Forward Economics
Chapter 13
Solving the Problem of Big Government
“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”
— Milton Friedman
Let’s begin by summarizing what a forward economy delivers. In such an economy, wages are strong, profits are shared with workers as growth occurs, and companies continuously reinvest in new ventures that create jobs and strengthen communities. Families thrive. Recessions, financial crises, and depressions are largely eliminated.
When you put all this together, something remarkable happens: the need for government taxation and services diminishes dramatically. Local, state, and federal tax burdens decline. So does the need for government borrowing and debt.
This leads to a key insight:
Big government is not the cause of economic dysfunction — but it is its inevitable consequence.
Conversely, small government is a natural byproduct of good economic design.
Today’s conventional wisdom gets this backward. Many pundits argue that “big government is strangling business.” But that view conflates cause and effect. In reality, how we structure and run the economy determines what kind of government people vote into being. A backward economy naturally self-organizes into a large, debt-laden government. A forward economy does the opposite.
Let’s explore four mechanisms through which a backward economy builds big government almost automatically.
Redistribution Pressures: Government Assistance to Counter Inequality
In a backward economy, investors hoard an ever-growing share of profits, leaving workers with stagnating wages. Unsurprisingly, many citizens respond by demanding that government step in to remedy the situation. In 2019, a Pew Research Center survey found that 61% of Americans believed there was too much wealth inequality in the country. More than three-quarters of Democrats said taxes should be raised to address it.
This pressure inevitably translates into social programs — food stamps, Medicaid, unemployment insurance, earned-income tax credits, Social Security — funded by taxes on businesses and the broader population or by government borrowing.
When private wealth is hoarded and not shared more equitably, the public inevitably pushes for government redistribution to fill the gap.
Unfunded Tax Cuts and Ballooning Debt
The backward economy also gives rise to a countervailing force: the investor-led political movement to keep more profits through tax cuts. These cuts are rarely matched by spending reductions, so they, too, are financed through borrowing — expanding the size of government on the debt side.
The U.S. provides a vivid example. In 2001 and 2003, when Republicans controlled both Congress and the presidency, sweeping tax cuts lowered income-tax rates across the board and reduced them for inheritances, capital gains and dividends. None of this was offset by reduced spending; it was all financed through borrowing. According to a 2018 analysis by the Center on Budget and Policy Priorities (CBPP), these tax cuts accounted for more than one-third of total federal debt as of CY 2019.
A similar story unfolded in 2017, when the Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. The Congressional Budget Office estimated the cuts would add $1.5 to $2 trillion to the debt over the first decade — roughly 10% more in total debt at the time.
What happened to the extra cash? According to The Washington Post, in the first three quarters after the 2017 tax cuts, only 40% of the freed-up money went into new business investment and R&D. The other 60% flowed into share buybacks and dividends. And even that 40% bump proved temporary: by 2019, before the pandemic, private investment had fallen back to historical norms, as noted by economists Robert Rubin and Theo Lacy in The Wall Street Journal.
We’re continuously told that income and corporate tax cuts are necessary to get businesses and shareholders to reinvest profits and take new risks and grow our economy.
But this leads to an almost ridiculously obvious question: why not design businesses that always reinvest in the first place?
When we fail to design businesses to reinvest profits consistently, we find we must continuously “bribe” them with tax cuts — and then watch in wonder as inequality and debt grows.
Financial Crises and Bailouts
The third mechanism is the boom-and-bust cycle. In a backward economy, speculation and financial excess build up until a crisis hits, forcing the government to step in as lender, spender, and insurer of last resort.
The 2008 Financial Crisis provides a good case study. To stabilize the economy after the collapse of Bear Stearns and Lehman Brothers, the federal government enacted the $700 billion Troubled Asset Relief Program (TARP) and the $800 billion American Recovery and Reinvestment Act (ARRA). Combined with reduced tax revenues during the downturn, these measures accounted for over an additional quarter of total federal debt as of CY 2019.
The earlier Bush tax cuts were also, in part, a response to the bursting of the Dot-Com Bubble in 2001. Taken together, unfunded tax cuts and financial crises were responsible for more than half of total U.S. federal debt accumulation by 2019, according to analysis by the Center for Budget and Policy Priorities.
Wars and Global Inequality
Finally, economic design shapes geopolitics. A backward economy that concentrates wealth tends to produce inequality not only at home but abroad. This, in turn, fosters instability, conflict, and the need for sustained military spending.
The Middle East offers a striking example. As journalist Thomas Friedman has observed, when Western oil companies entered the region in the early 20th century seeking petroleum reserves, they extracted profits without requiring local reinvestment or any kind of sharing among the broader population. By partnering with authoritarian regimes, companies like BP, Shell, and Exxon, and others prioritized investor returns over local development and equitable distribution. The result was deep inequality and resentment — fertile ground for extremists like Osama bin Laden, who grew up in Saudi Arabia during this era of economic distortion.
The wars in Iraq and Afghanistan alone account for over 10% of U.S. federal debt, according to government data.
A backward economy doesn’t just produce inequality; it produces conditions for perpetual conflict, which demands high defense spending and keeps government large.
Toward a Smaller, Smarter State
Big government doesn’t emerge in a vacuum. It grows out of the economic structures we build. Nearly the entire US federal debt is directly traceable to our backwards economy, as we have just observed. The results are summarized in the chart below.
Hoarded profits, ever-growing inequality, financial crises, and wars make government intervention inevitable. A forward economy, by sharing wealth broadly and reinvests continuously, relieves these pressures and allows government to shrink naturally.
If we truly want to solve the problem of big government, we must first fix the economy that creates it.
