If Libertarian Gary Johnson Was President, Here's What Would Happen to the U.S. Economy

Editor's pick: Originally published June 22. 

Would a Libertarian America also be a rich America? Yes, says Libertarian Presidential Candidate Gary Johnson.

The former New Mexico governor would make major overhauls to the federal government if elected president, slashing taxes, rolling back regulations and in general taking a much more hands-off approach to running the economy. His socially liberal, fiscally conservative philosophy of governing would mean significant shifts in the way the U.S. economy works. He says we would be better off.

"I think that smaller government grows the economy, just the notion of less money spent on government and less taxes," said Johnson in an interview at TheStreet's New York offices on Thursday.

Johnson often touts his record in New Mexico, where he served two terms as governor from 1995 to 2003. While in office, he earned a reputation for setting state and national records for his use of veto and line-item veto powers, rejecting about 750 bills during his tenure. Many of his vetoes shot down tax increases and bills that meddled in the economy. He also made notable reforms to Medicaid, state payrolls and taxes.

Of course, the idea of a President Johnson in 2017 is a far-fetched one, given that the two-term governor is still fighting to even be included consistently in national polls (his name will be on the ballot in all 50 states, though). And even if he were to be elected, he wouldn't get an unobstructed path to change. He would have to get his policies through Congress, which would be difficult but perhaps not impossible, especially if Republicans maintain control of the Senate and House of Representatives, with Mitch McConnell and Paul Ryan at the helm.

But if he could, as he says, "wave a magic wand," and enact his policies, what would the U.S. economy look like with President Johnson in the White House? Many say it would grow the economy, though the benefits might not reach everyone. We talked to him and others to find out. Deep dive: Here's how you should invest if Johnson wins

Taxes

As president, Johnson would eliminate income tax and corporate tax and abolish the IRS, replacing all of it with one federal consumption tax. He advocates the FairTax, a proposal currently in front of Congress that enacts a flat 23% tax on new goods and services for personal consumption.

Such a tax would be regressive, meaning lower-income and even middle-income Americans would wind up spending a much larger share of their incomes than those in the upper echelons of the economy. The scheme includes a "prebate," which would ensure each household can consume tax-free up to the poverty level, to combat its regressive nature.

Its proponents say that by removing all special features of the tax code that treat different income levels and industries separately, it would also remove economic distortions that impact decision-making and cause individuals and companies to make decisions based on tax efficiency instead of productivity. The result, they say, is a better allocation of resources and faster growth. 

"From an economic standpoint, that would probably increase economic growth significantly," said Michael Busler, public policy analyst and professor of finance at Stockton University.

However, many economists say that even with the prebate, less-affluent Americans would be negatively impacted by a consumption tax.

"Distributionally, there may be much more growth, but overall, people that are in the bottom half of the income spectrum or more may end up worse off even despite the higher growth because they're going to have higher relative tax burdens and lower government spending programs that they're benefitting from," said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget.

Some put it more starkly.

"Every flat tax proposal I've seen analyzed is essentially a redistributive mechanism upwards," said Neil H. Buchanan, an economist and professor at The George Washington University.

It's something Johnson acknowledges could be a possibility, though he also makes the argument that a zero corporate tax rate would result in a boom in jobs.

"If with a zero corporate tax rate this country doesn't create tens of millions of jobs, for no other reason, then nothing's going to create tens of millions of jobs," he said. He also thinks it could put an end to crony capitalism. "If you eliminate corporate tax, I think you issue pink slips to 80% of Washington lobbyists."

Although a consumption tax like Johnson proposes would be more economically efficient, the rate necessary to replace all federal revenue under current law would probably be too high to be politically feasible, said Kyle Pomerleau, director of federal projects at Washington, D.C.-based tax analysis group the Tax Foundation. He estimates it would need to be closer to 27% or higher if consumers started to avoid the tax significantly. 

Government Spending

Curbing government spending is a top priority for Johnson, who says as president his first major act would be to submit to Congress a truly balanced budget.

"I believe that if we continue government spending at its present trend line that it will become unsustainable," he said.

Johnson would first move to eliminate the Department of Education. "People think it was established under George Washington; it was established under Jimmy Carter. What's been value-added about the Department of Education since Jimmy Carter other than mandates that are not funded?" he asked. He would also nix the Department of Housing and Urban Development and seek to make cuts across all agencies wherever possible.

The major spending cuts, however, would come elsewhere.

Jeff Miron, director of economic studies at the Cato Institute and director of undergraduate studies in the Economics Department at Harvard University advises Johnson on economic policy. In a phone interview with TheStreet, he identified a handful of major spending categories under the microscope.

One is national defense. While Johnson is not an isolationist, he is not an interventionist either and would seek to slow and shrink the defense budget to reduce spending on military and foreign intervention.

Another is entitlements, which would likely be the biggest area of focus. Johnson would seek to raise the retirement age, implement means testing and allow social security beneficiaries to self-direct funds, including passing money onto their heirs. And Medicaid and Medicare would be delegated entirely to the states without federal involvement.

"If you have programs that are growing so fast they're going to bankrupt the economy, then obviously they don't make sense," said Miron. 

Obamacare would be nixed, too, which Johnson would repeal "in a heartbeat" if given the opportunity. He would replace it with a free market for health care that would not entail health insurance for ongoing care but instead only for catastrophic events and illness, offering Americans a pay-as-you go system he estimates will cost about one-fifth of what it currently is. The idea is that price transparency and open competition would lead to more affordable products and services than what we see now. 

"We would have gallbladders-R-us, we would have stitches-R-us, x-rays-R-us," he said.

If Johnson's and other libertarians' theory on health care is correct, this new system would remove distortions from the current health care market and render insurance and services much less expensive -- a scenario the health care sector might not exactly be rooting for.

But even if that is the case, pulling out safety nets -- health insurance, food stamps, entitlements, etc. -- would almost certainly hurt those at the lower end of the spectrum.

"The Americans that are not prepared to contribute to the economy get left behind," said Busler.

Johnson insists he wouldn't pull the rug out of low-income Americans entirely, and the argument can be made that if the federal government shaves down its entitlements, states would be free to expand their own, perhaps providing a partial substitute. Still, it's unclear whether that would be enough.

"Most economists would say that income inequality would worsen," said Busler.

The overall economic impact of Johnson's spending cuts would also depend on how much he nixes and, perhaps more importantly, how fast, said Goldwein.

"Balanced budget on its own will be economically beneficial in the long-run, [but] if you get there too quickly through abrupt spending cuts or tax increases, that could hurt the economy in the short and medium term, because it can take demand out of the economy," he said. "So there's a balancing act of timing."

Regulation and Government Intervention

Johnson would employ a libertarian-inspired hands-off approach to regulation. He would, however, sign and enforce legislation that he says levels the playing field, promoting competition and the free market.

"President of the United States does administratively run the federal government, so from a rules and regulations standpoint, I'd like to think that they'd be a little more common-sense based," he said.

While he acknowledges climate change, he does not believe in energy regulation, nor is he a fan of the minimum wage or many other government controls.

Such items, Busler says, would likely benefit business and perhaps help the majority of consumers, though a drawback remains. "But again, the low-income workers would end up getting clobbered," he said.

Buchanan was more cutting in his assessment of Johnson's largely anti-regulation stance and offered an example of why.

"If I've got a coal-fired power plant and the government wants me to not spew pollutants into the atmosphere, I then say, 'Oh, this is horrible big government, they're imposing this on me.' But getting rid of that is essentially saying that nobody has the ability to assert their rights to clean air," he said. "The government isn't out of the picture, the government is just changing whose side it's on."

But that's not to say Johnson's anti-regulatory, anti-government intervention stance would always promote big business. For example, he says that had he been president during the last financial crisis, he wouldn't have intervened with a major stimulus or by bailing out the banks.

"The system would not have failed if they had been allowed to go bankrupt," he said.

He said he wouldn't get involved in the current Puerto Rican debt crisis either, though he left some wiggle room. "I don't want to say never, either," he said.

Johnson would sign the Trans-Pacific Partnership and is a strong proponent of free trade. In other words, he's no fan of presumptive Republican nominee Donald Trump's trade war and tariff tirades.

"If China wants to sell a product that costs them $10 to produce to you and I for $1, who benefits?" he said. "I think the criticism of free markets today is really criticism of crony capitalism of the guise of it being free market."

The Unknowns

"It's hard to think of any case where the expansion of individual liberty isn't good for the economy," said Miron. That could be true, but there are also a lot of cases we haven't yet studied, as libertarianism is a relatively small political school of thought in the United States and, both in the electoral and in policy, it hasn't been wildly successful.

Take, for example, the gig economy on the rise with companies like Uber and Airbnb. Johnson says he would like to live in a world that's Uber-everything, but how would that work and what does it mean? Well, we don't know.

It could open up marketplaces and provide American workers and consumers more choices and flexibility by fostering competition, thus moving the economy in a more market-based direction, Goldwein said. But it's not that simple.

"We don't have a government benefits structure that's designed for that kind of system. We have an economic and government structure that's more designed for people that work full-time or near full-time," he said. 

The same goes for immigration, which Johnson says he would address by advocating a simplified system of work visas regulated by the marketplace and labor demand. Immigration generally means good things for the economy, though it's not quite so simple, especially if the minimum wage is lowered or abolished.

"One might expect more immigrants and no minimum wage that there would be more jobs in the economy but perhaps lower average pay or lower pay for some segment of the labor force for a while," said Goldwein. "A lot of economists believe that's a short-run transitional effect and ultimately you get more productivity out of it and get to a point where everybody has higher wages and more jobs, but the research on that is a little bit uncertain, and it's hard to tell what would happen."

Johnson's appears aware that implementing his policies and libertarian agenda might require some give and take, conceding potential imperfections.

"I'm making a pitch here that I really am a thoughtful guy," he said. "I've told the truth, and so when you tell the truth, you can admit mistakes. If this is a situation where here's the information available and I'm changing my mind, I'm going to be the first to say why."

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