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Power By Any Other Name

Mises Daily: Friday, February 04, 2005 by

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While some still see the Republican Party as the party of smaller government, it is hard to know why. Perhaps no one else did more to create this impression than Ronald Reagan. In his inaugural address Reagandeclared that "Government is not the solution to our problem, government is the problem." While President Reagan’s actions fell far short of is rhetoric one might excuse Reagan by noting that the Democrat controlled House frustrated many of his efforts. This excuse obviously does not apply to the current Republican administration.

President Bush delivered more big government regulations and spending in his first four years than President Clinton did in his eight years in office. The first State of the Union speech of his second terms promises to deliver more of what we saw in his first term.

The high point of his speech was when he pledged to reduce or eliminate spending on more than 150 government programs. Discretionary spending will rise more slowly than inflation, tax cuts will become permanent: "taxpayer dollars must be spent wisely or not at all." This indicates a degree of fiscal responsibility yet unseen from Americas' 43rd president. However, this brief moment of Reaganesque rhetoric near the beginning of his speech was immediately followed by the kind of oratory that one would have expected from a President Kerry.

President Bush claims success with the centralized planning of education in his "No Child Left Behind" act. He wants to go further in planning education during his second term by "demanding better results from high schools", "reforming community colleges", and by making college more affordable by "increasing the size of Pell Grants". Given the overall track record of planned education in the US, we should be wary of President Bush's plans.

President Bush called for an end to needless regulation and junk lawsuits. While no reasonable person would support needless regulation, it would be interesting to learn which regulations President Bush believes are necessary or desirable.

President Bush supports reform that will make the tax code easy to understand and fair. This makes sense, but 2 paragraphs earlier he proposed low income tax credits for health insurance. These are the types of measures that make the tax code, in president Bush's words "archaic" and "incoherent".

Of course, one such exemption does not make the tax code incoherent, but there are a vast number of other potential exemptions which would benefit particular taxpayers. Is it "fair" to single out one particular need of one particular group of taxpayers as worthy of exemption, while eliminating other exemptions? Isn't this the kind of intervention that gave us the monstrous tax code that the President decries?

President Bush also has an energy plan to modernize the electricity grid, develop hydrogen powered cars, increase domestic energy production, and encourage conservation. While I am not an energy expert, I have to wonder why private industry won't invest in things like hydrogen engines- if they are as efficient and as clean as experts claim. One could say that pollution is a negative externality, but if there is political gain from serving the public in this way, it is at least possible for there to be some private profit opportunities in serving this same exact demand.

Perhaps the most disappointing part of President Bush's speech was the section on Social Security. President Bush proposes that about 1/3 of mandatory payroll deductions be devoted to real investments to be strictly regulated by the Federal Government. You will not be able to empty "your account" all at once. You will be limited to investing in "a conservative mix of bond and stock funds" in "your account". You will also be protected from market swings and hidden Wall Street fees.

How could President Bush have shown more contempt for the workings of the market process and the capabilities of ordinary people, or more faith in paternalistic government? While there are surely some instances where individuals make mistakes with their own money, or are defrauded by private money managers, the idea that the Federal bureaucrats are more capable or more trustworthy is absurd.

Aside from the fact of past failures of the Federal Government to provide a sound system of financing retirement, there are inherent defects of government that make the likelihood of future success miniscule. Special interests have an inherent advantage in lobbying the government over broader interests (Olson 1965).

The Bush plan for Social Security will result in Wall Street working with the Washington Bureaucracy, rather than with the people whose retirement incomes are at stake. These Wall Street firms, as a special interest group, will have far more influence over the structure of this program than the general public. Also, bureaucrats have their own agendas, and informational problems prevent the public from abating bureaucratic abuses.

The Republican party has hijacked the word "privatization" to help sell President Bush's plan for Social Security. What President Bush has proposed is not privatization at all, but the partial substitution of paternalistic interventionism for the current system of outright government control. President Bush appears to suffer from two general misconceptions. First, he accepts the view that the problem with Social Security is that it will become insolvent in several decades. He declared that Social Security was "a great moral success", but that it was "created for a different era" and changes that "the founders of Social Security could not have foreseen" have put it into crisis.

The problems of Social Security are not, as President Bush claimed, that people are living longer and the ratio of workers to beneficiaries is falling. Private pensions have no such problem because individual contributions go into real accounts that earn a real return. Social Security was founded as a direct transfer program where the average worker died at about the time when they became eligible for payments. It is also something like a Ponzi Scheme- those who pay in now are paid back by others who pay in later.

The problems of Social Security were fully foreseeable because life expectancies were already on the rise back in the early twentieth century, and much earlier, and direct transfer programs can never match the rate of return of savings and investment in the private sector. That is the problem with Social Security- money saved and invested earns a return and contributes to economic development. Income transfers cannot deliver the same kind of return because transfers do not contribute to capital accumulation.

The overall insolvency of Social Security is not the real problem. The real problem is that people receive a plus 2 to minus 2 percent return on their money in Social Security, depending upon the life expectancy of their ethnic and gender group. Why should we trust Federal bureaucrats to manage our "private accounts" on Wall Street when they have fared so poorly with public accounts in the past? In addition, according to the Wall Street Journal, "the administration has left the door open to raising the cap on the amount of wages taxed."

Other elements of President Bush's plans for America are to teach young men to stay out of gangs and to respect women and to provide Federal funding for defense lawyers. This is a far cry from when President Reagan spoke of the how the march of freedom and democracy will leave Marxism-Leninism on the ash heap of history.

President Bush also has plans for much of the rest of the world. While he declared that the US has "no right, no desire, and no intention to impose our form of government on anyone else", he clearly intends to continue with intervention abroad. President Bush may have no intention to plan out the specific details of foreign governments, but he made it clear that Democracy should displace Monarchy and Dictatorship.

So, in a general sense President Bush has a deep and abiding desire to impose "our form of government" on others, and has done so already. Some would say that this is a good thing, because Democracy is better than its alternatives.

However, the ends do not justify the means. Even if Democracy is the best form of government, the methods of the current administration leave much to be desired. The US invasion of Iraq has cost many lives and much money, increased resentment of the US abroad, and was in no way justified by security concerns. The US was not under threat of attack by Iraq.

It is also not at all clear that a better world requires more democracy. The success of democratic government in the US was due to the constitutional limitationsof this government. That is, American Democracy succeeded because of its least democratic elements. Rather than stressing the need for limiting democratic authority, President Bush stressed the activist role that he intends to assume in planning out a new world political order. He wants 350 million dollars to subsidize Palestinian democracy. He also asserted that Saudi Arabia and Egypt should move towards democracy.

Bush's plans for global democratization are not as detailed as his domestic plans. Yet, he does favor intervention and planning on a global scale, and didn't mention the need for limits on authority. Would ordinary Saudis do better with a British style limited constitutional monarchy or an unlimited democracy? President Bush seems concerned only with the form of government, rather than the limits of its authority.

It is hard to say exactly why President Bush has embraced interventionism. The influence of special interests surely has something to do with it. Yet, there should be a political payoff to the prosperity that typically follows the adoption of a true Laissez Faire policy.

Hayek once noted that the value of freedom rests upon the opportunities it provides for unforeseen and unpredictable actions. Government deals with more obvious consequences, so people overestimate the benefits of central direction because of the costs of giving up on the market are unseen. President Bush lacks an appreciation of this kind of reasoning. Consequently, he apparently believes in what he is doing. He believes in planning rather than the spontaneous order of markets and free enterprise.

What we need instead is a President with the ability to see past the obvious. Appreciating the market system means embracing the notion that people will arrive at solutions to problems which you cannot imagine, because the market allows for a division of labor whereby each can apply their individual talents in unique ways. Centralization places the burden of problem solving on fewer minds. This is antithetical to progress. The true state of the Union is unfortunately that its chief executive fails to grasp the profound truth that central planning by political elites can never match the results of decentralized planning by the general public.


D.W. MacKenzie teaches economics at Ramapo College. Send him MAIL and see his Mises.org Daily Articles Archive.


Sources:

Hayek, FA: 1973 Law, Legislation, and Liberty

Mises, Ludwig: Bureacracy

Olson, Mancur: 1965 The Logic of Collective Action

Tullock, Gordon: The Politics of Bureacracy