What Ever Happened to America’s Limited Government Under Federalism?

The Federal Government’s Legitimate Role Went Off the Rails in 1936.

America is an exceptional nation for many reasons. However, the ability of the federal government to live within its means is not one of them. This has not always been the case. Prior to 1936, the federal government employed a conservative interpretation of the Taxing and Spending Clause of the Constitution (aka the General Welfare Clause). This Clause limited the power of Congress to raise taxes for the sole purpose of paying debts, establishing a national defense, and providing for the general welfare. James Madison was an advocate of a conservative interpretation of this Clause that limited Congressional power to tax in support of those functions explicitly enumerated in Article I, Section 8 of the Constitution. Other Founders, including Alexander Hamilton, argued for a more expansive interpretation of the “general welfare” portion of this Clause citing the need for federal investment in infrastructure and economic development. The consensus at the Constitutional Convention of 1787 was to adopt Madison’s interpretation.  But such restriction ended in 1936, thereby igniting the spark that would place our nation on a path toward fiscal insolvency. So what exactly happened that year to do this? Read on to find out more.

The Supreme Court Turned the Notion of a Limited Federal Government on its Head.

The Supreme Court of the United States (SCOTUS), in its landmark case United States v. Butler, 297 U.S. 1 (1936), forever changed the scope of the federal government’s authority to tax and spend by empowering Congress to define “general welfare” as broadly as they arbitrarily deem appropriate. The Butler decision effectively changed the trajectory of growth in the federal government by giving Congress expanded authority to spend on anything that would benefit the general welfare of Americans. However, Butler also undermined the Founder’s view of federalism by expanding the definition of general welfare beyond what even Hamilton advocated. Subsequent to Butler, Helvering v. Davis, 301 U.S. 619 (1937), reaffirmed and expanded Congressional spending authority further while affirming the constitutionality of the Social Security Act of 1935. These two SCOTUS decisions, taken together, helped eliminate an important check against the spending power of Congress and forever changed the notion of federalism in America.

The Butler Decision Was Wrongly Decided and We Are Paying the Price For SCOTUS’ Mistake.

The Butler Decision opened the flood gates of federal spending because politicians, regardless of party, have a very strong incentive to spend other people’s money. The result of Butler was that federal spending grew from what was 2.7 percent of GDP in 1929 to more than 22 percent today (see Chart 1 below). Along with the increase in spending came new federal bureaucracies that created an ever-increasing federal tax burden for all of us. Today, most of that federal spending is comprised of transfer payments that involve no goods or services being exchanged. According to the Foundation for Economics Education, federal transfers have increased from 11 percent of the federal budget in 1953 to 53 percent today. With transfer payments at this level, most Americans would be better off receiving a lump-sum check from the federal government each month instead of participation in specific support programs. Doing so would at least eliminate the need to fund a federal bureaucracy that consumes so many of our tax dollars.

The Contradiction Between Butler and Federalism Requires That Americans Make a Choice.

Since Butler, the incentives of politicians to tax and spend have only increased, giving Americans a federal government that apparently cannot contain its love for spending. This has led to a plethora of new transfer payment programs that contribute billions annually to our federal budget deficit and resulting $23 trillion in federal debt. Further, many of these programs operate with huge unfunded promises, including Social Security with almost 14 trillion in unfunded liabilities and Medicare with more than 37 trillion. These unfunded promises reflect the height of intergenerational immorality because they represent financial obligations imposed on taxpayers that have not even been born yet. Fortunately, we can help meet the retirement needs of seniors without imposing such immoral obligations, but it will require program reforms. This includes adopting a more restrained interpretation of the Constitution’s general welfare clause.

Progressive Democrats Have Opposed Credible Reform of Transfer Payment Programs.

Periodically, a politician will come along and offer credible reforms to put one of our transfer-payment programs on sound financial footing. For example in 2002, President George W. Bush proposed transitioning Social Security to a system of individually owned retirement accounts (e.g., IRA, 401K) that would allow individuals to invest their contributions in market instruments instead of funding the retirement of others. Democrats, however, objected to Bush’s proposal out of concern for the risk of putting retirement funds in the stock market. A bi-partisan compromise could have been reached to limit such risk by imposing regulated diversification guidelines on these accounts, and by imposing limits on the percentage of contributions exposed to the market. Unfortunately, Democrats stuck to their progressive roots and would hear none of it.

Progressives think anything that empowers the individual or strengthens individual rights reflects a commitment to “hyper-individualism,” something that takes away the common social bond they seek around government dependency. Such progressive thinking certainly contradicts the notion of “general welfare” as it was understood by the Founders, including Hamilton, and replaces it with an emphasis on entitlement. 

Critical Fiscal Reforms Are Unlikely in Today’s Political Environment, and That’s Unacceptable.

Given the current political gridlock we face in Washington, it is unlikely that necessary reforms of the federal transfer system will be accomplished for decades to come. That is a major problem for the country as most analysts will tell you that the financing trajectory for many federal transfer programs is unsustainable. This includes the two largest programs, Social Security and Medicare, that are now projected to become insolvent in 2035 and 2026 respectively. The risk posed to the nation from the insolvency of these two programs alone suggests we cannot wait decades for reforms. We can hope that an appeal for reconsideration of the Butler Decision by the new conservative SCOTUS might finally restrain spending by Congress. However, hope is not a strategy for reform because most conservative justices acknowledge the principle of stare decisis and, therefore, will be reluctant to overturn precedent.

Fiscal Responsibility and National Security Requires That We Restrain Federal Spending.

We now have more than 80 years of empirical history demonstrating what happens when the spending power of Congress is not held in check. The Butler Decision has placed our nation on a road to fiscal insolvency and created an administrative state that extends far beyond what had even been envisioned by the Founders. Our nation has also been left with $23 trillion in national debt and with total unfunded liabilities for all transfer programs that have been estimated to total $122 trillion. In fact, existing benefit commitments are so excessive that they have one more critical side effect. Former Chairman of the Joint Chiefs of Staff Admiral Michael Mullen has previously warned our nation’s debt obligations are the number one threat to our national security. Few Americans pay attention to this threat. But America cannot sustain the level of spending we now enjoy, including that for Social Security and Medicare, without experiencing severe economic and national security consequences.

Americans Can Fix Our Fiscal Problems by Supporting an Article V Convention of the States.

In order to reestablish reasonable Constitutional constraints on the power of Congress to tax and spend, a more direct strategy will be required. That strategy involves the approval by two-thirds of state legislatures to authorize an Article V “Convention of the States.” Such a Convention bypasses Congress and permits representatives of state legislatures to propose constitutional amendments. Of course, any amendment approved by representatives at an Article V Convention would still need to be ratified by three-fourths of the state legislatures before it becomes part of the Constitution. This process is far too burdensome for progressives as they know it will take too long—and may even be impossible—to mold public opinion to their liking. They traditionally prefer the more expedient method of undermining the Constitution through activist judicial appointments and with executive orders. However, amendments coming out of an Article V Convention that might establish term limits for members of Congress, require a balanced budget, limit the power of lobbyists, and establish boundaries for federal spending would force fiscal change in the near term.

The Founders gave the people an Article V Convention of the States as a strategic tool for restraining a runaway federal government. It’s time to use that tool to reestablish a federal government that can live within its means.

Eric A. Beck
Free Nation Media LLC
Greenville, South Carolina

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