I recently had the opportunity to be a guest on the Glenn Beck Show along with writer Amity Shlaes. In the course of the interview I was asked what we should do to reduce federal government spending. I suspect people were expecting me to give particular examples – such as extending the retirement age for Social Security by two years.
Instead, my answer was that we need to win the battle of ideas.
We cannot address federal government spending until we address the proper role of government. It makes little sense to give a prescription to slightly alter how a federal program is operated without asking whether the federal government should be involved in the issue to begin with. And in order to answer what the role of government is, we need to understand how the spontaneous order of the market place works.
Frederic Bastiat, the great 19th century economist and political theorist, wrote in his book, The Law:
A science of economics must be developed before a science of politics can be logically formulated. Essentially, economics is the science of determining whether the interests of human beings are harmonious or antagonistic. This must be known before a science of politics can be formulated to determine the proper functions of government.
As the clock ticks down to the “fiscal cliff,” the issues are how much should federal spending be cut? And what should be happening with taxes?
On the tax side, we can look at the economic effects of raising taxes. For example, increasing marginal tax rates on small businesses and individuals will reduce their incentives to expand, innovate, and hire people.
But the federal government does not have a tax problem. Revenues for the just-ended 2012 fiscal year were $2.5 trillion. Outlays, on the other hand, were in excess of $3.5 trillion. We need to be reducing federal spending rather than searching for more ways to take income from the American people.
To reduce spending we must first address the question of what government should be doing. We need to understand that market capitalism is the only economic system that allows individuals to gain for themselves by pleasing other people. The role of government should be limited to protecting life, liberty, and property. Government must establish certain rules of the game – and that allow capitalism to operate.
Bastiat argued that we have a natural right to self-defense and that government is the collective organization of that natural right. A just government fulfills this purpose. That is, it protects us from the incursions of others. An unjust government is one that does the opposite – it takes from one person and gives to another.
In my book, “A Capitalist Manifesto,” I discuss what Bastiat said would happen once government began doing the opposite of what it was organized to do. That is, when it engages in what he called legalized plunder. One of the results would be that “the plundered classes would attempt to engage in the making of the law.” A major reason we have big government today is that big business has every incentive to engage in lobbying to benefit itself.
Thus, we have thousands of laws that are there not to protect the market system but to use government to alter what would have occurred if people were free to purchase what they wanted – and to produce what others wanted.
Bastiat also wrote that we would lose our sense of what is just and what is unjust. Thus, entitlement reform—something the Republicans are arguing for. In fiscal year 2012, Social Security spending was $762 billion, up almost 6 percent from 2011. To keep this in perspective, that’s more than total federal spending until 1983.
And how does Social Security work? The government leads you to believe you pay money into Social Security while working – then get it back when you retire. That’s not how it works. I truth, while you were working the government took your money away from you and gave it to someone else. Once you start receiving Social Security the government takes money from someone else and gives it to you. In effect, Socials Security takes money from that person working behind the counter at Taco Bell – and gives money to Warren Buffett.
But no politician in their right mind can point out that Social Security operates the way it does. AARP would attack them. As a consequence, how can we possibly reduce federal spending on the major spending programs: Social Security, Medicare, and Medicaid?
We can only reduce the size of the federal government when we have a consensus on what the proper role of government is. And this cannot happen until we understand how market capitalism works – and why a free society is so important.
(Dr. Gary L. Wolfram is the William E. Simon Professor in Economics and Public Policy at Hillsdale College. Find him on Facebook at www.facebook.com/GaryWolfram. And on Twitter at @Gary_Wolfram. Originally posted on The Michigan View.)
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