It's a pleasure to be in Dallas tonight, although in all candor, given my philosophical orientation, it's a pleasure to be just about anywhere other than where I work. The Cato Institute may be located in Washington, D.C. but it's something of an anomaly among inside-the-Beltway institutions in that our purpose is not to spend the money and run the lives of everyone who lives outside the Beltway. Quite the contrary, we view our mission as protecting the interests and rights of those Americans who do live outside the Beltway in what we now refer to as the "private sector."
There was a time in this nation's history when people would have looked at you quizzically if you had said you were from the "private sector." For the first half of the great American Experiment, society and what we call the private sector were pretty much the same thing. Government, or what we now call the "public sector," was viewed as a necessary evil -- and therefore kept very small -- with its task being limited to protecting the rights to life, liberty, and property of those individual human beings who constituted society.
But as everyone in this audience is keenly aware, things have changed. In the early part of this century, government spending at the federal, state, and local levels amounted to under 10 percent of national income. But by 1950 that figure had risen dramatically to 26 percent. Today, spending at all levels of government amounts to 43 percent of national income and is continuing to grow. This, I submit, is something that should be of considerable concern to anyone who values freedom and prosperity.
I agree with Milton Friedman that the true level of taxation on the American people is the level of government spending. That is, the burden on those of us in the private sector is determined by the amount of resources extracted by the public sector. Whether the extractions come in the form of taxes, borrowing, or inflation is less important than the fact that resources are being removed from the private, productive, job-creating part of society.
So in this sense the deficit issue is bogus. The government never has a deficit -- it spends every penny it can get its greedy little hands on. If you want to cut spending primarily to reduce the deficit, that's fine with me; but from my perspective, we should cut public sector spending because to do so increases the prosperity and freedom of the private sector.
And, of course, spending is only part of the burden the private sector suffers at the behest of the public sector. Regulations alone cost the American consumer an estimated $600 billion a year, according to Murray Weidenbaum at the Center for the Study of American Business. In fact, when you talk about regulation, there's not a single element of your existence that some politician or bureaucrat inside the Beltway doesn't feel completely justified in regulating or controlling -- if he's not already doing so. And it takes plenty of bureaucrats to do all that regulating.
You know, someone once said, and I'm certain this is true, if you took every bureaucrat inside the Beltway and laid them end-to-end, that that would be a good thing. What I'd like to do today is make the case for what I call the civil society over political society. Some time back the famous jurist Oliver Wendell Holmes wrote, "Taxes are what we pay for civilized society." I think Holmes got it precisely wrong. In fact, I would argue that the level of taxation and of government regulation is a measure of our failure to civilize our society.
Because there are basically only two ways to organize society: Coercively, through government mandates, or voluntarily, through the private interaction of individuals and associations. Take all the various political "isms" and they all boil down to a single question. Fascism, communism, conservatism, market liberalism, neoconservatism -- you name it -- the bottom line of political philosophy and therefore of politics itself is, "Who is going to make the decision about this particular aspect of your life, you or somebody else?" There's an awful lot of heavyweight philosophical debate that goes on, but don't let them fool you: Politics is about the individual's relationship to the state, pure and simple. Do you spend the money you earn or does some politician? Do you pick the school your child goes to or does some bureaucrat? Can you buy products someone from another nation made or does a politician say you can't have that choice? Can you pick your own retirement plan, or are you forced to put so much money into a mandated pay-as-you-go government plan, that you can't afford to choose for yourself?
In a civil society you make the choices about your life. In a political society someone else makes those choices. And because it is not the natural order of things for someone other than you to make those decisions about your life, the political society is of necessity based on coercion. None other than George Washington warned us of this reality when he wrote, "Government is not reason, it is not eloquence -- it is force! Like fire, it is a dangerous servant and a fearsome master."
Civil society, on the other hand, is based on voluntarism and predicated on giving the widest possible latitude to the individual so that he has sovereignty over his own life, so long as he respects the equal rights of others in society. It's a simple concept, really, but a radical one nevertheless. It's the concept on which this great nation of ours was founded and which was so revolutionary that it motivated tens of millions of people from around the globe to come here, often giving up everything, just to live in the "land of the free." The immigrants of the past did not -- and they do not today -- come to America for food stamps, wheat subsidies, or Head Start programs. They came, and come, for the right to live their own lives as they choose.
Here's an interesting thought experiment. Suppose we increased the level of immigration, but the rule would be that immigrants and their descendants would have no access to government social services, including welfare, social security, health care, business subsidies, or the public schools. I would argue first that there would be no lack of takers for that proposition. Second, within a generation, we would see those immigrants' children going to better and far cheaper schools than the average citizen; there would be less poverty, a better work ethic, and proportionately more entrepreneurs than in the rest of U.S. society; and virtually everyone in this group would have inexpensive high-deductible catastrophic health insurance, while the truly needy would be cared for by an "immigrant culture" that gave proportionately more to charity. If my hypothesis is true, and I believe it would be for virtually any immigrant group you could name, it is something to think about, isn't it? That kind of freedom's why people came here in the first place -- not for a government that takes 43 percent of your income, regulates you to death and tells you which books your child must read in school.
Today, the vision of liberty that drew immigrants to the United States in the past is inspiring freedom movements all around the globe. More than an arms build-up, it was the ideas of the American Revolution that toppled communism in Eastern Europe, and that are energizing freedom fighters in Asia, Africa, and Latin America to set up societies in which the individual is more important than the state. The tragedy is that, while all these wonderful movements for freedom are going on, we seem to have forgotten the lessons of our forefathers here at home. Rather than losing ground, government in the U.S. is steadily gaining ground. The political society is winning at the expense of the civil society.
The last presidential campaign is a case in point. That campaign was not one of the high points in the history of political discourse. George Bush couldn't offer a satisfactory reason why he broke his promise to the American people not to raise taxes, much less explain why he wanted a second term. Ross Perot did allow us to express our frustration with both the Republicans and Democrats, but in the process temporarily dropped out of the campaign because, he said, the Republicans were out to sabotage his daughter's wedding. And Bill Clinton, the erstwhile pal of Gennifer Flowers, pretended he was a New Democrat while his wife Hillary baked cookies and didn't let on for a minute that she planned to totally revamp one-seventh of our GDP in the first hundred days of the new administration.
That campaign was to put it mildly, unworthy of the American people. Americans have an interest in politics precisely because it does deal with our relationship to the state and all that that entails. Politics has a profound impact on our lives and the lives of our loved ones. We deserve more than platitudes, paranoia, and pratfalls in our presidential candidates. But the great tragedy of the 1992 presidential campaign was not so much in the personal weaknesses of the individual candidates as it was in its utter lack of philosophical content. The Founders of this nation believed that government had to be strictly limited, that there were vast areas of human society in which government had no legitimate role to play at all. Messrs. Bush, Perot, and Clinton did not and do not share that view. To them, there is no area of human activity that government can't be involved in, no social or economic problem that government can't solve. The only real debate between them, when you analyze it, was over how much in the way of resources government has to deal with these problems.
It does seem ironic that so many politicians in this country hold this curiously benign view of government as some kind of giant nanny, that will make everything okay if we just give it more money. Because as we enter the 21st century, government activities beyond its legitimate function of the protection of life, liberty, and property have pretty much been exposed as one of the great failures of civilization. Coercive, political society simply doesn't work very well. Most people, whether they're willing to admit it or not, know that now. There is a reason why East Germany produced the smoke- belching bucket-of-bolts Trabant, and West Germany produced the Mercedes, the BMW, the Porsche, the Audi, and the Volkswagen. Same people, same culture, different political system. Civil society worked; political society didn't.
Yet politicians in America continue to give credence to the idea that the political society can address our problems better than the institutions of the civil society. As Milton Friedman has observed, we seem to be saying that we know that socialism is a failure and that capitalism is a success, therefore we need more socialism.
Ladies and gentlemen, the time has come for us to say that the Emperor has no clothes. We've been too tolerant for too long of politicians and their court intellectuals who smugly tell us that 30 years of declining SAT scores and increasing expenditures means we must spend more on the public school monopoly; that sluggish economic activity means we must take more money from the productive private sector to give to government bureaucrats to spend; that protectionism saves jobs when we know it costs many more than it saves; that we must sacrifice while Congress votes itself a 30 percent pay raise; that escalating health care costs means we need more government involvement in medicine, rather than less.
How much longer can we let this charade continue? Freedom isn't perfect. The civil society will have its problems. But compared to the litigious, contentious, corrupt political society? Can anyone seriously maintain that a single major domestic government program has actually worked? That the private sector isn't more responsive, innovative, cost-effective, and, indeed, humane, than the public sector? I don't think so. Yet the trends for much of this century in America -- and especially over the past 5 years -- tend to ignore this common sense truth.
Consider just a few examples of where the American government has assumed a huge role in our society. In a civil society, people provide for their own retirement by saving real money. Those savings go into savings accounts, stocks, bonds, and other vehicles to provide the capital that creates jobs, productivity and economic growth. In a political society where the government runs the retirement system, there are no real savings because politicians would rather spend the money now and pretend that it's in a trust fund, as they do with social security. Did you know that according to the government's own figures the combined payroll tax will reach 26 percent early in the next couple of decades -- and that's based on the eternally optimistic actuarial assumptions of the Social Security Administration? (Of course, their idea of optimistic is that we'll all stop living longer.)
But there's going to be intergenerational warfare before we get a combined payroll tax of 26 percent. The younger generation will not play the victim in some babyboomer Ponzi scheme. There is a way out of this looming disaster that the politicians pretend doesn't exist. It involves seriously cutting federal spending and allowing young people, say those under 40, to opt out of the system and invest instead in a tax-free Super IRA, thereby creating capital, economic growth, and retirement security outside of the political society.
Or take government regulation of business, which is pervasive, counterproductive, and harmful to America's international competitiveness. In a civil society such regulation as existed would be for the purpose of preventing fraud, misrepresentation, and excess pollution. (Note I said "excess pollution" because any economic activity creates waste -- although capitalism produces much less waste than socialism as witness the horribly polluted Eastern European nations -- and there are those in the Green Movement who are more interested in shutting down industry than they are in preventing pollution.) But in a political society business regulation takes on a life of its own, with agencies brimming with bureaucrats who make a living by throwing wrenches into the machinery of the free market. That's why the so-called Clean Air Act requires about $4 billion of expenditures to combat acid rain, when a ten-year $500 million government study concluded that acid rain was a non-problem. Less than one percent of American lakes are acidic and the majority of those are acidic for natural reasons, unrelated to industrial waste.
The great Nobel laureate economist F. A. Hayek, who, prior to his death, held the honorary title of Distinguished Senior Fellow with the Cato Institute, used to refer to attempts by bureaucrats and politicians to improve on the marketplace through government regulations as the "fatal conceit." It's an apt phrase, because what the bureaucrats and government planners never really comprehend is that the market is a continuous discovery process. Regulation, by its nature, blunts the discovery process by forcing businesses to act in a prescribed manner, thereby limiting the options from which to discover better alternatives.
Let me give you an example of what I mean. When interstate trucking was heavily regulated there wasn't much competition and a few big companies dominated the industry. Many smart economists and even some bureaucrats believed that if the market for interstate trucking was deregulated, competition would increase, leading to lower shipping rates. They were right. But what they didn't predict was that the deregulated market would generate much greater savings -- on the order of tens of billions of dollars -- by discovering that greater flexibility allowed for radical downsizing of inventories, the so-called just-in-time-inventory phenomenon.
And this discovery process, which the political society stifles, applies in any number of fields. I mentioned the high cost and low quality of much of our government monopoly education system. In a civil society parents, not bureaucrats, determine where their children go to school and what curriculum they study. The whole debate over prayer in school is a good example of the inherent conflict that exists in political society. Private schools cost much less and do a better job while affording parents the opportunity to have their child pray or not, depending on their choice. The teachers unions and public school bureaucracies fight the idea of school choice with a remarkable passion, given their record of success.
But the truth is that the days of the public school monopoly are numbered. Parents are increasingly demanding their right to opt out of the political educational system and join the civil educational system. I said the discovery process works in education. It does so in a very simple but effective way. Take our inner-city schools, which in many instances are not much more than day care prisons. Given a choice system, the parents of these kids who are being deprived a fair start in life would immediately improve the quality of education in the inner city. How? This is how: Mrs. Smith notices that Mrs. Jones's kids tuck in their shirts, say "yes, sir," and "yes, ma'am," and generally keep their noses out of trouble. "Mrs. Jones, which school did you say you're sending your kids to?"
And don't buy the argument that there simply aren't enough schools to meet the demand. Empowering parents with school choice vouchers will be incentive enough for entrepreneurs like Chris Whittle and others to fill the void.
The examples of the superiority of the civil society over the political society, are endless and nothing new to this audience in any case. So let me focus for a moment on three policy prescriptions the Cato Institute's been working on that we think would be highly effective in helping to roll back government in our society. As you know, Hillary Rodham Clinton is determined to change our health care system in America. She's right that there is something wrong with the system. She's wrong in believing that it suffers from too little government involvement. Most Americans don't want the same system that delivers the mail delivering our health care.
Over the past two decades health care expenditures have risen from about six percent of GDP to about 14 percent. That's a huge increase that reflects systemic problems. The roots of those problems go back to the government-imposed wage and price controls of World War II. With wages frozen companies competed for employees by offering improved fringe benefits, most notably free health insurance. By the time the IRS got around to realizing that health insurance was in fact income to the worker, it had become such a popular benefit that their attempt to tax it was overturned by Congress. Hence, we have today a third party payment system that features very low deductibles -- generally ranging from $100 to $300 -- that makes health care appear to be almost a free good to the consumer. Low deductibles for health care are like buying grocery insurance and saying, lucky I have this grocery insurance because we're out of food again this week.
Health care expenditures are a part of life and should be paid for by the consumer, just like we pay for our groceries. Insurance should be limited to catastrophic or high dollar coverage. The Cato Institute has developed a free market approach to health care called the Patient Power plan based on our book by that name authored by John Goodman and Gerald Musgrave. Here's how it would work: The average company now pays $4500 for an employee's family health plan, all of which is deductible for tax purposes. We propose having the company instead purchase for $1500 a catastrophic, $3000- deductible plan, giving the employee the remaining $3000 to place in a Medical Savings Account, which would accumulate earnings tax- free, like an IRA. The $3000 would not be taxable to the employee, but the government wouldn't be out any money because the whole $4500 was a business expense for tax purposes in the first place.
At this point the employee now has first dollar responsibility for his or her health care. Suddenly, the discovery process of the market kicks in as the consumer -- rather than state regulated, cost-plus third party insurance companies -- is controlling the health care dollar. Like Mrs. Smith and Mrs. Jones, word gets around about who charges what and we start to see some comparison shopping. When patients do go to the doctor -- and they don't go as frequently as they used to because they get to keep whatever they don't spend of the $3000 in their Medical Savings Account -- they start asking if this procedure is really necessary; do we really need another x-ray; and isn't there a generic drug that does the same thing as this designer drug does for one-tenth the cost? Suddenly, nurses will start being polite because when people are spending their own money, that's what they expect.
In addition, we estimate that there will be over $30 billion in administrative savings alone with this plan because insurance companies won't be checking on the vast bulk of medical expenses they currently have to. Some 94 percent of Americans never exceed $3000 in medical expenses during the course of the year, and it's only when they do that insurance companies come into play.
Another benefit of the Patient Power plan is that the savings that accumulate in the Medical Savings Account provide health care security between jobs. The funds there can be used to purchase individual insurance until the worker is under another company plan. You hear a lot about the estimated 37 million uninsured Americans, but what you don't hear is that fully half of them are uninsured for four months or less, and some 70 percent of them are uninsured for a year or less. We can deal with the remaining 11 million or so Americans without driving the rest of us into some kind of government managed plan complete with rationed care and higher costs. In fact, many of the remaining uninsured would take advantage of the tax feature of the Patient Power plan that would allow them to set up their own Medical Savings Accounts independent of their employer.
We estimate that the total savings from the Patient Power plan would be in excess of $200 billion a year -- all without mandates, taxes, or more government involvement in health care delivery.
The list of major government failures goes on and on. Welfare dependency, the savings and loan debacle, wetlands regulations -- it's not an enviable record, and given the history of governments around the world, we shouldn't expect it to be. I hardly claim to know all the answers on how to reverse the growth of government in America, but as I mentioned, I do have two proposals that I believe can effect systemic change in the dynamics of that growth. The first is radical tax reform. There is a growing grassroots movement -- that is gaining increased academic support -- to simply get rid of our income tax system and replace it with a federal retail sales tax.
Let me immediately point out that I am definitely not talking about a value-added tax (VAT). The problem with a VAT is that it is far too easy to increase. It's a hidden tax and the experience in Europe is that it just grows 'n' grows. A federal retail sales tax is something else. For one thing, you'd be aware of it every time you bought something. For another, it's so simple and easy to understand that it would be much easier to create some taxpayer solidarity in trying to lower the level of federal taxes (which did not, contrary to popular opinion, decline during the Reagan years). Instead of grabbing your wallet when somebody mentioned tax reform, as is the case under the current system, all you'd have to do is vote for the candidate who promises to lower the federal sales tax.
According to a Cato Institute study by the noted Boston University economist Laurence Kotlikoff, an initial federal sales tax of 17 percent would replace the funds raised today by all the various income taxes -- personal, corporate, and capital gains. Because of the boost to the economy such a tax structure would create through increased saving and, hence, productivity, the tax could eventually be lowered to just 11 percent, according to Kotlikoff.
Furthermore, there is something to be said for the salutary effects of Americans living in a country where it was none of the government's business how much money they made. The civil liberties implications of not needing an IRS to fund the federal government should by itself make the concept of a federal sales tax -- as a replacement, not an addition to the income taxes --worth considering.
The second systemic reform we need to implement as soon as possible is legislative term limitation -- at the local, state, and federal levels. To put it bluntly, too many of our problems as a nation are a direct result of professional politicians who suffer from Hayek's "fatal conceit." With the system we have today, where, for instance, it takes an average of 19 years in office for a congressman to become a committee chairman, a lot of good folks look at the prospect of running for Congress and decide not to because they'd have to be there too long before they had any real influence. They don't want to spend 10, 15, or 20 years as a politician. They'd rather live in the private sector leading productive lives as doctors, businessmen, computer programmers, or whatever.
The problem is, that is precisely the kind of person we need in Congress -- not the person who looks at running for Congress and thinks, Gee, I could stay there the rest of my life! For democracy to work, it must be representative democracy, which means our elected officials represent the private sector, not the public sector. We know which sector career politicians identify with.
But even if we didn't have this adverse preselection process -- even if the men and women serving in Congress truly did represent a good cross-section of the private sector -- eventually even the best of them would be corrupted by what I call the "culture of ruling" inside the Beltway. It is unnatural to wake up every morning and have reporters pushing microphones in your face, asking you your opinion on everything under the sun. Pretty soon you start thinking that maybe your opinion is more important than it really is. Worse, you start thinking that maybe you should codify your opinion on everything under the sun. Indeed, the records kept by groups like the National Taxpayers Union demonstrate that the vast majority of congressmen become bigger spenders and submit more and more bills, the longer they're in office. I wonder, for instance, if an earlier Phil Gramm would have volunteered to carry George Bush's water on the huge tax increase that ultimately did in his administration?
In any case, we need to limit the terms these people serve in Congress -- for their own sakes, if for nothing else. The national movement for term limits is rapidly growing. It calls for a six year limit in the House and 12 years in the Senate. If we're going to have a government of, by, and for the people, need a true citizen legislature and that means we're going to have to have term limits.
At the same time, the recent election results are somewhat encouraging. New York City and the state of Maine passed term limit initiatives. In New Jersey voters chose a 30 percent tax cut candidate for governor over a multi-billion dollar tax increase incumbent. Voters in Texas and Washington state passed initiatives that will make it harder for the legislators there to raise taxes. So right now the trend is improving. But we've got such a long way to go to regain the freedom and prosperity that is our heritage as Americans. It's a vitally important battle, the battle between civil society and political society.
It's not a game, or something we should just look in on during the late night news. Our liberty is a precious heritage. I remember the first time I went to the Soviet Union back in 1981. As a market liberal I was prepared for the lack of creature comforts and consumer goods. What I don't think I was prepared for was what statism -- the completely politicized society -- does to the human spirit. People there walked a little stooped over. There was no light in their eyes. They had been stripped of something that's as important to the human condition as food and shelter: their freedom.
The current administration in Washington is, in my view, philosophically commited to increasing the politization of America. This is a leftist administration. (I went to Berkeley in the Sixties and I know a leftist when I see one.) Hillary Clinton told reporters recently that she's "a government junkie." No joke. This whole administration seems addicted to the notion that federal bureaucrats are better qualified to make decisions regarding our lives than we are. And they're serious about it. The 1500-page health care proposal would create 105 new government agencies, boards, and commissions. It's not easy running other people's lives. Bill Clinton last October, campaigning against school choice, used a revealing turn of phrase when he said it would be lamentable if more parents chose to send their children to private schools because private schools don't "have to meet any standards at all." Which is true, of course, if you don't count the standards that parents demand for our children's education. And the Clintons don't. To them, standards that aren't set by government aren't standards at all.
Ladies and gentlemen, we've got to stand up to the statists in both parties. America should be leading the worldwide market-liberal revolution, not pulling in the other direction.
So, let me conclude by reminding you again of America's heritage of freedom. The Founders of this great nation thought they were creating a civil society. They did, and except for the very un-American institution of slavery, it worked magnificently. But just as the Founders feared and tried to prevent, the political society has emerged again with a vengeance in the Twentieth Century. We must not let the statist politicians destroy the great American experiment in human liberty. There is, it seems to me, a moral imperative for all of us to reclaim our heritage as a free people and our right to live in a civil society. And it can be done, if only we take seriously our responsibilities as a free people, which means never conceding to politicians and bureaucrats the right to run our lives. Thank you very much.