The Return of Big Government

And as Walker sees it, the United States is already in pretty deep, with a $9 trillion national debt and some $44 trillion in unfunded entitlement obligations. He thinks politicians would be wise to pay close attention to the downfall of Bear Stearns. "Look at what happened," he says. "They had a tremendous market cap and reasonably strong balance sheet, but they sold off for fire-sale prices because they ran out of cash." Medicare, he further notes, is already cash-flow negative, and Social Security will be too in less than a decade.

Priorities. Many of the same folks who are talking about investing in human capital and infrastructure today were also talking about it back in 1992, when Bill Clinton was elected on a "Putting People First" agenda. Yet Clinton was convinced by then Fed Chairman Alan Greenspan that dealing with America's fiscal problem should take priority, and he instead adopted what might be called a "Putting the Bond Market First" strategy. Indeed, Clifton of Strategas Research envisions a similar scenario in 2009, especially with some private estimates putting the 2009 budget deficit at $500 billion and climbing. Federal Reserve Chairman Ben Bernanke "has to sit down with the next president and tell him that if he raises taxes, they can't spend any of the money," he says. So while higher payroll or income taxes may represent more government intrusion, they may translate into deficit reduction rather than higher spending.

FDR and LBJ also didn't have to deal with a ruthless legion of foreign investors who daily buy and sell U.S. stocks, bonds, and dollars, in effect voting on American economic policies and the prospects for earning a high return here vs. elsewhere. "We are dependent on the kindness of strangers as never before," says Yardeni, who coined the term "bond market vigilantes" two decades ago. "Today, we have global financial vigilantes monitoring financial markets around the world who can invest anywhere they like...and the United States will in a sense be forced to get our fiscal act together, because right now we are not managing our economy in a way that is attractive to foreign investors." Walker puts a finer point on it: "The next president is going to have to deal with this because the window is closing. . . . I don't think we can count on forever being able to borrow whatever we need, whenever we need it at attractive interest rates from foreign lenders."

Nor did FDR and LBJ have to fret about competing with scores of countries that have adopted the American model of lower taxes and regulation. As Chris Edwards of the Cato Institute notes, America's corporate tax used to be about average for an advanced industrial economy, but "we're now at 40 percent, so we have one that is 16 points higher than the average." This is a fact not ignored even by those on the left. Rep. Charles Rangel, the New York Democrat who chairs the House Ways and Means Committee, has proposed cutting the corporate income tax in the name of global competitiveness, while Schwenninger advocates doing away with it completely. More and more future tax, spending, and regulatory moves will be viewed through that harsh comparative lens.

Then there's the American public. The free-market policies of the past 25 years were preceded by a huge decline in American trust in government. But there's little sign that a decade of corporate blunders and scandals—from Enron to Citigroup—or even political fiascoes like Katrina has created a renewed enthusiasm for government. It's more like a pox on both their houses. Indeed, as public-opinion analyst Karlyn Bowman notes, times of economic trouble generally make people less favorably disposed toward government. And even Hacker, a fellow itching for more activism, concedes there is little public support for radical change. "You have to establish public trust by doing relatively small things and then working from there," he says. Big government? Small government? Maybe all Americans really want is a bit of effective government.