Fighting Big Government

All of a sudden, proponents of limited government are in high spirits. Big government is on the run almost everywhere--only not in the U.S. Congress, admittedly a big exception!

Across the world, critics of big government are getting organized and winning some incredible victories. An enormous triumph in the number two world economy, Japan, heads the list. A referendum in California could rouse the U.S. as did its tax-limitation predecessor. Kentucky’s governor has successfully attacked the myth of judicial supremacy and South Carolina’s has touched the third-rail of medical entitlements. Even in the Congressional wasteland, Sen. Tom Coburn has begun to organize opponents of big spending, for the first time filling the void left by Phil Gramm—who proved one senator can make an army.

In the most dramatic small government victory, Prime Minister Junichiro Koizumi won two-thirds of the seats at stake in Japan’s Diet parliament, running on a platform of cutting government bureaucracy and, believe it or not, smaller government and less spending. It was not just talk. For four years, he restrained government spending and even eliminated many large popular public works projects, indexed and increased employee contributions to politically sensitive pensions, and allowed private firms to compete to run government functions. His banking reforms reduced a glut of $480 billion in bad debt by half and he had started to privatize the bloated post office with its 380,000 employees and $3 trillion in small deposits, more funds than the total in the four largest private banks combined.

Koizumi’s critical and gutsy decision was to go to the voters when the upper house of the Diet vetoed his plan to privatize Japan Post. He dissolved parliament and called for new elections, saying “Let the people decide.” With Japan’s large government sector headed by the massive postal service, its high population of government employees, and the scores of millions dependent on government benefits, the political experts predicted defeat or at least fewer seats. Yet, after four years of such “unpopular” reforms, he won 61.7 percent of the seats, plus 31 more from a coalition partner.

The Koizumi program is a revolutionary one for this very traditionalist nation. Not only will he complete the postal privatization, he will toughen its provisions before passage, which is assured. He will look for additional privatization opportunities. He will extend his social security reforms. Most important, he plans to decentralize the national bureaucracy and give more power to local governments, a first in this historically top-down nation.

How did this happen in a country wallowing in stagnation ever since its asset bubble burst in the early 1990s? Unlike in the U.S., real estate broke together with the securities market and created trillions of yen of bad debt in the private sector, with government income falling rapidly against expenses. Fifteen years of little or no growth followed. As a result of Koizumi’s reforms over the last four years, however, growth of two percent was recorded in 2003, 2004 and 2005 (so far). In other words, the voters thought the reforms worked and rewarded its author and his Liberal Democratic Party.

Incredibly, he even convinced some civil servants. A career bureaucrat at the Economy Ministry told a reporter: “Koizumi wants smaller government and I realize my own job may at some point be in danger. But Koizumi is a strong leader determined to reform Japan and the people are behind him. I don’t think we have another option. It needs to be done and Koizumi is the only one who can do it.”

A subtler factor was that Japan, like most of the rest of the more developed world, has long had a very low birthrate. After 2006, the population will actually decline. Twenty percent of the population is over 60 and the average age is quickly moving upward, making the workforce less productive and providing fewer available for work at all, drawing heavily on already fiscally strained pension and health programs. Rather than ignore economic estimates that this would seriously limit future economic growth, Koizumi took the bull by the horns and proclaimed that lower future populations made it more essential to reduce government and rely more on the more efficient private sector.

The contrast with the election in the third-largest economy, Germany, could not be greater. The Christian Democratic Union candidate Angels Merkel refused to say very much about what she would do and eked out a small plurality, insufficient for a victory in parliament. Her main proposal was to substitute a sales tax for a business tax, exciting corporations but not anyone else. One could even make an argument that—ignoring the Free Democratic Party (which came in third)--the socialist incumbent Chancellor Gerhard Schroeder was the real small government candidate.

Schroeder actually trimmed some welfare state benefits and even cut some taxes. But his Green Party partners (and the new Left Party) would not let him go very far and this had little economic effect other than for unemployment to continue, creating the opportunity for Merkel’s Christian Democrats. But the same demographic dynamic is driving events there as in Japan, with the explosion of elderly draining resources at alarming rates. Whoever finally organizes the government will be forced to cut spending no matter how unpopular but, interestingly, voters seem to trust the parties of the left to do so more fairly, which does not bode well for the Republicans in the U.S., which has the same long term problems.

At home, the only real action is at the state level. South Carolina Gov. Mark Sanford has introduced the first serious attempt to control costs in the run-away federal/state health welfare program, Medicaid. It will be an uphill battle but all of the other governors are watching and, if he wins, it will spread like wildfire since it is devouring every state budget in the nation, putting it ahead even of the historic top program, education.

In some ways, Kentucky Gov. Ernie Fletcher took on an even larger problem for those favoring limited government--courts and prosecutors who claim new government powers from whole cloth, with no legal authority. One particularly virulent such enthusiasm sweeping the legal field is the claim that government employees not covered by civil service also have bureaucratic protections for their jobs and cannot be replaced by governors with more politically responsive executives. Gov. Fletcher protected his executive powers by recently granting blanket pardons—which even courts have agreed is an unlimited executive power--to every current and former member of his administration who was charged with “improper hiring,” saying: “I cannot allow state government to continue to be consumed by this game of political ‘gotcha’ paralyzing our ability to serve.”

The biggest revolution may be brewing in the state that prides itself on hatching national political trends. It was California’s propositions 13 cutting real estate taxes by 57 percent and 4 limiting government spending that began the national anti-tax movement that culminated in the election of Ronald Reagan. Its new Proposition 76 would limit spending to an average of the last four years growth, reduce the education formula and allow the governor to force other spending cuts. Another proposition would limit the electoral activities of public employee unions. Both are presently losing in the polls and Gov. Arnold Schwarzeneggers popularity is low so everyone expects defeat. Yet, if Prop. 76 prevails—and Arnold has surprised the experts before—it will for that reason have even more impact on public opinion nationwide.

Republicans back in Washington are convinced that government must spend its way out of problems or they will lose power. But Katrina might have changed things. The conservative House Republican Study Committee under Rep. Mike Pence was even able to get the president (although not the GOP House leadership) to accept spending offsets for its disaster relief efforts. More important, while saying that obviously there is some role for big government, Washington Post columnist Anne Applebaum continued “but it is true that the worst failures of the past two weeks have been big government failures. The biggest successes, by contrast have come out of this country’s incredibly vibrant, amazingly diverse and fantastically generous civil society. Sooner or later it will be impossible not to draw political lessons from that paradox.”

But it might be too much later for Republicans. In contrast with Japan, under a Republican president and Congress over the same period of time in the U.S., nothing of note has been privatized and domestic discretionary and entitlement spending have exploded by more than under any recent Democratic president. At the same time, elections have been won with razor-thin margins and presidential and Congressional public support has sunk to its lowest level since the GOP came to power. But it will get worse.

Like it or not, America’s aging population will explode entitlement spending over the next dozen years or less and the U.S. will look like Japan and Germany. George W. Bush will be long gone. Republicans can ignore the coming fiscal crisis, as did Koizumi’s predecessors, and ultimately face another repudiation like Herbert Hoover’s in 1932, when voters switch to the party of the left because they trust it more. Or they can be like Ronald Reagan and explain to voters that big government is the problem and that it will have to be reduced in size to guarantee continued prosperity. The next generation of American leaders could do worse than relearning the rewards of principled leadership from the courageous Prime Minister of far away Japan, or maybe closer to home in Kentucky, South Carolina and California too.

Donald Devine, Editor.

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