Will the Fiscal Crisis Create an Opening to Shrink the Burden of the State?

August 2013Liberty Conference

The Looming Fiscal Crisis

Because of poorly designed entitlement programs and demographics, the western world is in deep trouble. Politicians probably won’t deal with problems until they face Greek-style fiscal chaos.Let’s look at numbers from the Bank for International Settlements, Organization for Economic Cooperation and Development, and International Monetary Fund.

France – 400 Percent of GDP

Germany – 300-plus Percent of GDP

Greece – 400 Percent of GDP

Ireland – 300 Percent of GDP

Italy – 250 Percent of GDP

Netherlands – 400 Percent of GDP

Japan – 600 Percent of GDP

Portugal – 300 Percent of GDP

Spain – 300 Percent of GDP

U.K. – 500-plus Percent of GDP

U.S. – 450 Percent of GDP

In other Words…

What’s the Response to Crisis?Is Naomi Klein (author of The Shock Doctrine: The Rise of Disaster Capitalism) right that chaos leads to free-market reform?Or is Robert Higgs (author of Crisis and Leviathan: Critical Episodes in the Growth of American Government ) right that chaos leads to more statism?Some evidence on both sides, with Chile and former Soviet Bloc offering some hope for libertarians.

Which Direction for the West?

Things will get worse before they get better.Nations such as Greece, Spain, and Italy have been forced to finally cut spending.Unfortunately, they’ve raised taxes even more, stifling the private sector.Can a nation re-learn the work ethic and entrepreneurship?Don’t be surprised to see a loss of democracy in some nations.

Big Government Inevitably…

…Erodes America’s Social Capital

But there is Room for Optimism

The fiscal crisis in Europe has had a sobering impact - on both elites and ordinary people.Widespread agreement that dramatic change is needed.Over time, it will become increasingly apparent that the tax-hike option no longer is feasible.When all other options are exhausted, politicians may do the right thing.

The U.S. Example

Politicians rarely take steps that will irritate special interest groups – particularly if they’re being asked to cast symbolic votes.Yet the House of Representatives – for three consecutive years – has voted for a budget that would dramatically restructure both Medicare and Medicaid.A genuine example of legitimate patriotism.

Signs of Hope Elsewhere

Switzerland is in good shape and its “debt brake” is a good role model.Nordic nations have too much government, but also have implemented lots of free-market reform.Some good signs in Eastern Europe, including flat tax.Even Germany is being semi-sensible.

What Should Be Done?

The answer is simple – just restrain the growth of spending.Nominal GDP almost always expands, even in stagnant economies.Key to long-run fiscal sanity is to have government grow slower than the private sector.Enables a virtuous cycle for both numerator and denominator of Gov’t/GDP.

Where Do We Go?

Three challengesCorrectly identifying the problem – big government is the disease. Deficits and debt are symptoms.Figuring out ways to “bend the cost curve” of government spending.Convincing people that liberty is better than dependency.

Conclusion

For more infowww.cato.orgwww.danieljmitchell.wordpress.com@danieljmitchellwww.youtube.com/afq2007