the triumph of incumbency.
The third step down that road was taken by President Johnson
and his Great Society, and the open-ended promises made, particularly in the
area of health care, where the combination of those promises and changing (but
not unanticipated) demographics made current programs (Social Security,
Medicare and Medicaid) unsustainable in their present form.
In each case, a fundamentally good and generous impulse led
to unsustainable commitments, as the government attempted to satisfy an
expanding constituency’s short-term desires. Instead of a focus on long-term innovation and
infrastructure (both physical and cultural), we largely devote our resources to
health care and a comfortable retirement for an aging middle class.
So, the question is not whether the federal government is
inherently evil or benign. The relevant questions are instead:
(1) what do we really, really want government to do;
2) what are the appropriate priorities among those desires,
understanding that we simply do not have the financial or human resources to do
everything we might want; and
(3) how do we best enhance our long-term fiscal situation to
enable us, and succeeding generations, to have the resources necessary to
answer society’s legitimate needs, while avoiding piling up long-term debt to
address short-term desires.
In fact, one could argue that if one is a true liberal, and
sincerely wants to have an expanded government role to help those seen as in
need, then the first priority should not be increased taxes and an expanded
bureaucracy, but an enhanced economy, which is what will eventually pay for any
of those government functions.
And, as a bit of a sneak preview regarding fiscal sanity,
the answer probably lies somewhere close to the recommendations of the
President’s own fiscal commission: a 3 to 1 ratio of spending cuts to tax
increases, realizing that much of those tax increases will necessarily fall on
the middle class.
