Believe it or not, federal spending has been stable at around 20 percent of the gross domestic product for more than 50 years, ever since it settled down after World War II. Conservatives have been relatively successful in holding down the growth of big government for the last half-century.
The bad news is that this will change over the coming decades. According to the latest projections of the Congressional Budget Office and the General Accounting Office, federal spending will soar by 2040 to close to 40 percent of GDP, or more. This is primarily due to our nation's big entitlement programs, Social Security, Medicare and Medicaid.
Add in state and local spending, and government in America at some point would be consuming more than 50 percent of GDP. The crushing burden of taxes and spending this implies will crater the economy, destroy any notion of limited government and strangle freedom of enterprise.
Unfortunately, even some conservatives are now saying that the answer to entitlement spending will require large tax increases. Some want to try to cut a grand deal between liberals and conservatives, Republicans and Democrats for huge entitlement cuts in return for tax increases. Nonsense!
Slapping two bad ideas together does not make one good idea. For those who call ourselves progressive conservatives, this would mean agreeing to a still massive increase in government spending to around 30 percent of GDP or more, along with an enormous tax increase.
In a path-breaking article in Barron's on Oct. 8, Peter Ferrara of the Institute for Policy Innovation and the American Civil Rights Union, offers a better way. Ferrara argues that the yawning entitlement financing gap is far too big to try to address with entitlement cuts, and tax increases would be counterproductive and unfairly burdensome for working people.
He argues that instead we need to think outside the box of our current entitlement structures and seek to reform them from the bottom up. Today's entitlement programs are based on outdated, late 19th century tax and redistribution models. Reform to modernize them for the 21st century would bring in much greater reliance on modern capital and labor markets to achieve the goals of these programs. Ferrara shows in the article how such reform can leave us with new programs that serve the current beneficiaries far better but require only a fraction of the government spending of the current programs.
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