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Budget Blundering 101
Traditional GOP spending-cutters should move to the supply side.


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Larry Kudlow

Federal spending restraint and limited government are important long-run goals — in many ways the bedrock of traditional conservative economic thinking. But these goals will never be fulfilled without strong economic growth. Nor does the traditional government-limiting approach, by itself, provide the necessary growth-inducing, after-tax incentives that are essential to economic growth.

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That is why the budget-cutting model of economic policy is at best partial analysis, and at its worst nothing more than a prescription for austerity.

If marginal tax rates on work, production, and investment remain high, then no amount of budget cutting or government shrinking will unleash the supply of human creativity and capital risk-taking that is the main building block for maximizing the economy’s long-run potential to grow.

History proves that the surest way to reduce the size and scope of government over the long run is to lower tax rates and grow the economy. In
the end, prosperity, not budget cutting, is the surest way to contain the leviathan.

For these reasons, I believe that right now it’s a mistake for conservatives to obsess on budget spending issues. Reducing tax rates should be the main goal, particularly because the current economic slump will result in higher outlays on entitlement and non-entitlement spending — no matter what budget guidelines may be legislated in place.

Recent economic numbers on declining jobs, falling retail sales, and rising unemployment claims, have recession written all over them. Through numerous automatic formulas running throughout the budget, recession is a recipe for more, not less, federal spending. No amount of presidential vetoes or other futile budget-cutting efforts will stop this process.

And yet, like moths drawn to a flame, austerity-obsessed conservatives are again embarking on a self-destructive campaign to slay the old budget dragons of pork-barrel spending, corporate subsidies, and wasteful social programs. There’s an ontological blood feud between traditional, GOP establishment budget-balancers and the federal government. At the end of each of these battles, it’s the government — not the GOP — that’s always left standing.

This time, the quixotic crusade is aimed at the holy grail of defending President George W. Bush’s new 4% growth limit for domestic spending. Problem is, it’s an unrealistic budget plan that has virtually no support in Congress.

Ignoring this, manic-obsessive budget cutters found deep in the conservative ranks would have the president lay out a militant budget-veto strategy that will surely alienate key senators, and doom the tax-cut plan that is so vital to economic recovery, Republican prospects for the 2002 midterm elections, and the president’s own political future. Plainly, lower tax rates on capital and income is the right solution — not another futile budget battle. Yet, many traditional conservatives persist in going down the wrong budget road.

Bush the Elder used an anti-Congress veto strategy that perversely led to higher taxes, higher spending, higher regulating, and political humiliation in 1992. Gerry Ford used a tough-on-spending veto strategy that failed to hold down spending or deficits, failed to ignite the economy, and ultimately led to his defeat in 1976.

If these old-guard Republicans had set aside their green eyeshades and instead opted for a tax-cutting, economic-growth strategy, they both would have been reelected.

Right now, OMB director Mitch Daniels and his budget-cutting followers should be taking their political cue from two old-Senate bulls who have outlined a better 2001 fiscal strategy. Chief tax-writer Charles Grassley and budgetmeister Pete Domenici strongly support lower tax rates to restore economic growth, but strongly oppose the Bush budget. They are willing to accept something like 6% spending growth, and they recognize that the real reason to get a budget resolution through Congress as quickly as possible is to prevent a long, drawn out, anti-tax-cut summer filibuster in the Senate that would cripple chances for across-the-board tax-rate relief.

In the rules of budget reconciliation, 51-50 passage of a joint Senate-House budget resolution is permissible. Otherwise, an unreachable 60-vote majority would be necessary to break a filibuster logjam.

If another $500 billion in spending over 10 years is the price to pay for a supply-side, tax-cutting budget resolution, then it’s a price worth paying. But if the GOP gets itself all tied up in budget-argument knots, in the end they’ll get neither tax cuts nor limited government nor economic recovery.

Alienating core constituents such as farmers, businesses, energy producers, et. al., threatens to break up Bush’s already-thin potential governing coalition. Giving the Washington Post and New York Times front-page ammunition on children, health care, and safety is totally counterproductive. Left to its own devices, the root-canal wing of the GOP will soon be arguing that ketchup is a nutrient.

Sure, there’s going to be pork in the budget. Why are we shocked? It’s part of the congressional job description. But think of this: What Congress hasn’t done in fifteen years is reduce personal tax rates. That’s where the conservative obsession should now be focussed.

Growth-inducing tax relief is the most reliable way to limit federal spending. The public demands fewer government subsidies and services during economic good times as jobs and wealth replace the dole. Significant reform legislation — such as the landmark, budget-cutting welfare reform of 1996 — is more plausible when the economy is expanding. This will certainly hold true for the private-investment-account reform of Social Security.

However, budget cutting when the economic pie shrinks is a political non-starter. The Bushies should wait for the next recovery cycle and then launch full-scale tax and spending reform, simplifying tax rates and eliminating unnecessary agencies and pork-barrel handouts to corporate groups and others. Now, however, as the economy continues to turn down, benefit receivers will not go quietly off into the night.

During the two-decade-long, economic-growth supercycle of the 1980s and 1990s, continued prosperity shrunk government as never before. The share of the nation’s gross domestic product absorbed by federal budget spending dropped to 18.2% from 23.5%. Non-entitlement discretionary spending fell to 6.3% from more than 10%. Domestic discretionary spending eased to 3.1% from 4.5%, with only a 4.2% yearly growth rate — much less than the rate of rise of nominal GDP.

If it takes a little budget vigorish to immediately lower personal and capital-gains tax rates, I say go for it. A few more roads, highways, and harbors, even the occasional judgeship: I say go for it. The public doesn’t want vetoes, it wants economic recovery. Traditional GOP budget-cutters should move to the supply side and realize that growth is the best way to limit government. Take the road less traveled, and cut tax rates.



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