- The Washington Times - Wednesday, October 19, 2005

Since the early 1950s, federal spending has hovered around 18-20 percent of gross domestic product (GDP). But the Congressional Budget Office now projects that over the next 40 years federal spending will soar to 34 percent of GDP.

Let the overwhelming importance of this one single statistic sink in. If anything even close to this happens, conservatives and free-market advocates will have been completely routed on economic issues. After all the intellectual and political victories for conservatives over the last 25 years, Ted Kennedy will still have won. We will have Swedish socialism in America, and our workers will be tax slaves. Our economy will fall into long-term decline, along with our standard of living.

Republicans and even activist conservatives who tell me today nothing can be done to slow the runaway spending freight train need to understand this. Over the next 30 years, national politics will be about either dramatic reforms to slow growth of government, or enormous tax increases to pay for it. There is no other choice. Pick your side now.

Fortunately, the doomsday scenario not only can be stopped, but even reversed, by practical, concrete, sweeping reforms that can win the overwhelming support of the American people. Indeed, well-structured reforms would actually serve all existing social welfare goals far better than the current system.

First, the coming explosion of government is a central reason Social Security personal accounts are so important. We need accounts large enough to eventually pay all Social Security retirement benefits, as proposed in the Ryan-Sununu bill.

This one reform would eventually reduce federal spending about 5 percentage points of GDP. Once enacted, the personal accounts can expand to provide workers a better deal for Social

Security survivors and disability benefits as well. This would reduce future federal spending by about another 11/2 percentage points of GDP.

Second, most people think welfare was reformed in the 1990s. But that legislation reformed only one program, Aid to Families with Dependent Children (AFDC). There are three other major federal welfare programs — Medicaid, food stamps and public housing — and a slew of smaller ones.

The very successful reform of AFDC should be extended to these other programs. Federal spending on them would be replaced by block grants to each state for their own programs for the poor, based on work requirements for the able-bodied.

Most importantly, these block grants would be limited to grow no faster than GDP each year. This means these programs, particularly Medicaid, would no longer contribute to growth of the federal government relative to GDP.

The welfare reforms would restrain federal spending more than enough to finance the transition to personal Social Security accounts without increasing permanent debt. At the same time, large personal accounts for Social Security would make the Medicaid block grant reforms more practical.

The long-term Medicaid problem is really due to nursing home expenses. But if people retire with large personal accounts accumulating to several hundred thousand dollars, part of those funds can be used to buy nursing home care insurance, effectively covering the current nursing home financing of Medicaid through the private sector. This is a key reason personal accounts do need to be large.

Finally, reforms involving personal accounts for Medicare and restraints on its growth are both needed. But this will be politically the most difficult thing to accomplish, because long-term Medicare finances are the greatest government train wreck in world history.

If we combine these reforms with restrained growth of federal discretionary spending and pro-growth tax reform, making GDP substantially bigger, this entire reform agenda can reduce federal spending down to as little as 10 percent of GDP.

Averting the coming crisis of big government needs to be the central conservative economic policy concern and theme. If we begin acting vigorously now, we can still turn the pending, crushing, historic defeat into a glorious historic victory.

Peter Ferrara is a senior fellow at the Institute for Policy Innovation and policy director for the Free Enterprise Fund Institute, both of which have detailed papers on this issue.



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