The return of big government

Republicans love tax cuts, and Donald Trump, being a businessman, was happy to go along with that. The move to reduce corporate tax rates to the middle of the OECD pack was enough to make the US the world's most competitive economy in 2018 and second in 2019¹.

But tax cuts don't equal small government, something Republicans are supposed to be enthusiastic about². And given both internal and external pressures, small government is a pipe dream. We're headed for a much bigger role for the state over the next generation, and it won't be something any politician can stop. There are three main reasons: demographics, economic imbalances, and China.

Demographically, the Baby Boomers are entering mass retirement. The process began in 2009³ and will continue until around 2030⁴. This means a large rise in government expenditure (for social security and healthcare, especially for those who haven't saved enough for retirement) and lower demand for consumer products (those purchased by the coveted 25-54 age bracket), which damages companies and therefore tax revenue. The result will be not just higher taxes, but more government services to cater to an elderly population less able to do things for themselves.

Economic imbalances seem straightforward, but are actually much more complex. The "99-percent" protests of the post-financial crisis era focus on the classic (and boring) "rich vs. poor" narrative, but more thorough analysis reveals a deeper problem: that of insufficient consumer demand.

Aging demography is one contributor, not only due to the retirees' own reduced consumption but also via knock-on effects: since many retirees haven't saved enough, and government faces intense pressure not to raise taxes, the only way out is asset inflation via central bank money-printing⁵ so that retirees' feel a wealth effect. The high cost of land, housing, etc. reduces spending power for everything else, depressing the whole economy. Add to this the disproportionately rising costs of healthcare, education and other essentials, and it's no wonder consumers, particularly young people, feel pinched.

Then there's the international factor, laid out so elegantly by Michael Pettis of Peking University. China, Japan, and Germany (in fact, the EU as a whole), not to mention smaller countries like South Korea, all run significant surpluses against the United States, in effect using American consumer demand to drive their economies. Exports comprise nearly 50% of German GDP, 45% of Korea's and so on⁶. This is totally unsustainable and does great damage to the U.S., from lost jobs to higher debt. Slowly but surely, the narrative is turning on globalization, "free trade", and global capital flows.

Finally, there's China. Not only is the Middle Kingdom the biggest factor in U.S. trade imbalances, but it's become a full-spectrum threat, from military to technology to political influence. The U.S. is responding by accelerating its development of hypersonic missiles and tripling the Pentagon's AI budget. Corporate titans like Jeff Bezos are taking advantage of this to try and land large contracts⁷. The government is also cracking down on Chinese espionage, especially in companies and universities. All this requires not only more government spending but broader authority. In the information age, enemies don't necessarily wear camouflage and spend their time on the other side of the trench. If corporations and universities are unwilling to crack down on enemy action due to financial and ideological interests, government will have to intervene--harshly.

All this must make for a depressing read if you're a libertarian. Good–I despise libertarians⁸. But regardless of how you or I feel, the trend is clear and unalterable–bigger government is on its way.