A U-Turn on the Road to Serfdom: Prospects for Reducing the Size of the State

The authors

Grover Norquist

Grover Glenn Norquist is the founder and president of Americans for Tax Reform.  He is the creator and organiser of the Taxpayer Protection Pledge, a public written commitment to oppose all tax hikes, signed by most members of the US Congress. Norquist is a graduate of Harvard College and Harvard Business School.  He also serves on the board of directors of the Center for the National Interest, the Parental Rights Organization and the National Rifle Association.

Nima Sanandaji

Nima Sanandaji is a Swedish author of Kurdish origin who holds a PhD from the Royal Institute of Technology in Stockholm. He has written books and reports about policy issues such as women’s career opportunities, integration, entrepreneurship and reforms which encourage innovation in the provision of public services.

Matthew Sinclair

Matthew Sinclair is a senior consultant at Europe Economics – a consultancy specialising in economic regulation, competition policy and the application of economics to public policy and business issues – and a former chief executive of the TaxPayers’ Alliance. He was the editor of the book How to Cut Public Spending (2010) and author of Let Them Eat Carbon: The Price of Failing Climate Change Policies and How Governments and Big Business Profit from Them (2011).

David B. Smith

David B. Smith studied at Trinity College, Cambridge, and the University of Essex in the 1960s. He then worked as an economist, predominantly in banks and the securities industry, until the mid 2000s. David is currently a visiting professor at the University of Derby and maintains his own econometric forecasting model of the international and UK economies at Beacon Economic Forecasting. He has written extensively on monetary policy and financial regulation as well as on public spending and tax issues.

Foreword

The IEA was honoured to host Grover Norquist, president of Americans for Tax Reform, for the 2014 Hayek Memorial Lecture. Norquist took as one of his main themes the observation that we are on the road to serfdom, as predicted by Hayek in his book The Road to Serfdom. Norquist laid out an action plan, grounded in political economy, to suggest how the US could do a U-turn and return to being a low tax and low regulation economy.

Grover Norquist expressed optimism that the tide could be turned in the US. There were a number of reasons for this. Firstly, there is a large coalition of people with different priorities but who believe that the state should ‘leave them alone’. There is little in common, for example, between those who wish to have the right to bear arms, those who home-school their children and those who are trying to start small businesses. However, they all wish to be left alone by government to pursue their different interests and their well-being. At the same time, the coalition of people who wish to increase the power of government is becoming harder to hold together. Secondly, in the US, there is a well-thought-out plan – the Ryan plan – for reducing government spending at the federal level to more sustainable levels. There is also competition between states. States – many of them in severe financial trouble as a result of high spending, low economic growth and large future pension commitments – have an incentive to reduce taxes and regulation to attract business.

The future of the US economy is certainly relevant to the UK. However, not all the analysis of our Hayek lecturer could be applied directly to the UK’s political and economic situation at the present time. It is necessary to draw lessons from the analysis in order to create the sort of momentum that Grover Norquist described in the US. For that reason, we asked three economists to comment on the lecture and provide some further European context.

In his chapter, David B. Smith discusses the empirical evidence that shows just how far we have moved down the road to serfdom. In countries such as the UK, the government is spending about as much as the people. A peace-time economy is being run with war-time levels of government spending. The levels of taxation necessary to finance government spending also have a serious impact on economic growth. In order to effect the change discussed by Grover Norquist, it is necessary to educate opinion formers about the damage done by current policies.

Matthew Sinclair’s commentary deals with the important issue of fiscal decentralisation. In the UK we have one of the world’s most centralised taxation systems which contrasts starkly with the situation in the US. As Matthew Sinclair explains, this not only makes it more difficult to reduce the size of the state, it also leads to less efficient service provision. Sinclair details a plan to take the UK system of local government finance closer to that in the US.

Finally, Nima Sanandaji develops Grover Norquist’s observation that it is necessary to build a coalition of people who have a strong belief in – and interest in – economic freedom. Drawing on his experience of Sweden, Sanandaji shows how radical reform can create interest groups that wish to promote further reform as well as wish to protect the reforms that have already happened. Sanandaji has two other observations. The first is that entrepreneurial activity can undermine entrenched government interests in unexpected ways. The second is that taxes should be made as visible as possible so that people understand the true costs of government spending.

The 2013 Hayek lecture, together with the commentaries, form an important contribution to the discussion of the role of government in economic life. As government spending and taxation have increased in recent years, it is important to discuss both the economic consequences of this and the political economy mechanisms that might lead to a change in policy. As such, the IEA commends this collection.

Philip Booth

Editorial and Programme Director

Institute of Economic Affairs

Professor of Insurance and Risk Management

Cass Business School, City University

March 2014

The views expressed in this monograph are, as in all IEA publications, those of the author and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council members or senior staff.

Acknowledgements

The Institute of Economic Affairs would like to thank CQS for its very generous sponsorship of the 2013 Hayek Memorial Lecture and of this publication.

Summary

•There is a growing coalition of people in the US who hold a strong view that they would like the government to ‘leave us alone’. The coalition includes home-schoolers, those who run small businesses and taxpayers. These groups do not want special favours from government and their priorities are very different from each other. However, the coalition is united in its desire for the government not to interfere in their lives.

•There is a coalition opposed to the ‘leave us alone’ coalition. This is the ‘takings coalition’ that views the proper role of government as taking money from others and giving it to them. All tax increases feed the ‘takings coalition’ and increase its strength and appetite.

•However, if taxes cannot be increased, the interest groups that wish to increase spending on their own favourite causes will only be able to do so if spending is decreased on other programmes – choices will have to be made and the ‘takings coalition’ will become fractious.

•Because there is a significant degree of fiscal decentralisation in the US, the states can lead the way in reducing government spending, taxation and regulation.

•In the US, states can copy each other’s successful policies. States are, in a sense, in competition with each other. Those that follow policies that discourage business will see an exodus to states that have lower taxes and regulatory burdens. This is already happening.

•Currently, a majority of people live in states that have governors and legislatures that would be sympathetic to an agenda of lower taxation and less regulation. This provides reason for optimism.

•At the federal level, the Ryan budget plan provides

hope that there will be a significant reduction in government spending compared with current projections. The plan would lead to lower and simpler taxes and the decentralisation of responsibility for welfare programmes. Ponzi Medicare and pensions schemes would be replaced by funded, individually controlled, defined contribution plans. If nothing changes in the US, spending at the federal level

alone will increase to around 40 per cent of GDP

from around 20 per cent today. The Ryan budget plan would bring the spending ratio back down to below

20 per cent.

•In order to maintain – and increase – momentum towards a free economy, we need to create favourable demographic trends. This can be done through radical reforms that give families control over education, pensions and welfare. When such reforms are carried out, those affected will tend to support economic policies that involve a less substantial role for the state.

•Detailed analysis of government spending around the world shows that there have been very rapid increases in the share of national income taken by the government. Since Ronald Reagan’s election as president in 1980, the proportion of national income spent by the US government at various levels has