The Daily Hatch

Question of the Week: “Can America Be Saved?”

January 6, 2013 by Dan Mitchell

Since I routinely spread a message of doom and gloom about the ever-expanding welfare state and warn about the potential for European-style fiscal collapse, I guess I shouldn’t be surprised that I’ve received several emails asking me variants of this question: “Do you think the United States can be rescued?”

Or sometimes, I get questions that I think are somewhat related, such as “Doesn’t Washington drive you crazy” or “Why haven’t you given up?”

I’m not sure I’m good at introspection, but I’ll try to answer, and we’ll start with the main question and then deal with the secondary queries.

To be blunt, if I had to place a bet on the outcome, I think the United States will become a failed European-style welfare state. The burden of government spending already is far too high and our long-run outlook is terrible, as shown by these OECD and BIS numbers, and I don’t think the callow politicians in Washington will fix the problems because they rarely think past the next election cycle.

This doesn’t necessarily mean that we’ll have a Greek-style fiscal collapse. Perhaps we’ll simply descend into permanent stagnation, with anemic growth (at best) and widespread dependency and joblessness.

That being said, even though I would bet on a bad outcome, I think there’s a genuine opportunity to save the country.

My job: Putting my finger in the dyke, trying to hold back the flood of big government

No, I’m not talking about creating a libertarian Nirvana, with the federal government consuming only three percent of economic output. But I think we can at least hold the line and prevent government from becoming bigger than it is today. Sort of a watered-down version of Mitchell’s Golden Rule.

The key is the right kind of entitlement reform. Our long-run fiscal nightmare is entirely the result of programs such as Social Security, Medicare, and Medicaid, so the solution is obvious.

But is it achievable?

As I’ve already indicated, I wouldn’t bet on it. We definitely know there won’t be any good reforms for the next four years, but let me give you a plausible scenario for what might happen beginning in 2017.

We’ll start with the fact that the House of Representatives already voted for Medicaid reform and Medicare reform as part of the Ryan budget in 2011 and 2012. We also know that Republicans retained the House in the most recent election and there seems to be a political consensus that voting to fix the healthcare entitlements was not a political liability.

There was no Social Security reform in Ryan’s budget, but we also know that George W. Bush (for all his other faults) supported personal accounts in 2000 and 2004 and didn’t suffer any political backlash. Indeed, personal accounts still seem to be reasonably popular.

With this in mind, I think it may be possible to fix entitlement programs in 2017 assuming that the 2014 and 2016 elections lead to pro-reform lawmakers in the House, Senate, and White House.

That may not be likely, but it’s definitely possible.

My job, simply stated, is to help inform and educate people so that the climate is favorable to reform.

Which brings me to the secondary questions about whether Washington drives me crazy and whether I should give up.

The short answer is that I’m intellectually pessimistic but operationally optimistic.

In other words, my brain tells me that things will probably deteriorate but my heart tells me that this is a battle worth fighting.

So, yes, Washington does drive me crazy. It is both an immoral town and an amoral town, pervasively corrupt and filled with people who seem to think that it is perfectly okay to steal so long as it happens through the legislative or regulatory process.

And, yes, I may decide to give up if something really horrible happens, such as adoption of a value-added tax. Giving politicians a big new source of revenue, after all, would cripple any incentive for fiscal restraint.

But until that happens, I think I’m very lucky that I get to wake up every day and be part of the Cato Institute’s fight to preserve (and restore) American exceptionalism.

P.S. This is the second “Question of the Week” in two days, but I neglected to answer a question last week, so I had to catch up and get back on track. Yesterday’s question and answer generated a lot of interest, so I hope this one is equally thought-provoking.