The Lower Cost of a Truly Limited Government
By Richard Ebeling - April 29, 2014

A demonstration of just how far the United States has moved from its original founding principles is seen in the fact that in all the jousting over ObamaCare, the general rise in "entitlement" spending and the burden of government regulation over American enterprises, there is one question that seems rarely to be asked: What should be the size and scope of government, and what would it cost if government were cut down more to the size delineated in the original Constitution?

Whenever, occasionally, this question is asked, the answer seems to be very far from what the Founding Fathers had in mind, if one is in anyway familiar with their conception of limited government and individual liberty.

Thinking the Clinton Years were "Limited Government"

For example, in 2012 two books appeared by "conservative," free market-oriented economists who were clearly trying to influence the terms of the political debate during that presidential election year.

They were, First Principles: Five Keys to Restoring America's Prosperity by John B. Taylor and Why Capitalism? by Allan H. Meltzer. John Taylor is a professor of economics at Stanford University and a highly regarded monetary theorist who is generally critical of Keynesian "activist" fiscal and central banking policy. He served in President George W. Bush's Council of Economic Advisors and as Treasury Undersecretary for International Affairs.

Allan Meltzer is a professor of political economy at Carnegie Mellon University and an internationally acclaimed expert on the history of the Federal Reserve, as well as one of America's leading monetary theorists who, also, has long been critical of "easy money" policies by America's central bank.

They both believe strongly in the value and importance of a competitive economic system that fosters entrepreneurship, innovation and rising standards of living. They also don't think that government has the knowledge, wisdom or ability to direct a complex market order.

Their books contain insightful and wise analysis of how and why America has gotten into its present dismal situation. Plus, as "insiders" in the halls of Washington, D.C. at one time or another, they have many interesting examples of the manipulation, corruption and inefficiencies to be found in American politics.

So what, in their views, should the current size of government be cut back to? Since they were both writing "political" books in an election year, perhaps they were fearful of seeming to be too "radical" in a more limited government direction. But the fact is that for both of them it seems that getting government cut down to its dimensions during the 1980s and 1990s would more or less set everything straight.

For many of us who lived in the 1990s during the presidencies of the older Bush and then Bill Clinton, however, government taxing, spending and regulating all seemed to be far too high and extensive, given an older conception of what a free America could and should be like.

In other words, two prominent and respected market-oriented economists made the case for using as a benchmark of having a freer America the interventionist-welfare state of merely twenty years ago.

A More Reasonable Benchmark for Judging "Big Government"

So from a more clearly classical liberal perspective, what might be used as a more reasonable standard or benchmark of a limited government and freer market society in judging the size and scope of government today?

The first edition of The World Almanac was published in 1868. The entire federal government fit on one page in that first edition; half of that page was taken up with listing the names of the U.S. ambassadors to foreign countries.

The executive branch of the federal government included only seven departments: Treasury, State, War, Navy, Interior, Attorney General and the Postmaster General. And this was after the significant growth in the federal government during the recently fought American Civil War (1861-1865)!

Today, the listing of all departments, bureaus and agencies of the federal government takes up at least seven or eight pages of very small print in The World Almanac. The administrative units of the federal government that regulate, control, supervise, plan and oversee virtually every aspect of American life now number in the hundreds. The United States government has sometimes been portrayed as a giant octopus whose numerous tentacles are wrapped around everything that any American does in the market, social, or personal spheres of life.

The Cost of a More Constitutionally Downsized Government

Let us suppose that government were to be "downsized" to what it was in 1868, as listed in that first edition of The World Almanac. What would be the cost of government and the tax burden on the American citizenry? In making such an estimate, let us recall that the departments of war and the navy are now part of one Department of Defense. Let us also presume that the government's post office monopoly is abolished and all forms of mail delivery are fully left to private competitive enterprise, so there is no longer a Postmaster General.

That would leave five executive level departments comprising the entire federal government: defense, justice, interior, treasury and state. In terms of their combined expenditures in 2013, together the cost of the federal government would come to about $900 billion, if that was all for which Washington was responsible.

Of course, this presumes that in a more limited government America, the current activities of these departments would not be radically reduced to be more consistent with the "original intent" of the Founding Fathers in the Constitution.

If we add the interest paid on the national debt in 2013 ($233 billion) to the cost of this smaller government, the total then would be $1.1 trillion, or less than one-third of what the federal government actually spent in fiscal year 2013.

The Washington spent over $28,200 per American household in 2013. If government were to be reduced to its 1868 size, that dollar spending per household would shrink to $9,800.

Approximately 140 million Americans filed tax returns in 2012. Median household income in 2013 was about $51,000. If the current progressive income tax were transformed into a flat income tax with a rate of about 16 percent, then the average tax burden per taxpayer would be around $8,000. (Repeal of the federal income tax might also be introduced at some point, of course!)

Plus, there would be no budget deficit, and no other taxes of any sort would have to be imposed to cover the costs of running this very much smaller federal government.

Limited Government Means Ending the Welfare State

Of course, the first reaction to these numbers is, no doubt: But what happens to all that other government spending, especially the "entitlement" programs (Social Security and Medicare, in particular) that in the 2013 fiscal year ate up about 50 percent of the government's nearly $3.5 trillion of total spending?

Clearly, these programs would have to be phased out, privatized, "denationalized," removed from the controlling and redistributing hands of government. Even if there were the political will to move in that direction, it would no doubt take some time to remove them from the functions of a truly constitutionally limited federal government.

But the point of this seemingly unrealistic exercise is precisely to mark off that point on the political horizon that should be the goal towards which friends of freedom should want to see America move.

This may seem terribly "fantastic" to many in America today. How could government ever be, well, that small?

In fact it was, and only one hundred years ago. In 1913, the year before the beginning of the First World War and the introduction of the federal income tax amendment to the Constitution, all levels of government – federal, state and local – taxed less than 8 percent of the country's Gross Domestic Product. In other words, 92 percent of all income received remained in the hands of those who had earned it in the private sector market place.

There was no welfare state, no "entitlement" programs. Americans took it for granted that helping those who had fallen on "hard times," and who were in "need" and "deserving" of such assistance would receive it through private philanthropy and voluntary community charity. A careful reading of the history of that earlier time shows that the private benevolence of free individuals worked very well.

Freedom Means the "Let-Alone Principle"

It is also worth recalling that there was a time when most Americans did not think that government was supposed to be responsible for them. The vast majority of Americans viewed themselves as self–governing and self-responsible individuals.

Simon Newcomb (1835-1909) was a prominent American astronomer and noted free-market economist who taught at Johns Hopkins University in the second half of the nineteenth century. In 1870, he published an article in which he summarized what he took to be the common-sense ideal of what he called, "The Let-Alone Principle." Newcomb said:

"That each individual member of society should be left free to seek his own good in the way he may deem best, and required only not to interfere with the equal rights of his fellowmen . . .

"The let-alone principle may be regarded either as a declaration of rights or as a maxim of political policy. In the first case, the principle declares that society has not the right to prevent an individual who is capable of taking care of himself from seeking his own good in the way he deems best, so long as he does not infringe on the rights of his fellowmen.

"In the second case, the principle forms the basis of a certain theory of governmental policy, according to which the political system is most conducive to the public good in which the rightful liberty of the individual is least abridged . . .

"It needs only a consideration of first principles to make it plain that the main object of government is the protection of minorities, especially those most powerless minorities, individuals . . . It makes little difference to the minority or to any particular individual whether [his] rights are disregarded by a despot, a highwayman, or a majority of his fellow-citizens, wielding the powers of government . . .

"The real point in dispute between the friends and the opponents of free government and individual liberty is simply this: Is man a being to be taken care of, or is he able when protected in his rights to take care of himself better than any governing power – congress, king, or parliament – can take care of him? The advocates of universal freedom claim that, if each individual is protected in the enjoyment of his individual rights as a responsible member of the community, he can take care of himself, and manage his own affairs and his share of the public affairs better than any other one else can do these for him."

Simon Newcomb added that government "interference is so apt to lead to unforeseen complications, – that the best course for a government to follow is, to adhere to the let-alone policy as a matter of principle."

Losing Sight of the Value of Self-Responsible Freedom

The danger, therefore, was drifting into the false and dangerous belief that individuals could not and should not be self-responsible, and that government could and should take paternalistic responsibility for people, instead.

Another prominent American free-market economist who expressed this in the late nineteenth century was J. Laurence Laughlin (1850-1933), who founded the economics department at the University of Chicago. In 1887, Laughlin warned:

"Socialism, or the reliance on the state for help, stands in antagonism to self-help, or the activity of the individual. That body of people is certainly the strongest and the happiest in which each person is thinking for himself, is independent, self-respecting, self-confident, self-controlled, and self-mastered. When a man does a thing for himself he values it infinitely more than if it is done for him, and he is a better man for having done it . . .

"If, on the other hand, men constantly hear it said that they are oppressed and down-trodden, deprived of their own, ground down by the rich, and that the state will set all things right for them in time, what other effect can that teaching have on the character and energy of the ignorant than the complete destruction of all self-help? They think that they can have commodities that they have not helped to produce. They begin to believe that two and two make five . . .

"The danger of enervating results flowing from dependence on the state for help should cause us to restrict the interference of legislation as far as is possible, and should be permitted only when there is an absolute necessity, and even then it should be undertaken with hesitation."

Laughlin added, "The right policy is a matter of supreme importance, and we should not like to see in our country the system of interference as exhibited in the paternal theory of government existing in France and Germany."

Unfortunately, America did import the theory and policy of political paternalism from the collectivist trends then growing stronger in the late nineteenth and early twentieth centuries in Europe. They became the basis and rationale for a far bigger government in the United States beginning in the Progressive Era in the early decades of the twentieth century and accelerating in the New Deal days of the Roosevelt administration in the 1930s. They have continued ever since, up to our own time, under both Democrats and Republicans.

But the ideological wind is out of the sails of the interventionist welfare state. It continues to exist in America and indeed around the world not because most people really believe that government can solve all their ills and make a paradise on earth, but more out of pure political inertia due to a lack of rightly reasoned principles for a rebirth of a philosophy of individual rights that would logically lead to and necessitate a truly limited government.

Our task, however daunting it may seem at times, is to offer a new vision of a free society grounded in the concept of individual rights that can once again capture the excitement and confidence of our fellow citizens. When that is accomplished the size and cost of government, over time, will be reduced accordingly. And Americans will live in and value a far freer and more prosperous country.