The Return of Big Government

A bulked-up uncle Sam is coming back to deal with housing, healthcare, Social Security, and more.

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Here's a little straight talk: Whether you pull the lever (or fill in the oval or touch the screen) for Hillary Clinton or Barack Obama or even John McCain in November, you're probably still going to end up in 2009 with a push for Big Government of the sort not seen in a generation. More taxes. More regulation. More spending. "It's going to be like watching That '70s Show," says Daniel Clifton, political analyst at Strategas Research Partners, which provides research to institutional investors.

Certainly there are some gaping policy differences between the White House contenders that will determine just how big Big Government gets. Both Clinton and Obama want to make national health plans available to all—partially paid for by rolling back the 2001 and 2003 Bush tax cuts for wealthier Americans. McCain prefers a more market-driven approach and wants to keep all the tax cuts on income and investments.

But all three candidates are in favor of a "cap and trade" regulatory system to reduce carbon emissions suspected of causing global warming and to nudge the economy toward energy independence. It's an approach that could serve as a de facto $100 billion-a-year tax, since companies having trouble meeting government limits may be forced to bid for pricey carbon permits. And all three candidates will have to confront a Social Security system whose cash flow turns negative in 2017. Almost any politically feasible compromise would require higher payroll taxes—an option McCain says he's steadfastly against—as part of the mix. And it would be tough for any politician to ignore America's rickety infrastructure, which may require a nearly $2 trillion overhaul. "We're talking about government playing a different role than it has over the past decade or two," says analyst Sherle Schwenninger of the New America Foundation, a centrist think tank.

The return of Big Government? The smart-aleck response here would be something like "Really? I didn't know it ever left." And there's some truth to that view. Even though Americans have elected a generation of political leaders espousing the wonder-working power of free markets, the United States has never come close to resembling a libertarian fantasyland. Social Security and Medicare are still here gobbling up more and more of the budget. Two federal executive departments have been added—Homeland Security and Veterans Affairs—with current budgets of over $100 billion a year. The idea of a flat tax is coming close to joining the gold standard in public-policy purgatory. And despite dozens of cable channels devoted to kids and education, Uncle Sam still subsidizes Bert and Ernie.

Yet it's undeniable that America experienced an economic and political revolution that saw voters push back hard against the high spending, confiscatory tax rates, and heavy regulation that were the negative legacies of FDR's New Deal and LBJ's Great Society, programs that by the late 1970s had left the U.S. economy caught in a stagflationary trap. "Government is not the solution," President Reagan declared in 1981, and most Americans seemed to agree. Top income tax rates fell from 70 percent to 28 percent, and spending not tied to either mandatory entitlements or smashing the "evil empire" fell by 1.3 percent a year under Reagan.

By 1996, even Democrats were preaching the small-is-beautiful gospel. That's when President Clinton declared in his State of the Union address that "the era of big government is over." By 2000, government spending had fallen to 18.4 percent of gross domestic product, down from 23.5 percent in 1983. That was its lowest level since 1966, a year when America chose both guns and butter in the simultaneous ramping up of the Great Society and the Vietnam War.

But more and more, it seems as if the end days of the 20th century were the high-water mark for America's movement toward freer markets and smaller government. After all, it is the current president, a self-described conservative Republican, who created—in the prescription drug benefit—the first new entitlement program since Medicare; signed the expansive Sarbanes-Oxley financial regulation act, much loathed by Wall Street; and has presided over the fastest growth rate of spending in a generation. President Bush also offered up the first $2 trillion and $3 trillion annual budgets during his two terms. "The Bush administration has been a disaster for limited government," says Nick Gillespie, the former editor-in-chief of Reason, a magazine of libertarian thought.