The Tax and Spend Spectator

Government in Full Gallop

By From the November 2011 issue

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"The record the period before President Reagan was one of galloping socialism," the great libertarian and Nobel Prize-winning economist Milton Friedman wrote in a 2004 Wall Street Journal op-ed. "The Reagan years were ones of retreating socialism, and the post-Reagan years, of creeping socialism."

Now that the Bush years are a matter for the history books and President Obama has outlined the course of his presidency, it's hard to escape the conclusion that the pace of the growth of government has picked up substantially. By Friedman's own metrics, the creeping socialism of the past decade is poised to gallop.

Of course, there are many ways to measure the concentration of power in the hands of government. There is no bright line dividing a capitalist economy from a social democracy, nor one separating a social democracy from a communist or fascist regime. But Friedman thought that two statistics, in particular, were indicative of economic freedom: the government's share of economic output, and the number of regulations issued.

Reagan was an anomaly in postwar American history in that he did not significantly increase government spending. Whereas the 20 years before Reagan's inauguration had seen almost uninterrupted growth in government expenditures, the bureaucracy Reagan presided over maintained a roughly steady level of spending as a share of gross domestic product (GDP).

Similarly, the Reagan administration held the number of regulations issued each year in check, freeing millions of businesses and individuals to make their own decisions. In many cases, regulations imposed by administrative fiat can prove more onerous for businesses and individuals than taxes passed through the legislature. Reagan reversed the trend of accelerating numbers of regulations, as measured by new pages entered into the Federal Register.

Reagan's accomplishment was not in shrinking the government, but in leveling off its growth. George H. W. Bush and Clinton more or less followed Reagan's lead, although each ramped up the number of regulations issued. But the size and influence of government crept up slowly but steadily during George W. Bush's first term, and then skyrocketed in his second term and the beginning of the Obama presidency.

For the purpose of judging Friedman's claim of "creeping socialism," it's useful to look at nondefense spending as opposed to overall spending because national defense is unique for several reasons. First, it is a legitimate function of government, because only the federal government can provide for the common defense. Second, defense spending rises or falls depending on the risks posed to the homeland (or at least it should).

In other words, it is only logical that Reagan authorized the government to sustain a larger military and purchase more weapons, because he faced the threat of the Soviet Union. Similarly, George W. Bush needed unusual resources to prosecute America's campaigns in Iraq and Afghanistan. Regardless of the merits of those engagements, there is no doubt that it is proper for the government to spend what it needs to in order to fund the military's actions. Accordingly, it makes sense that the Reagan and Bush administrations would spend more on national defense than a true peacetime president would. (It should be pointed out that, post-Reagan, taxes haven't risen and fallen along with defense spending, which fact might have concealed the true cost of the nation's war efforts from the public.)

Yet the role of defense spending in contributing to the mounting national debt can't be ignored. Furthermore, it's necessary, 10 years after the start of the Global War on Terror, to consider whether the distinction between wartime and peacetime has been blurred--at least for budgetary purposes. Our expenditures on defense and, especially, homeland security have grown relentlessly under administrations of both political parties. While it's to be hoped that the country will spend less on actual wars in the near future, the establishment of a permanent, massive security apparatus could prove to be a new source of intractable government overspending.

Based on their records--not their rhetoric or their ideological backgound--it's an open question whether the difference between Bush and Obama is more than superficial. Bush increased total spending (including war spending) from 18.2 to 20.7 percent of GDP, and added almost 80,000 pages per year to the Federal Register. In a short time, Obama's ratcheted up spending to an estimated 25.3 percent of GDP, and himself added roughly 150,000 new Federal Register pages, to go along with countless new bureaucracies.

OBAMA'S RECORD, however, can be deceiving. He is almost three years into his presidency, but the most important spending and regulatory provisions he's signed into law will take place in the future.

The Patient Protection and Affordable Care Act, or Obamacare, will prove to be the single most expensive measure Obama has signed into law, yet its effects won't be reflected in the nation's balance sheets for some time to come. Although some of the measures in Obamacare took effect immediately after its passage, the bulk of the entitlement spending provisions will not come online until later this decade.

Once they become operative, however, the two main drivers of spending in Obamacare--the expansion of Medicaid and subsidization of insurance policies purchased through state-based exchanges--will add massively to annual outlays. Although the Congressional Budget Office (CBO) projects that the bill will generate about $200 billion in new spending each year once it's fully implemented, the reality is that there is no way to know for sure what the costs will be. Depending on how individuals and businesses respond to the incentives created by Obamacare, the ultimate budgetary effects of the bill could be far greater than the CBO's predictions.

It is difficult to over-dramatize the ways in which Obamacare will likely transform the nation's finances (not to mention its health care system). In recent years, the U.S. government has incurred about 50 percent of the country's total health care expenses, mostly through Medicare and Medicaid. Most European governments, however, account for closer to 75 percent of health care spending. For example, in 2009, 77.9 percent of all health care expenditures in France and 76.9 percent in Germany were marked to the government's ledger, according to the OECD. The corresponding figure for the U.S. was 47.1.

The discrepancy in government payments for health care is a major difference in the levels of spending between social democracies like France and the capitalist U.S. It is possible that Obamacare, eventually, could close that gap. The CBO officially predicts that the health care exchange subsidies and expansion of Medicaid mandated by the health care law will result in additional spending of about 1 percent of GDP by 2020. That, by itself, is an enormous amount.

But those projections, as even the CBO itself has been careful to point out, are a matter of great uncertainty. Any number of developments could cause Obamacare to become vastly more expensive: more people than expected signing up for subsidies, companies dumping their employees onto the exchanges, or increased health care consumption by the millions of newly insured individuals increasing prices. In any number of plausible scenarios, Obamacare could drain the public coffers far more than expected.

Even if Obamacare proves to be as inexpensive as in the best-case scenario, overall health care entitlement spending--including Medicare and Medicaid--will grow from about 5 percent of GDP today to a truly unsustainable 10 percent by 2030, by the CBO's projections, and will only go up from there.

In other words, Obama's decision to add another budget-busting entitlement to the government's already unsustainable commitments was a choice to bring America's size of government into line with those of European-style social democracy. Unless Obamacare is repealed and Medicare and Medicaid are reformed, America's government will grow to about half the size of the economy by mid-century. Absent significant changes, the best-case scenario is that, with a combination of massive tax increases and health care rationing, total government spending could be stabilized at about 25-30 percent of GDP. That is the liberal/Democratic vision.

Ronald Reagan may have stalled socialism's rise in the U.S. In the past decade, however, his legacy has been slowly undermined. The facts are clear: without a fundamental change in the direction of health care spending, the U.S. economy will cease to resemble the one Reagan left behind--with low spending and low taxes--and begin to look a whole lot like a high-tax, high-spending socialist one.

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About the Author

Joseph Lawler, former managing editor of The American Spectator, is editor of Real Clear Policy. Follow him on twitter: @josephlawler.