Today’s conventional policy recommendations are leading the nation astray. They rest on two questionable assumptions, neither as well-supported by theory or history as their advocates claim. The first is that the long-run growth potential of an economy is wholly determined and indeed fixed by its productive capacity (physical and human capital and technological know-how). The second is that this productive capacity will be fully utilized by the economy as long as markets are encumbered as little as possible by government regulation.

Unless changes are made soon, we face the prospect of exorbitant tax rates or severe benefit cuts. Although the federal payroll tax currently pays for almost all Social Security and Medicare benefits, the shortfall will grow rapidly during the baby boomer retirement years.

The United States government spends far more than it takes in.