A New Vision for America: Reducing Government to its Right Size

Since the loss of Congress in November 2006 — and even greater political setbacks since – conservatives have been wandering in the wilderness.  Their traditional commitment to smaller, limited government seems to have eroded.  Thoughtful conservatives in and outside of Washington have been searching for a new paradigm/vision for America’s future.

We need search no more.  

As is so often the case, during our darkest hour, a new opportunity presents itself. A body of evidence has been developing, commonly referred to as the “optimal” (or right) size of government.  It posits that when government at all levels in a nation exceeds about 20% of GDP, the people as a whole are harmed because economic growth is stunted, and the rate of wealth creation is the casualty.  

Right now all US governments together are spending about 35% of GDP.  As recently as 1948 – shortly after WWII – total government spending in the US amounted to about 23% of GDP.  If government had remained at 23%, instead of growing to 35% of GDP, economist Gerald Scully calculates that our Nation’s economy would have grown at 5.8% annually instead of 3.5%.  And such a compounded growth rate would have made all of us, today, three times wealthier than we are — and our economy three times larger than it is.

At this moment, with the apparent meltdown of the free market system, implosion of private fiscal controls and the rush to a government bailout, it may seem odd — even quixotic — to suggest that capitalism and private-sector economic growth are alive and well.  But they are and will be — and must be.  Why?

Because this economic catastrophe was the offspring of government gone berserk, not a breakdown of the marketplace.  Government encouraged lending and homeownership that was “politically correct” in the eyes of Barney Frank, Chris Dodd and other congressional powers.  And greedy financial institutions and execs — well beyond the known culprits at Freddie and Fannie — took full advantage of it to line their own pockets.

But, much as political pundits pronounced the Republican Party — and its conservative wing – DOA after the ’64 Goldwater trouncing and the ’74 Nixon debacle – we bounced back.  And now we have an even more convincing cake to bake, upon which the Obama team will place the frosting with their worn out New Deal policies.

The “optimal” analysis establishes an objective standard for limited government.  Smaller government is not a subjective preference but an absolute necessity if we are to maximize economic growth.  And we must maximize growth if we hope to assure the well-being of all Americans while confronting the daunting challenge of the entitlement demands of 78 million baby boomers who are beginning to retire.  Their demands on Social Security, Medicare, Medicaid and other federal programs will break the bank unless we rapidly increase our national economic pizza pie from “large” to “extra large.”  

Unless we right-size government, no combination of policy and program adjustments will enable us to achieve, near term, a rate of economic growth sufficient to deal with the demands our Nation faces.  Limited government is no longer a matter of politics or personal preference. It has become a moral imperative.  This is the new paradigm for our era: an objective standard for the proper size of government.  It confirms what the founders knew intuitively and set out to assure through a constitutionally established set of delegated, limited functions of the federal government.

A little personal history may help to make a critically important point about limiting government.  When I worked for then-Governor Ronald Reagan in the early ‘70s, the Governor, and other members of his Cabinet, asked me to chair a special task force to see if we could figure out how to limit California government’s growth year-over-year.  I assembled the best free-market minds I could find around the Nation:  Milton Friedman, Jim Buchanan, Bill Niskanen, Craig Stubblebine, Norman Ture, Peter Drucker, Martin Anderson and others at the Hoover – and many more.  With the help of our chief constitutional scrivener, Tony Kennedy, now Justice Kennedy, we devised the granddaddy of tax and expenditure limits – Prop. 1 in California.  The first TABOR.

The Prop. 1 design called for a one-tenth of one percent reduction per year in state government’s share of state income for 15 years, reducing the state’s share of state income from 8.5 to 7% over that period.  That was the way we started.  Prop. 1 lost narrowly at the polls in 1973.  Subsequent tax & expenditure limits (TELs) in Michigan, Washington State, etc., used stable shares of state income. In 1979 we got it right and passed the Gann Limit in California, limiting government growth to population and inflation changes, the model later used in Colorado’s TABOR.  That is the right formula, for it preserves all real economic growth for the private sector while over time shrinking the size of government relative to the private sector.

But our work for Governor Reagan was not guided by pursuit of an optimal size of government, because at that time there was no objectively determinable “right size.”  Now there is.  And we must use this body of knowledge to our advantage.

We are designing a major project, drawing upon past studies and delineating future research, to produce a “roadmap” to a right-sized government.  The first task of our project is to resolve some key issues:

1.    Shouldn’t we start with the presumption that any federal function not specifically delegated to the federal government in the Constitution bears the burden of proof to remain a government function?
2.    Do some government activities have a greater return on the investment of public dollars than others?  Is there a ranking system?
3.    What effect do non-fiscal/spending functions of government – regulation, government planning, etc. – have on achieving the optimal size of government?
4.  What role do certain special interests (“rent-seekers”) have in driving government growth beyond the optimal level, and how can they be neutralized?  These rent-seekers include government employees and public employee unions; lobbyists; special-interest spenders (farm lobby, defense contractors, etc.); and special-interest “advocates” for the poor and others.
5.   To what extent has excessive government “crowded out” private action in reducing societal problems, and what are the relative costs of public and private responses?
6.    How should the core (optimal) functions of government be allocated among the federal, state and local governments, and how should the allocation decisions be made?
7.  What is the most effective and least invasive/destructive tax system that should accompany the effort to right-size government and that will help us reach our goal ?  The reality of tax competition with other nations is forcing us to cut our corporate tax rate from 35% to at least 25%.  It is such tax competition between our US states that has tended to discipline those state politicians devoted to high taxes. We welcome this globalization of tax competition because it simply can’t be ignored by Washington liberals

While pursuing answers to these questions, we will be formulating the transition process, timeline and methods of controlling the growth of government spending.

First, we will lay out a 20-year (five presidential cycles) timeline during which total government growth rate is slowed (never cut) so we can reach optimal size as a share of a substantially increased GDP.  This would include setting annual targets for total government spending, government spending as a share of GDP, reallocation of functions between levels of government, privatization of functions, and tax rate reductions and tax reform.

These annual targets must be well understood and agreed to by “stakeholder” groups which will realize that their personal, family and retirement expectations depend on the success of this effort.

In order for the stakeholders to be involved effectively, information about budgetary actions must be instantly available, transparent and accurate.  Two major changes in budgetary practice should be pursued:  the federal budget should be converted from a cash to an accrual basis so we can see all liabilities clearly; the Joint Committee on Taxation must be required to score spending and tax changes accurately using a dynamic, not static, economic model

Second, we must identify the techniques for achieving the annual goals for individual program transfer, conversion, reduction, etc. These would include sunsetting and serious congressional oversight; domestic program commissions, using Dick Armey’s BRAC design,  that annually review government programs and recommend “packages” of program reductions and eliminations to Congress for a single up-or-down vote (using performance-rating systems and reports from the Office of Management and Budget, Government Accountability Office, and others); and outsourcing and competitive bidding of government functions in order to obtain real-world pricing and reduce the cost of performing government functions.

Using the welfare reform model, we should control and downsize so-called entitlement programs such as Medicaid, food stamps, Supplemental Security Income for the disabled, etc., through finite block grants to the states.  Also, we should institute, at all levels of government, constitutional spending controls designed to implement and secure the optimal plan goals.

It is by no means utopian to pursue policies and strategies designed to restore government to its optimal size.  Rep. Paul Ryan (R-WI), ranking Member of the House Budget Committee, has demonstrated one way to do it in his “Roadmap for America’s Future,” a proposal to control the Nation’s soaring entitlement program burden.  We are working with him on it.  

Ryan’s conclusion matches ours:  To avoid doing this is to invite a fiscal train-wreck that will deny our children and grandchildren the America we have enjoyed.