Negotiations in Washington are providing an instructive lesson in political economy as both parties haggle over terms for raising the debt ceiling (currently at $14.3 trillion, to be hit on 2nd August). Republicans, employing Rahn curve analysis, argue that optimum government spending (as a percentage of GDP), is around 18%. Yet this level has been far exceeded - hence the cry from the right that the deficit problem is not because Americans are taxed too little, but rather because their government is spending too much.
There are fears about what happens if an agreement is not reached. At the extreme end of ‘Tea Party’ complacency, it is argued that the United States will not default, as there is enough monthly revenue to pay for essential non-discretionary obligations such as interest payments on its debts, military payrolls, and social security entitlements - some 60% of federal expenditures. It is the other 40% that causes concern, and even the most fervent Republican deficit hawks believe that the debt ceiling must be raised, if only to carve out the necessary space to plan further cuts free from national hysteria.
Nevertheless, the prospects of an amicable agreement are bleak, requiring great reserves of chutzpah for anyone who will hazard an opinion on the eventual outcome. The ‘government as saviour’ mentality is so ingrained into the plurality forming the recipient class that gains for liberty will be few and form pyrrhic victories, crippling further reforms.
If the Obama Administration succeeds in browbeating Republicans into bowing to pressure for tax rises - additional revenue not met by closing special interest loopholes - the long-term implications are stark, as explained by pollster Dick Morris:
‘It is terribly important that we reduce the size of our government. We can’t have the government eating up 44 per cent of our Gross Domestic Product like it is to-day ... and still have a free enterprise system. You just can’t have the government absorbing that much capital and still have a country with a free market system left. So the issue is not just to balance the budget. Not just to roll back federal spending. Not just to help the economy by not taxing people. But to go further and to limit the size of government so that you can have enough capital for a free market system. You can’t have capitalism without capital and if the government’s eating up all of the capital you can’t begin to have it.’