How did we get into this mess? How bad will things get? The answers are grim.
The graph nearby illustrates two key facts: 1) our government has grown substantially faster than our private sector and economy over the long term and more so recently, and 2) its excess burden for more than 50 years has progressively cut aggregate human well-being from levels we would enjoy if it were smaller.
Total public spending grew from 26 percent of the economy in 1960 to 36 percent in 2012. (It was about 8 percent in 1900.) The spending ratio is widely used as the measure of government in our lives and businesses; other graphs are available that show extreme increases also in taxes, regulation, deficits and debt.
The empirical economic literature shows that the optimal public-spending level (the level that maximizes growth) is about 20 percent to 25 percent. So, for over a half-century this trend increasingly has depressed economic growth, the source of human progress, flourishing and well-being.
In the 1980s, Ronald Reagan’s efforts to slow the surge of spending and regulation and to reform taxes, plus sound monetary policy by Paul Volcker, ignited a boom that lasted with only one hiccup until 2000, despite poor policies of Presidents Bush 41 and Clinton.
Later, extremely loose monetary and credit policies of Alan Greenspan and Ben Bernanke, acting much at the behest of Congress, also helped drive household, financial-sector and non-financial business debt through the roof. The bursting of the resulting asset bubbles precipitated the Great Recession and financial crash, but it did not solve our excess debt problems.
Since 2008, the unprecedented Keynesian spending binge of Presidents Bush 43 and Obama, plus the latter’s mad regulatory orgy, have yielded only our worst recovery ever. Americans are poorer today in real terms than in 2007. For four recovery years, we’ve had 1 percent annual real per-person economic growth, not the normal 3 percent.
Things may well get worse. Government excesses and errors in spending, taxing, deficits, debt and regulation continue mostly unabated. They will cause economic growth to remain very slow: 1 percent real annual per-person growth is likely the new normal, and we’ve seen all the recovery we’re going to get.
Worse, the monetary and credit-allocation gimmicks Bernanke used to mitigate both Obama’s tax, spend, borrow and regulate orgy and the private debt bubbles also are unsustainable. If our government continues to print money wantonly, it may foment an awful inflation spiral; if it tries to back off, it may precipitate another crash and big recession.
But wait, there’s more! We now have the slowing population growth that progressives have long desired. It will increasingly cause Social Security, Medicare, Medicaid and Obamacare to disintegrate in entitlements unsustainability crises and war between the generations. All that will further slow economic growth.
Is it a silver lining that almost all these problems will be worse in other major developed and many emerging economies? No, because that means our growth may decline even further.
Before the Industrial Revolution, long-term economic growth barely above zero meant that most people’s lot in life was essentially that of their parents. Subsequently, growth fostered by sound economic institutions, practices and policies made each generation almost twice as well off as its parents — and that’s our expectation now.
However, 125 years of progressivism culminating in a five-year-plus blowout means our children should greatly lower their expectations. The problems left to them by statist liberals are persistent, systemic and subject only to long, painful corrections.
Ron Knecht is an economist, law school graduate and Nevada higher education Regent.