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Archive for Monday, January 22, 2007

Entitlement tidal wave looms

January 22, 2007

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How big should the federal government be? Most people probably would say it's about the right size. But what if you knew that forces - indeed plans - were in motion to make Uncle Sam's bite on the economy almost twice what it is now?

The government spent about $2.7 trillion in 2006. That's a lot of money, of course, but the gross domestic product, or GDP, is around $13.3 trillion, and so it's a manageable figure. Indeed, federal spending, which hovers at 20 percent of GDP, has been remarkably stable as a share of the economy, through war and peace, in the past half century.

But that spending status quo could change. The Congressional Budget Office says federal spending could rise to around 33 percent of GDP by the middle of this century. The cause, of course, is entitlement spending, combined with an aging population. And if one were to include state and local spending - also due to balloon because of retiree costs - the government's share of the economy in the decades ahead could easily reach 50 percent of GDP. In other words, America would move toward the sorts of hulking welfare superstates that afflict Europe today.

And, of course, taxes would have to go up, too. It's possible to finance deficits if they run at just 2 or 3 percent of GDP, as is the case now. But, if spending starts marching decisively upward, taxes will have to march upward, too.

Most notable among entitlements, of course, is Social Security. Two years ago, President Bush proposed "personal retirement accounts" - partial privatization of the system - as a way of reducing the government's future financial burden, also as a way of letting younger workers participate in the stock market.

Bush was onto something. Ever since Thomas Jefferson extolled the idea of "widespread distribution of property," ever since Abraham Lincoln signed the Homestead Act, ever since Harry Truman endorsed low-cost Veterans Administration home loans, Americans have liked the idea of controlling their own destinies by controlling their own assets.

And, in fact, the idea of helping people develop their own nest eggs is increasingly popular around the world. In Singapore, for example, the government strongly encourages and subsidizes the asset-accumulation of its citizens.

But when Bush proposed his Social Security plan in 2005, Democrats in Congress quickly disposed of it. Veteran anti-tax activist Grover Norquist says he thinks he knows why: "The Democrats want people to be dependent on the government," he said Tuesday at a conference on Capitol Hill sponsored by the Free Enterprise Fund (of which I am a fellow) and other limited-government groups. That is, the Democrats, as the Party of Big Government, want Uncle Sam to grow big enough to take in lots of money and then dole out lots of money - enough to buy everyone's vote.

By contrast, Norquist continued, the Republican Party has a different vision: People own assets so that they are not dependent on the state.

OK, so now what? In Washington today, Treasury Secretary Henry Paulson is leading a quiet effort to raise taxes as part of a "deal" to bolster Social Security. And budget number-crunchers such as Paulson have a point: If spending soars by 60 percent or more as a share of GDP, taxes will have to soar, too.

But is there another answer to keep the United States from going the way of, say, France? Peter Ferrara, former domestic policy aide in the Reagan White House, offers a solution in his paper "The Coming Crisis of Big Government" - available at freeenterprisefund.org - proposing a new and improved version of the "personal accounts" idea.

Ferrara's recommendations for entitlement reform will be no better received by Democrats than Bush's were two years ago. But if we do nothing, the welfare state is destined to expand radically, pushing the burden of government up to unprecedented and economy-crushing levels.

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