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By W. James Antle III
Economic conservatives appear to approach policy debates according to the strategy some advised the United States to adopt during the Vietnam war: Declare victory and go home. At least that is what is apparent in their reaction to the shrunken version of President Bush’s economic stimulus plan passed by Congress. To be sure, aside from the federal handout to state governments, it isn’t a bad bill. It cuts the top marginal income tax rate from 38.6 percent to 35 percent. Dividends and capital gains taxes are cut to 15 percent retroactive to January 1 and May 6, respectively. Depreciation write-offs are boosted from 30 percent to 50 percent while small-business expensing is quadrupled through 2005. Child tax credits won’t do much for economic growth because they have no real incentive effect, but it’s always nice when families retain more of their income. This tax cut, unlike the on passed in 2001, is front-loaded to take place now. Given the Republicans’ slim majority in the Senate – and the squishy ideological composition of the Senate GOP conference – along with the Herculean efforts required to jam the most tax relief possible into the allotted budget window while staying within ridiculous dollar limits set according to static revenue estimates, it’s easy to imagine a far worse result. Indeed, several compromise stimulus plans that nearly passed were far worse. Politics is the art of the possible and a very strong case could be made that this was the best tax cut possible under the present political circumstances. Still, did it merit the almost unqualified euphoria it elicited from economic conservatives outside of government? This tax cut has gotten emphatic cheers not only from fiscally conservative congressmen from the economic-growth wing of the Republican Party, whose reaction is understandable, but by policy wonks and intellectuals whose aspirations should be guided more by ideas than political possibility. Syndicated columnist Bruce Bartlett described it as “one of the best tax bills in history,” perhaps second only to Ronald Reagan’s historic tax cuts. Stephen Moore of the Club for Growth was equally bullish, echoing the sentiment that this “is the most pro-growth tax legislation since President Reagan’s 1981 tax cut” in a column for National Review On-Line. Steve Forbes, who called for a 17 percent flat tax during his presidential campaigns, was similarly effusive in his television appearances. Just a few years ago, as moderate a Republican as Arlen Specter was calling for a flat tax. GOP Reps. Dick Armey and Billy Tauzin were holding debates on whether it was better to replace the current tax system with a flat tax or a national sales tax. An obituary in Human Events for the late Congressman John Rosselout noted that in his first campaign he had called for ending the federal income tax altogether. None of these ideas would advance very far in today’s political climate. In fact, National Review senior editor Ramesh Ponnuru has argued that by focusing on fundamental tax reform at the expense of more incremental policy changes, economic conservatives have made the same mistake with regard to tax-cutting that social conservatives have made by focusing on a human life amendment in trying to curb abortion. But the question is not so much about what politicians – like the Bush administration or Republicans in Congress – should do as much as what economically conservative policy experts, activists and pressure groups should be holding out as their objectives. The positions they forcefully defend in the marketplace of ideas now may be politically feasible tomorrow; they should not limit themselves to advocating what is politically practical today. One area where economic conservatives should ignore existing political constraints and push much harder is government spending. The supply-side notion that low taxes are in the long term compatible with constant public program expansion was disproved by the Reagan experience. Yes, lower marginal tax rates increase economic growth. Yes, a growing economy enlarges government revenues. But if spending continually outstrips revenues – or economic growth falters due to other factors – the resulting budget deficits will create pressure for taxes to reverse their descent. Whatever the economic effects of deficits – and a strong case can be made that while they are nowhere nearly as significant as the likes of former Treasury Secretary Robert Rubin claim, they are not as benign as most supply-siders assert – the political effect they have in undermining public confidence in tax cuts is indisputable. Large segments of the public were willing to back partial reversals of the Reagan tax cuts because of the 1980s and ‘90s deficits; deficits also made many people reluctant to support further tax cuts proposed by Bush. Writing in Tech Central Station, the Cato
Institute’s Veronique de Rugy and Tad DeHaven pointed out that Bush’s
spending record is worse than Reagan’s at comparable points in their
administrations. “Under President Bush, real total outlays are
estimated to increase by 13.5 percent as opposed to 6.8 percent under Reagan,”
they wrote. “More importantly, total real discretionary outlays are set to
increase by 19.5 percent under the Bush administration while they increased by
only 2.8 percent under Reagan.” Part
of this may be attributable to a necessary military build-up: Discretionary
defense spending climbed 19.2 percent during Reagan’s first three years in
office compared to 21.2 percent under Bush.
But, as de Rugy and DeHaven report, non-defense discretionary outlays
were cut 13.5 percent under Reagan while increasing 18 percent under Bush. This
is despite the fact that Bush has had a more favorable congressional composition
and has not vetoed any spending bills. Scarcely anyone is arguing for spending restraint on fiscal, economic,
constitutional, size-of-government or any other grounds.
Instead of abolishing federal agencies and departments, new ones are
being created. Many economic conservatives have also bought into the fallacy that the
Federal Reserve is pursuing an overly tight monetary policy.
Rather than allow bad investments to liquidate themselves and the free
market to undertake its internal cleansing process, they propose more liquidity,
more growth in the money supply, more private debt and government interventions
to forestall the inevitable. On
these issues, Larry Kudlow makes scarcely more sense than Paul Krugman.
Near-zero interest rates and monetary growth have failed to induce
recovery in Japan; these same conservatives would recognize the error of these
policies if their delivery mechanism was instead direct federal subsidies to
uncreditworthy businesses. But
outside of ignored economists from the Austrian school, nobody challenges the
bipartisan, transideological consensus. Bush has been able to get a couple of decent tax cuts through Congress.
So what if economic conservatives aren’t pushing for bigger tax cuts,
less spending and reigning in the Fed? The
problem is that if the tax cuts aren’t big enough to overcome the effects of
massive government spending, pretty big government borrowing and the inevitable
failure of businesses that acquire credit and take on debt thanks to a loosey-goosey
monetary policy, the public isn’t going to conclude that the tax cuts were too
small or blame the other aspects of federal economic policy.
They are going to be receptive to the steady Democratic talking points
arguing that the tax cuts failed to stimulate growth but succeeded in
bankrupting the federal Treasury. This line of argument nearly succeeded in the wake of the president’s
first tax-cut success in 2001. It
was of course ridiculous to blame a tax cut that mostly hadn’t happened yet
for the economic effects of an economic contraction already underway by the time
they were signed into law. Moreover,
most of the tax cut that had taken effect consisted of Keynesian rebates and
credits rather than incentive-enhancing marginal-rate reductions.
But the Democrats had the advantage of being able to justify their logic
by juxtaposing a misleading economic timeline with simple cause and effect.
While the war on terror has thus far prevented them from translating this
drumbeat into election victories, it surely is a primary reason why the tax cut
ended up being smaller than the one the White House originally proposed. Conservatives err when they conclude that the most constructive role they can assume under a Republican administration is that of cheerleader. Now is the time to begin promoting policies beyond what is conceivable in the contemporary political environment. If nothing else, the opportunity to think boldly should be taken while there is an administration in which economic conservatives have influence.
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