Suppose that in 2005, Bush managed to “privatize Social Security” to a politically astonishing degree.  Under the hypothetical legislation:

1. Workers are free to divert 100% of their future payroll tax into private accounts.

2. Workers are free to immediately ask for the present value of their future SS checks, as long as they put their money in reputable investments.

Let’s say that half the people in the SS system took full advantage of the new rules. 

Question: After the 2008 crash and subsequent fall-out, how would the political system have responded?  I’ll bet it would have made TARP look small.  Tens of millions of people would have lost half their assets and half their retirement income as a “direct result” of Bush’s legislation.  The government wouldn’t have stood idly by.  In all likelihood, it would have enacted a kilo-page relief measure to tortuously compensate (some of) the losers, randomly increase regulation on financial markets, and bribe a hundred fence-sitting legislators.

This scenario and others like it make me suspect that “constructive” free-market reforms like Social Security privatization, school choice, Medicare vouchers, etc. are largely a waste of libertarians’ political capital.  They pose two great risks:

1. If anything goes wrong, the market will receive all the blame.  The political backlash could easily lead to policies more statist than ever.

2. In practice, the government will never implement a transparent free-market reform.  Even an idea as simple as “give people the freedom to invest their own payroll taxes in a private account” will quickly morph into a kilo-page Congressional boondoggle.  This further increases the chance that something will go wrong.  And when it does, the market will take all the heat.

Depressing?  I have a better way.  Instead of pushing for “constructive” free market reforms, libertarians should doggedly focus on austerity: opposing spending increases, and pushing spending cuts.  Instead of trying to “privatize” Social Security, for example, libertarians should push for lower benefits, a higher retirement age, and means testing.  Instead of pushing for school choice, libertarians should try to restrain/shrink education budgets and push user fees.  If libertarians have any political success, this will automatically expand the role of the market.  After all, the less government does for people, the more they will do for themselves.  Dissatisfied with government provision, people will save more for their own retirement and spend more on private education.  In the limit, once the flow of government money ceases, voluntary exchange is all that’s left.

Austerity has two major advantages over more “constructive” free-market reforms:

1. If anything goes wrong, public opinion is less likely to blame the market.  Government decided to spend less on X; how is that the market’s fault?  Logically, people could simply reframe their complaints.  But psychologically, it’s easier to point fingers at markets directly sanctioned by government action than markets indirectly prompted by government inaction.

2. Congress is also less likely to use austerity as an excuse for new kilo-page legislation.  Officially expanding market options takes “sweeteners.”  Mere budget cutting, not so much.

To be fair: I understand why libertarians promote “constructive” free-market reforms.  They sound better and feel nicer.  Rhetorically speaking, a person can promote SS privatization and still be “pro-retiree,” or promote school choice and still be “pro-education.”  The person who pushes for cuts in retirement and school budgets effectively forfeits these rhetorical options.  But if you actually want to promote liberty, austerity seems like the option most likely to deliver it.

HT: Partly inspired by a lunch with Steven Teles.