Freedom’s Assets

This article appeared in the Washington Times, on January 14, 2000.

Arecent report by the Commerce Department indicates what many workers, investors and consumers already knew instinctively: the American economy has been growing in this decade a lot faster than first thought.

The upward revision in economic growth also means Uncle Sam's share ofthe total economy is shrinking. This is despite much of the irresponsiblespending enacted by President Clinton and the Republican Congress that I and othershave railed against for years.

In 1991, federal spending as a share of GDP hit 23 percent. In 1999, itfell below 20 percent for the first time since 1974. Moreover, this year federal spending might fall below 19 percent of GDP, which will be the lowest level since President Lyndon Johnson's Great Society was launched in 1965.

Milton Friedman has reminded us over the years that "the true cost of government is how much it spends." Modern governments can best be thoughtof as a toll imposed on private-sector wealth-creating activity. Over the past15 years that charge at the federal toll booth has fallen from almost 24 centsto about 19 cents on the dollar (see chart).

This is hardly a call for retreating from privatizing and downsizing government activities. There is still huge progress to be made inrestoring government to its constitutional and economically optimal size. A recentbooklet by the Institute for Policy Innovation on the growth of government showsthat back at the start of this century the federal toll was less than 5 cents onthe dollar. By my calculations, the historical average federal share of theeconomy was about 8 percent to 10 percent. So despite the recent progress, thefederal government is still twice as big as it should be.

Moreover, overall spending isn't falling at all. Over the past fouryears, the federal budget has expanded by more than $200 billion - during a timeof peace and prosperity. Bill Clinton's last budget had more than $150billion in new spending requests over five years. The Republicans have made a habitof late of spending more money than even Mr. Clinton has requested.

The major factor behind the government's retreat is that the privateeconomy has been surging over the past 18 years. It appears that Ronald Reagan,Arthur Laffer and Jack Kemp saw the future with more clarity than anyone else in Washington: the American miracle economy is outgrowing the budget,rendering it gradually more inconsequential over time. This is a phenomenon that CNBC economist Lawrence Kudlow has described as "growing the denominator." Soeven though the federal budget is now about 140 percent more obese than it wasin 1982 when this record 18-year Reagan expansion (1982-99) began, the U.S.GDP has increased by an even more robust 185 percent.

With the right constellation of freedom and growth policiescustom-designed for the high-tech, investor class age, the next president could veryconceivably shrink the federal toll to between 10 cents and 15 cents on the dollar. Considering that the government toll charged in the still socialist or"third way" European economies falls in the 30 cents to 40 cents per dollar range,a 10 percent to 15 percent federal burden in the United States would create for American workers and firms an insurmountable comparative advantage in theglobal economy. That giant sucking sound would be trillions of dollars ofinvestment capital from every corner of the globe pouring over the borders into theUnited States.

To get government down to between 10 percent and 15 percent of GDP by2005 will require modest fiscal disciplinary measures to slow federal spending.We should immediately shut down the Commerce or Energy Departments, forexample. We should finally pull the United States out of failed and corruptinstitutions like the International Monetary Fund and World Bank. The private sectorshould take over activities like legal services for the poor, public broadcasting, space exploration, medical research, and making bank loans to small and minority-owned businesses.

Equally important, a prosperity agenda aimed at maintaining growth in the3 percent to 4 percent range is imperative to shrinking government'sinfluence. Here Republicans in Congress need only plagiarize Steve Forbes' boldeconomic playbook. Forbes proposals include: personalized accounts for SocialSecurity, a postcard 17 percent flat tax, medical savings accounts as an alternativeto government-run health care, a U.S. policy of expanded free trade, schoolchoice for all children, and an iron-clad commitment to keep the internet forevertax and regulation free. All these together would virtually guaranteeaccelerated growth.

Skeptics will say we are simply living through a temporary pause in the relentless growth of government. They may ultimately be right. When Baby Boomers start signing up for Medicare and Social Security in about adecade, federal expenditures could easily double as a share of GDP. This makes itall the more imperative that we shrink government now, and find private sector alternatives to socialism for senior citizens.

We are now living in an global era aptly described by Walter Wriston as"the twilight of sovereignty." Even Bill Clinton's own "new Democrat" budget envisions federal spending dwindling down to 18 percent of GDP within thenext five years. If congressional Republicans get back to promoting a genuine platform of freedom and limited government, we can even do better thanthat.

Stephen Moore is director of fiscal policy studies at the Cato Instituteand president of the Club for Growth.

                GOVERNMENT IN RETREAT   Federal Spending as share of Gross Domestic Product.                     2000 - 19.3%                     1999 - 19.5%                     1998 - 20%                     1997 - 20%                     1996 - 20.5%                     1995 - 21%                     1994 - 21.5%                     1993 - 22%                     1992 - 22.5%                     1991 - 23%

Stephen Moore

Stephen Moore is Director of Fiscal Policy at the Cato Institute.