it's not obvious that Republicans actually offer more free-market politics than Democrats do.
Probably true, but beside the point. I am not upset with political trends because I want Republicans to win. I am upset because I foresee a one-party state. Even if neither party is particularly libertarian, gridlock and competitive checks and balances are better for libertarians. Moreover, a one-party state is corrupt and backward relative to what we are used to. Again, I just come from reading North, Wallis, and Weingast, and a major characteristic of a "natural" state is that every economic organization must necessarily be a political organization. What we are seeing now, with government threatening private business executives while rewarding lobbyists with "stimulus" (see Russ Roberts, for example), is "natural state" behavior.
I don't care whether or not Hispanics support a welfare state. The welfare state is not the issue. The one-party state is the issue. And ethnic bloc voting (which we have always had in the country, I will freely admit) is, given the current demographics, giving us a one-party state.
Ethnic bloc voting means that voters will not defect. On top of that, the huge step increase in government involvement is going to enhance the strength of the party in power, which for now is the Democrats.
As for various commenters who assure me that there is some natural tendency for a second party to be competitive, allow me introduce to you to Montgomery County, Maryland, as well as to many large American cities. In fact, it is quite easy for a one-party government to emerge when there are ethnic blocs and a large public sector relative to the private sector.
I do not think that this is a case of my being ignorant of history or wildly speculative. I saw this scenario playing out way back in September, when I tried (unsuccessfully) to convince a Republican Congressperson to vote against what we now call TARP. I said that this would be exactly what the Democrats needed--much greater government control over the financial system and big business in general. From now on, every Fortune 500 company has to align itself with the party in power.
As hard as it is for the Gary Gortons of the world to admit it, the financial system of five years ago is gone forever. Similarly, as hard as it is for many people to admit it, the political equilibrium of competitive balance is gone for the next decade.
For now, the only two elements of the political system are Progressive Corporatism and The Resistance. And the latter does not amount to much yet.