In our opinion, just about every single problem with the federal government can be linked to how large it is. Its enormous size is the biggest underlying reason why there are so many radical spending proposals being offered by 2020 Presidential candidates. They see no limit to how much larger and invasive the federal government can become. Parts of our culture are increasingly under assault, not because of radical politicians, who’ve been present throughout history, but because of the massive reach the government now has into our everyday activities. Programs implemented at the federal level affect everyone, and the more of them there are, the more aspects of our lives they touch. If those programs are put in place by an Administration whose ideology you disagree with – tough. There’s no escaping them unless you leave the country.
At the Constitutional Convention in 1787 when our country was founded, an overriding concern of the delegates was that the new federal government be limited in scope. A primary objective was that the individual states retain a large degree of the sovereignty they already had so they would still conduct most of the business of governing the people. Given that premise, several of the leading delegates at the convention, including James Madison, didn’t believe a federal Bill of Rights was even necessary in the Constitution. Madison wanted the Constitution to be read as a simple statement of limited authorities for the federal government and nothing more. Any authority not specifically stated in the Constitution would naturally be retained by the states and the people (a Bill of Rights was subsequently added anyway by way of the first ten amendments).
The dominant annual expenditure of the federal government from 1789 – 1920 was for the country’s defense. For these first 130 years (more than half of our history) the money needed to fund the federal government came entirely from tariffs and excise taxes. There was no need for a personal or corporate “income” tax because the federal government remained relatively small and its expenses were generally in-line with its revenue. And it’s not like there weren’t any catalysts during this period that could’ve easily triggered big growth in the federal government. The country endured the War of 1812, the Mexican-American War, the Civil War, the Spanish-American War, the 1st World War, 3 depressions, 21 recession’s, and 8 Panics (haven’t had one of those since 1910!). While the country grew dramatically during that period, including the addition of 35 new states, the purpose and reach of the federal government remained largely true to its founding principles.
This began to change around 1920, due in large part to the costs incurred from World War I. For the first time, a modestly-sized income tax was imposed on individuals and corporations to augment the revenue from tariffs in order to help to pay down the war debt. However, the government got used to having this extra cash from income taxes and started spending more money on non-defense items. Then, a confluence of three events occurred in a relatively short time that caused a historic permanent shift in how the federal government raised revenue, spent that revenue, and provided services.
1. The Great Depression of the 1930’s
2. The policies of the Roosevelt Administration to deal with the depression.
3. The onset of WWII
These three events in the period between 1930 and 1950 set in place an entirely new philosophy for the purpose and scope of the federal government. Unlike all the other tumultuous periods in our history up to that point the reaction to this crisis was a tremendous expansion of the overall role of the federal government.
At the time, it was unknown just how deep the Great Depression was going to get. Once the 2nd World War started, no one knew how long it would go on. It was a time of true crisis and it was genuinely believed drastic measures were necessary to save the country. While a lot of what the Roosevelt Administration did was considered justified given the circumstances at the time, those restorative measures were never “retired” once the crisis had finally passed. By the end of the Roosevelt Presidency, personal income tax, corporate income tax and a new social security tax had increased to the point where they replaced tariffs and excise taxes as the main source of revenue for the federal government. This total changeover took less than 20 years to happen. Around 1950, with the depression over and WWII ended, there was still a huge amount of cash flowing through the federal government as a result of all the income taxes being collected. Now that the crisis was over, rather than the government shrinking itself back to normal proportions, it instead began spending money in two new areas where it had never before ventured – retirement pensions for ordinary citizens (Social Security) and healthcare. From 1950 onward, these two government expenditures grew exponentially. By the 1980’s, the combination of Social Security and healthcare (by then known as Medicare and Medicaid) began to exceed national defense as the largest federal government expenditure. Today, Social Security and healthcare each individually exceed national defense as annual government expenditures.
With a revenue stream that could be increased at any time simply by raising income taxes, and no inclination to reduce or payoff a growing national debt, the federal government became massive. In the 1920’s, the federal government employed less than 500,000 people. By the 1950’s that number had more than quadrupled to just over 2 million, which is about what it is today. The government had so expanded that it found itself far beyond all known academic and practiced ways of efficiently managing itself. Unfortunately, a lot of politicians simply accepted a bloated and inefficient bureaucracy as the “new normal” way a government this size must operate. That acceptance had the undesirable effect of elevating individuals with grossly inadequate skills to positions of enormous management responsibility within the federal government. Needless to say, these poor managers would never be considered qualified for similar positions in the competitive private sector. Elevated egos often accompany these promotions making the management problem exponentially worse.
Another characteristic of our gigantic federal government is that wasteful and inefficient programs are buried so deeply within the immense organizational structure that they run unabated from one Administration into the next. Career government employees protect these embedded programs without ever evaluating their present value because their jobs and stature rely on them. This strong motivation for self-protection, and the multitudinous layers of management which conceal these programs, make them “invisible” to any meaningful oversight. The only way this problem can be solved is to shrink the federal government to the point where well-practiced oversight tools become effective and one can “see” all the operations in the organization.
States governments are a key element in the solution to this problem. The size of a State government is more directly determined by the people in that state and can be as big or small as the local constituency votes it to be. Most of the social services currently provided by the federal government can and should be provided by individual states instead. This would include each state needing to justify expenditures to its constituents who generate the necessary tax revenue to operate the service. People can then choose a state with a menu of services and a tax profile that best fits their preferences. There is, of course, a measure of this state customization already in existence today. We believe this should be expanded to a much greater degree. This would also encourage more of the healthy competition that exists between states to offer better services and attract more constituents. Healthcare services should be first on the list in this transition. An example of how this can work (and actually did work) is in Massachusetts. The people of Massachusetts and their elected officials wanted to make health insurance more available and affordable to all state residents and were willing to pay additional taxes for that benefit. To that end, the Massachusetts Healthcare Reform Act was passed in 2006 and within two years 95% of the state’s population had health insurance coverage (including all children and seniors). Massachusetts soon achieved the distinction of having the highest per capita health insurance coverage of all 50 states. At the time, the other states were free to copy the Massachusetts service, come up with a competing service, or do nothing – a choice determined by the residents within each state. Instead, the federal government intervened in 2010 with the Affordable Care Act (a.k.a. Obamacare or ACA) and forced the Massachusetts health insurance model to be legally binding on every state whether they wanted it or not. Unlike at the state level in Massachusetts, the sheer size of the ACA proved unwieldy to manage at the federal level and far costlier than anticipated. Two key elements of the ACA had to be changed in 2012 when they were determined by the Supreme Court to be unconstitutional. That led to the slow and expensive disintegration of the ACA. These two crippling changes at the federal level were not necessary in the original state-run Massachusetts implementation of the program since the state Constitution of Massachusetts had not been violated. Unsurprisingly, the ACA has now joined every other existing federal government healthcare service on a path to financial insolvency (Medicare, Medicaid, Veterans Administration). While some may want to debate the efficacy of these federal programs in delivering actual healthcare, that argument is moot when the federal money that sustains them runs out.
Smaller state-run services are much more within the boundaries of tried and true management best practices. They have lower operating budgets, less opportunity for waste/fraud/abuse, and lend themselves to more effective oversight by existing tools and techniques that were never designed for an organization as gargantuan as the current federal bureaucracy. If a state service should fail, it does not affect the entire country. At the federal level there is only one chance to succeed, while at the state level there are fifty. Also, there is greater opportunity for innovation and evolution of government services at the state level because the risk of failure is dispersed. With services hosted by state governments, voters would be far more directly connected to choosing what they want their government to provide. If they don’t like what their state offers, there are 49 other choices.
It will take bold decisive actions by both Houses of Congress and the President to make such a transition. It is highly unlikely this outcome could be achieved with a divided government (like we have now) or a Democrat-controlled government since party ideology works against it. And the philosophy of the nascent Socialist politicians is the absolute antithesis of a smaller federal government. Even some prominent Republicans in the House and Senate have not demonstrated the will or courage to reduce the scope of the federal government. The late John McCain provided the most obvious example with his deciding vote to sustain the existence of Obamacare even in the face of its imminent demise. In our view, there are two paths for returning to the original principle of a small and limited federal government. One is the organized approach of electing true advocates of smaller government to the House and Senate in the next election with a President willing to follow their lead.
The other path is what will eventually happen by default if nothing is done to address the problem. As we’ve written in past articles, there is an unavoidable accounting impasse approaching in the federal budget that will ruthlessly and destructively stop growth and reduce spending by the federal government. The portion of the budget that must be used for interest payments on the national debt has been encroaching on the ability to sustain, let alone grow, all other government services. The dollar amount of the required interest payment is now so large, no amount of income tax increase can offset its inexorable consumption of the budget. Taking on even more national debt to delay this day of reckoning, as has been the practice for the last 60+ years, only accelerates us faster to the inevitable impasse since the amount of the interest payment increases as the debt increases. The mathematical result forces a decrease in the amount of money available to the four programs that make up most of the rest of the federal budget – Medicare, Medicaid, Social Security, and Defense. There is no way around it. Odds are that if this automatically forced reduction in government services occurs, it will be highly disorganized and panic-inducing. We’ve seen what form that might take with the recent collapse of government services in Greece which happened for exactly this same reason. It doesn’t have to come to this if we elect leaders that understand the problem and are willing to take some arrows to fix it. Also, down-sizing the federal government doesn’t mean existing social services must cease. State governments can play a big role in providing those same services if the transition is done smartly.