Politics & Policy

Flawed Fiscal Philosophy

Bush should listen to Friedman and Hayek.

The fiscal news out of the White House continues to be appalling. The Bush administration now admits that the recently enacted $400-billion prescription-drug program will actually cost $534 billion. This week President Bush unveiled a record $2.4 trillion budget proposal. Despite a few nominal program cuts made by the White House, overall federal spending is spinning out of control

A key reason for this is the president’s flawed fiscal philosophy.

The president has been right on target when it comes to taxes and their effect on the economy. Because of his persistence, federal income taxes have been lowered, the marriage penalty has been reduced, the death tax is being phased out, and taxes on capital gains and stock dividends have been cut. The economy has responded with higher growth and increased productivity.

Yet Bush fails to tie his tax cutting to anything resembling spending discipline. If it’s a noble cause, then the president seems willing to spend the people’s money on it. Besides his costly prescription-drug program, Bush wants to spend billions of tax dollars on new government initiatives ranging from a manned moon mission to programs for strengthening marriage to increased spending on existing programs such as the National Endowment for the Arts.

The president seems not to fully realize that taxation and spending policies are more than just fiscal tools to improve economic performance or address group demands. In addition, these policies determine the extent of individual liberty in our society. In this regard, Bush should heed the advice of two Nobel Prize-winning economists and conservative icons, Milton Friedman and Friedrich Hayek.

Friedman has always supported tax cuts for more than just their effect on the economy. A few years ago, he wrote, “I have long favored cutting taxes at any time, in any manner, by as much as possible as the only way of bringing effective pressure on Congress to cut spending.” Bush, however, has not used lower taxes as leverage to cut the congressional allowance. Instead he has acted like the parent who gives his child everything the child wants.

For Friedman, taxation and spending policies are not ends in themselves, but rather the ” means to the ultimate objective of increasing the freedom of the individual to use their resources in accordance with their own values — as President Reagan put it, to get government to get off our back.”

To get government off our backs, spending, in addition to taxation, must be curtailed. Friedman’s recommendation: “A real cut in direct and indirect government spending as a fraction of national income is required to achieve that basic objective.”

Government spending on noble causes, even those staked out by Bush, still adversely affect the individual liberty of Americans. In his famed book Road to Serfdom, which celebrates its 60th anniversary this year, Hayek warned that when government seeks to impose specific effects on people, “It must, of necessity, take sides, impose its valuations upon people and, instead of assisting them in the advancement of their own ends, choose the ends for them.” The National Endowment for the Arts, for example, has certainly been guilty of imposing the government’s values on people in its choice of art projects to fund.

Hayek further observed “that the most important change which extensive government control produces is a psychological change, an alteration in the character of the people.” Although it may take generations, “even a strong tradition of political liberty is no safeguard if the danger is precisely that new institutions and policies will gradually undermine that spirit.”

One can see such a transformation occurring in the American people. A people who once demanded “give me liberty or give me death,” now say “give me a government program” as an answer to any perceived problem.

An expansionist government, even in the pursuit of noble causes, reduces freedom. That’s why the current federal spending spree isn’t just a budget issue, but a freedom issue. Given the unrest among his conservative base, President Bush must rediscover the importance of limited government to the maintenance of a free people and the promotion of a free society.

Lance T. Izumi is senior fellow at the Pacific Research Institute for Public Policy.

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