The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter Thirteen

The Elephant in the Economy

What the Government Giveth and Taketh Away

In july 1988, Ronald Reagan signed into law the biggest expansion of Medicare since its creation in 1965. Henceforth, the federal health program for the elderly would cover the crippling bills that result from catastrophic illness or injury. Prescription drugs would also be covered. No longer would any senior have to choose “between bankruptcy and death,” Mr. Reagan declared.

Senior citizens weren’t grateful—they were apoplectic. In Chicago, a group of them screamed “Liar!” “Impeach!” and “Recall!” at one of the most powerful men in Congress. One threw herself on his car, forcing him to flee on foot. The reason they were so unhappy: Unlike most new government programs, the beneficiaries were expected to shoulder all the costs of this one: up to $800 per year. The next year, the law was repealed.

Fifteen years later, George W. Bush did not repeat that mistake. When he signed into law a generous new Medicare prescription drug benefit, the elderly were only asked to cover a slim portion of the cost. The remainder—$14 trillion, by the most comprehensive estimate—would have to be dealt with by future taxpayers.

The government makes its presence felt in the economy in multiple ways, but the most important and controversial is how it spends and taxes, collectively called fiscal policy. As the contrasting experiences of Mr. Reagan and Mr. Bush show, Americans have come to love the benefits the federal ...