Politics & Policy

Big Foot Vs. Invisible Hand

Conservatives taken to the cleaners.

The passage of President Bush’s ten-year, $350 billion tax cut has put a bounce in the step of conservatives while casting a pall of gloom upon their liberal brethren. Yet it’s unclear to us exactly why devotees of limited government are cheering while advocates of activist government are booing. Our view of the facts suggests that both the Left and the Right are reading off the wrong political scripts. The Left should be popping the champagne bottles and the Right should be wondering how they ended up being taken to the cleaners.

The president sold the tax cuts as a good-old-fashioned Keynesian stimulus measure. “My proposal,” Bush said, “is based upon this principle: If your economy is slow, you need to increase the demand for goods and services.” While Bush’s tax cut is admittedly not a particularly muscular attempt at providing this short-term stimulus (one of the few facts that both liberal and conservative economists agree on), the Left can cheer the fact that — rhetorically at least — the leader of the Republican party has repeatedly and publicly embraced the one macroeconomic theory that justifies big government in spades.

Ironically, this GOP stamp of approval comes at a time when most academic economists have already quit this school of thought. If ideas indeed have consequences in politics, Republicans — by further cementing public opinion behind Keynesian orthodoxy — will find it difficult if not impossible in the future to replace the big foot of government with the invisible hand of capitalism in course of managing future business cycles.

Then there’s the curious deficit fight. While the Left pounds away at the red ink, most of them are happy to preach the Keynesian gospel to justify increased spending. But big-time deficits are part and parcel of the orthodox Keynesian prescription for moving sluggish economies out of the doldrums. You can’t be a Keynesian in the morning and a Monetarist at teatime.

The Right’s total abandonment of balanced budgeting is even more curious. Sure taxes are unpleasant to pay. But someone, someday has to pay for the government we’re buying every year. Deficit spending just puts off the day of reckoning — but with interest. Trading off smaller taxes today for larger taxes tomorrow is a curious position for anti-tax conservatives to take.

Machiavellian conservatives usually fall back when pressed on this to what we’ll call “The Milton Friedman Hypothesis.” That is, the only way to restrain the growth of government in the long run is to starve it of revenues. This is certainly a plausible argument at first glance, but where’s the beef? Government this year will be about $400 billion in the red but spending will increase nonetheless by at least 7.4 percent. Republicans control the House, Senate, and presidency and we’re in a non-election year. If political planets aren’t properly aligned now for an attack on government spending, then when will they ever be?

Moreover, the Friedman Hypothesis is testable. If one runs a regression analysis and controls for the business cycle, no relationship can be found between the growth of federal spending and the size of the federal deficit since World War II. It might well have held in earlier days, but the public’s tolerance for debt over the past six decades demonstrates that, if deficits are a restraining factor on politicians, we’re a long way from crossing that threshold of red ink.

Conservatives may well be right to argue that the Bush tax cut will enhance long-term economic efficiency by reducing the double taxation of dividends and reducing the marginal income tax rate applied to high wage earners, but such reforms do not require deficit spending. Whether the modest gains in economic efficiency will offset the long-term damage done by exploding deficits and new distortions introduced to the tax code is anyone’s guess.

So this is the “Great Tax Fight of 2003″ in a nutshell. Both liberals and conservatives happily and without great argument sign off on the purchase of a $2.3 trillion dollar government (with more spending surely to come). But as a matter of high principle, liberals argue that we should put 11 percent of this year’s tab on the national credit card while conservatives argue on high principle that we should put 17 percent of it on said national credit card. Conservatives are nearly drunk with glee over an “historic” tax cut that will reduce government’s take on the private sector by all of 0.2 percent over ten years, while liberals bemoan that this minute reduction in federal revenues ushers-in a Dickensonian world of hellish squalor. How partisans of either side can get their blood up over such an argument is beyond us.

Once we clear away the political smoke, it is crystal clear that conservatives in Washington have completely abandoned their campaign against big government. Rather than tackle spending head-on, Republican politicians trot out tax cuts as a symbolic surrogate and Republicans respond with ideological gusto, forgetting the fact that tax cuts have nothing to do with the size of government. They have to do with how we pay for government.

Conservatives who are ambivalent about how we pay for government should be reminded that deficit spending invites more spending than would likely be the case if Republicans actually had to swallow hard and raise taxes to pay for the spending bills they’re busily whooping-through the Congress. After all, you’ll usually buy more of something when you think you’re getting it at 20-percent off with payments due…probably not in your tax-paying or vote-getting lifetime (that’s the next generation’s problem).

This collapse of Republican principle shouldn’t surprise. George Bush’s 2000 campaign slogan of “compassionate conservatism” was a not-so-veiled call for the GOP to give up the green eyeshades once and for all, a call Bush made reality during the campaign when he excoriated House Republicans for contemplated cuts in the growth of domestic spending. Domestic-spending increases under President Bush, accordingly, are among the largest in postwar history. And all the while, many conservative activists happily cheer the administration on, either oblivious to the fact — or cynically all too aware of the fact — that political success is being achieved at the expense of the one thing — limited government — that supposedly divides the two parties. Annual tax-cutting campaigns, the White House hopes, will distract fiscal conservatives from the reality of what’s going on here.

Liberals should revel in this little-noticed turn of events. If deficits no longer matter and fights over the size of government are off the table, how bad can things be? Conservatives who care about limited government, on the other hand, should despair over developments within the Republican party and the conservative movement as a whole. As long as fiscal conservatism is defined as taking a “no new tax” pledge as opposed to a “no new spending” pledge, the limited government crowd will find themselves increasingly irrelevant to American politics.

Jerry Taylor is a policy director at the Cato Institute in Washington, DC. Peter VanDoren is editor of Cato’s Regulation magazine.

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