Politics Trumps Economics?

After a brilliant defense of economic freedom by Steve Forbes opening Hillsdale College’s “Great Economists of the 20th Century” conference, one of the participants responded in great frustration: “Since free market economists had so clearly won this ‘great economic debate,’ why does Washington not know it?”

I had wondered why a political scientist had been scheduled at such a conference and now I understood only too well. Experts on economists Frederick Hayek, Ludwig von Mises, John Maynard Keynes, Frank Knight, James Buchanan and Milton Friedman were invited to present the good news that limited government, free market ideas were superior to their socialist alternatives and had won the day intellectually worldwide. I was there to tell the poor students, it did not make any difference to the politicians.

In the wake of the fall of communism and the worldwide movement toward markets and led by a Republican president, Senate and House of Representatives, non-defense, non-security U.S. spending increased proportionately more under George W. Bush than any president since Franklin Roosevelt’s New Deal. Indeed, the current administration and Congress had added the first new large entitlement since Lyndon Johnson’s Great Society, the Medicare prescription drug act—as the existing ones were already nearing fiscal imbalance—which single act added a liability 150 percent that of all of Social Security’s, bringing the total unfunded liability to $50 trillion, with not the remotest idea how to pay it. At the same time, government planning soared as measured by the Competitive Enterprise Institute’s count of regulatory additions to the Federal Register and pork-generating earmarks increased from 150 in 1987—when they drew a veto from Ronald Reagan for being excessive—to 1,400 in 1998 and 6,371 in 2005.

The sad fact of political science is that politics trumps economics—and always will, unfortunately. Unless one adopts pure anarchism—and even Mises accepted a central role for government in regulating the police power, government rules will structure how economic affairs will operate. They might negatively affect economic activity—and the economists demonstrate they often do—but Hayek was unambiguous in insisting that pure laissez faire never was and never can be. For one thing, markets require private property and property requires legal rules under which it can operate. Hayek, following John Locke, required the rules be “promulgated, established laws, not to be varied in particular cases, but to have one rule for rich and poor” adopted by popular consent, “by themselves or their deputies,” with the aim of preserving property, security and liberty.

Once government is granted the power to regulate policing of coercion domestically and in internationally and in setting rules for property, it is difficult to limit it to those necessary functions. That was a major concern for the economists discussed at the conference, all of whom in varying degrees went beyond simple economics to matters of law and political science. Indeed, it can truly be argued that Hayek’s and Buchanan’s major contributions were in politics, even though they won their Nobels in the gloomy science. All of these had wonderful ideas to limit central power but, as even the U.S. record demonstrates, they have not been as embraced in the real world as have their more strictly economic insights, which have often been overridden by political considerations.

Journalist Thomas Friedman has nicely captured the difference between the two different realms with his symbols of “The Lexus and the Olive Tree.” The Lexus is in the market and is the domain of economics. The olive tree is a symbol of the family domicile, carefully tended and protectively surrounding the loved ones, where all are safe and sound as long as the outside is kept out. But trade introduces Lexuses within the range of the garden and with them come foreign ideas and images that threaten the family and community. In response, clan or tribe or government are used to block intruders, who often fight back with their own governmental power. In such an environment, few will die for their Lexus but many will for their family and friends and olive trees, the domain of politics.

Politics trumps economics because the olive tree trumps the Lexus. I like my Lexus but I love my family and friends. Through Machiavelli, politicians have learned to manipulate these symbols so that they can control economies and their resulting wealth, although the wise prince was warned to respect property because people will fight for their olive trees. Lobbying by businessmen will often win advantage for some market participants and a political scientist must know this has only marginal effect but it was not until this one became personally and professionally very close to a top legislative leader that he learned, in fact, the influence is the other way around. The legislator manipulates the economic interests to support him rather than being influenced by them, at least most of the time. The politician has his ear closer to the olive tree interests that will actually fight for their rights unlike the businessmen who, as another top economist Joseph Schumpeter noted, do not have the courage to say “boo to a goose,” especially clever and powerful political ones.

A political scientist must predict that with all our greater knowledge of and respect for the market, the economy will get worse because of politics, but especially because of today’s realities. The bills for years of political irresponsibility on entitlements will become due as early as 2016 and tax rates will have to increase greatly to pay them. By 2030, Medicare and Social Security will absorb 14 percent of GDP, almost half of it unfunded, requiring a 91 percent increase in the payroll tax, or an 81 percent increase in income taxes or a 36 percent increase in total federal taxes--drastically slowing growth if not leading to hyper-inflation or depression. As these obligations come due, fewer workers are available to pay them. Many fewer younger workers are available to take the place of the now less productive elderly and the former are no longer having children to support their own retirement.

It takes 2.1 children per childbearing aged woman to keep population steady. Europe is already finished. The rate is down to 1.4 percent in Europe and heading further south, which soon will lead to depopulation or mass immigration. The U.S. is better at 2.0 per woman but only 1.8 for the European stock population. The immigration that is mitigating the problem there to some extent, however, already has created a backlash that might make the demographic problem worse. The geopolitical aspects of the shift might even be greater. Of the 43 countries declining in population over the next 50 years, 80 percent are European and none are Muslim. Of the ten largest population countries today, none are Islamic but in 2030 half will be. The United States will decrease from 6.3 percent of the world population today to 4.6 percent in 2050, while the world Muslim population will increase by 100 percent.

So a political scientist was invited to throw some cold water on the hot economic news that free markets have won the economic debate. On entitlements, no politician is allowed to discuss the coming crisis even though it begins in less than a decade. President Bush raised the idea of Social Security reform but he was stopped cold last year and was jeered when he mentioned it in his recent State of the Union speech. Medicare, the much larger problem, can be raised by no one. In fact, the politicians mostly call for increased taxes, less free trade, more regulations, and additional spending, including President Bush’s own new incredibly expensive prescription drug entitlement. At a press conference just before the State of the Union, President Bush declared himself satisfied with the rate of spending under the current Congress, saying it had met his targets (if not his budgets) and that he did not foresee any future vetoes.

Can the coming entitlement crash be solved if it cannot be discussed? What about birth replacement rates? Try telling American young men and women they must have 2.1 children per family—which means three for most-- and many must even produce four or more children to make up for those who do not marry or prefer same sex. Medicare reform would seem an easy sell by comparison. If the population were convinced of the need to become more traditionally religious that might help since, as even non-believer Hayek said, paradoxically, freedom and markets require a traditional society with traditional moral values developed in sound families and vibrant local communities. Good luck selling that to the Paris Hilton generation.

I had done my job. The specter of politics-future trumped the economic good news that the market had won intellectually--and it would take a moral transformation of gargantuan proportions to change the social dynamics. One should urge the new generation to find a way anyway—and the eternal optimist Ronald Reagan would be the soundest guide--but preaching a politics of restraint is not as easy as teaching economics with a Lexus as a prize.

Donald Devine is a political science professor, director of the Center for American Vision and values at Bellevue University, a columnist and editor of ConservativeBattleline.com.

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