Free Markets, Free People

When the beast starves

I tend to be more optimistic than Dale about the near-to-intermediate future for the economy and for the culture. This may be unusual for a libertarian, but I’m heartened by many of the ways in which our opponents’ system is unsustainable.

Let me start by saying that, given a certain size of central government, libertarians could do worse than spending almost two-thirds of the budget on a few wealth transfer programs (Social Security and Medicare, both mostly funded by flat taxes, plus Medicaid, which gets much of its funding from the states) and a military like ours.  Imagine if that money was spent employing domestic police and busybodies.

But even that government is fiscally unsustainable, so we expect our government to eventually be forced to give up some of its “responsibilities.”  Assuming the country avoids a sovereign debt crisis, that adjustment might not be so bad for libertarians.

Let’s look at what’s already happened as our government has had trouble financing itself.  State and local revenues dropped due to the recession.  The federal government did step in to bail them out, but even a Democrat-dominated government balked at making the stimulus too big, so state and local governments had to make up half the difference with cuts in spending growth.

So what, the good libertarian might think, They still grew.  Yes, but the blue state model has built up such huge liabilities that it starts falling apart when its growth is interrupted.  At the local level, witness the string of municipal bankruptcies.  At the state level, look at the largest public pension fund in the country, the California Public Employees’ Retirement System, which has repeatedly overshot their estimates of how much they’d be able to cover without taxpayer bailouts, sometimes absurdly.  More than 1.6 million people are covered by CalPERS, and they’re not all going to get what they were promised.

Public sector employment and pensions are the leading edge of unsustainable expenses, and they are already being pruned despite Democrats’ best efforts: counting federal, state, and local government, the US had about 700,000 fewer government employees last month than it had in August 2008.  Generous pensions were a way to boost benefits but delay the fiscal impact, and now many of those pension funds are in clear financial trouble.  Voters don’t want to bail them out, and public employee unions have lost a series of battles over the last year, even in blue states.  I don’t know if California voters will pass Prop 32 – it was winning 55-34 in the last poll I saw – but over the last year there does seem to be a serious backlash even in the state where the Tea Party wave broke harmlessly in 2010.

Then there are federal entitlements, which will be a growing drag on the general budget; the trust funds are just to provide mandatory budget authority, not provide padding for the taxpayer. Congress could hypothetically tweak Social Security to make it fiscally sustainable, with a slight increase in the payroll tax cap, an increase in the retirement age, and perhaps some means testing.  But Medicare will need more than a tune-up.

Subsidized college education is already marked as an unsustainable bubble.  The cost of a credential cannot keep rising faster than its value.  To a lesser degree, the same is true of all public schools, which are still the biggest single expense in state and local budgets, and did not provide a better return despite a tripling of per-pupil federal spending over the last three decades.

These are major institutions for the Left, and when the promises they’ve made go unfulfilled in ways that can’t be ignored, people are going to be upset.

The key to turning public opinion in a crisis is having the right ideas in place to (A.) plausibly explain what’s happening and (B.) offer what sounds like a coherent response.

When the financial crisis happened in 2008, the shock was enough to politically activate millions of people. Republicans, still holding the White House, had no good explanation for what just happened or how McCain could fix it, so after a couple of withering months, voters went with vaguely-defined “change.”  But at the same time, libertarian-leaning people who had (A.) an alternative explanation for what happened, (B.) a set of solutions, and (C.) the credibility of having been critics of Bush-era Republicans, were able to start gathering many of those politically activated people under the Tea Party banner. The result was one of the most sweeping electoral routs in decades – and the third time in a row that Democrats had captured the White House and both houses of Congress for only two years before being smashed in a wave election (1979-80, 1993-94, 2009-10).

If and when the US starts having trouble borrowing, it will be easier to explain by pointing to unsustainable spending growth and a limited ability to raise revenue than to tell a complicated story about how we would’ve been fine if we had completely socialized healthcare or kept Clinton-era tax rates.

Assuming the country has to make a quick adjustment to a government that can’t borrow so easily, is this likely to turn out poorly for libertarians?

  • Democrats have so far been afraid to even hint that they might raise taxes on the middle class. Taxes on the rich aren’t going to be enough to save the blue-state model.
  • On health care, we have work to do popularizing market alternatives like health-status insurance, but Republicans have at least started talking about competition, patient-centered care, and moving away from third-party insurance.  There is an incredible amount of waste in health care today, so while quickly transitioning away from our highly-subsidized system is bound to create a mess, it may not be as terrible as it sounds.
  • On pensions, Republicans are on the side of the majority of voters, who don’t care to bail out defined-benefit pensions for public employees, but polls show consistently that voters would accept some tax hikes to preserve Social Security.
  • On education reform, school reformers already have the momentum at the grade school level, and just need to expand the fight.  Colleges are setting themselves up to be replaced by far cheaper alternatives.

And for good measure, the war on drugs is growing increasingly unpopular.  A Gallup poll last year showed that 50% of Americans want to legalize marijuana, and as with Prohibition the potential for significant revenues may be what finally convinces the government to accede; not all libertarians like the idea of taxing it, but it’s better than locking people up.

The government still hasn’t distorted the economy so badly that it can’t survive without constant handouts.  Farms may predict doom if their subsidies ever fall, but New Zealand’s farms fared well after they ended their ag subsidies (though the government did write down some farm debt).  Some individual businesses may fall, but one of the beauties of modern capital markets is the ability to take assets that were locked up in poorly managed companies and put them to a more efficient use.

Even when the basic domestic police function falters, Americans seem to adjust.  You don’t see too many Democrats campaigning on gun control anymore.

Unlike many libertarians, I’m not sanguine about the prospect of the military budget being cut so much that we can’t continue to reassure our allies, deter regional aggression, and police the sea lanes.  But depending on how Americans feel about their security, we may be content with doing what we can on the cheap: drones and long-range missiles instead of manned fighters and ships, cyberattacks instead of bombing C&C and other infrastructure, punitive expeditions instead of decade-long occupations, more caution before intervening, and requiring our allies to pitch in more toward their own defense, especially in ground forces.

Finally, on a cultural level, all of this means people are going to rely more on themselves, their families, and their peers.  They will have to make more of their own choices, and many will work longer instead of extending their adolescence in college or retiring early.  I don’t know if we’ll return to the old model of churches and social clubs providing a much greater amount of social support, but in the Internet age I don’t doubt we’ll come up with new ways of finding communities for mutual support.

That doesn’t sound too shabby for a libertarian.  If our bloated government can keep from imploding but has to slim down quickly, that need not interrupt the transmission of civilization from one generation to the next.  If anything, that kind of society sounds like it’s a lot less insulated from reality.

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8 Responses to When the beast starves

  • Sometimes I feel like Ned Stark but instead of ‘winter is coming’ it is ‘austerity is coming’.  There are two ways to do austerity.  Plan for it in a meaningful way so that the pain in minimized and spread out.  The other way is to let events outside of your control impose austerity on you.  Look at Greece and the unpleasantry going on there.
    There is some optimism that the US may gets its fiscal house in order but it seems at times to be too little and too late.

  • I am fond of telling my lefty friends who are worried that Romney will cut the safety net that in California, we are already cutting the safety net and all done by Dems…LOL!

  • I cannot agree, they will find some way to keep the war on Drugs going even if we face imminent bankruptcy.  The War hawks and the drug warriors, and the people getting agriculture subsidies will never give it up unless you shoot them dead.

  • Glad to see you post again. Always enjoy your take on things.
    Old World Watch friend.

    • Thanks.  It was somebody there that linked to QandO and got me reading this blog in the first place, which in turn led to my current career.

  • All you have to do is look at New Zealand or Canada. Those countries scaled back their government when it was demanded of them by reality.
    We will be there soon enough.

  • Austerity: that form of government MANDATED by the Founders 225 years ago…