Successful economic ideas usually end up being taken too far. Democrats dominated the middle part of the 20th century, thanks in part to...
Successful economic ideas usually end up being taken too far.
Democrats dominated the middle part of the 20th century, thanks in part to their vigorous response to the Great Depression. They used the government to soften the effects of the Depression and to build the modern safety net. But they failed to see the limits of the government’s ability to manage the economy and helped usher in the stagflation of the 1970s.
Ronald Reagan then came to power promising to cut taxes and unleash the forces of the market. And Democrats spent the next dozen years struggling to absorb the lessons of their failures.
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More than a few people believe the Republican Party is in a similar place today.
Dale Jorgenson, the eminent expert on productivity (and a Republican), was asked what had been the positive aspects of President George W. Bush’s economic policy. “I don’t see any redeeming features, unfortunately,” he said. After Republicans opposed the stimulus package this year, The Financial Times, not exactly a liberal organ, called the party’s ideology harebrained. When Olympia Snowe explained recently why she might be the only Republican senator to vote for an overhaul of the health-care system, she suggested it was because her party had moved so far to the right.
But perhaps the most persistent — and thought-provoking — conservative critic of the party has been Bruce Bartlett. He has worked for Jack Kemp and presidents Reagan and George H.W. Bush. Bartlett has been a fellow at the libertarian Cato Institute and the conservative Heritage Foundation. He wants the estate tax to be reduced, and he believes President Obama should not have taken on health-care and climate-change bills this year.
Above all, however, he believes the Republican Party no longer has a credible economic policy. It continues to advocate tax cuts even though the recent Bush tax cuts led to mediocre economic growth and huge deficits. (Numbers from the Congressional Budget Office show Bush’s policies are responsible for far more of the projected deficits than Obama’s.)
On the spending side, Republican leaders criticize Obama, yet offer no serious spending cuts. Indeed, when the White House has proposed cuts — to parts of Medicare, to an outdated fighter-jet program and to subsidies for banks and agribusiness — most Republicans have opposed them.
No fiscal responsibility
How, Bartlett asks, is this conservative? How is it in keeping with a party that once prided itself on fiscal responsibility — the party of President Dwight Eisenhower (who refused to cut taxes because the budget wasn’t balanced) or of the first President Bush (whose tax increase helped create the 1990s surpluses)?
“So much of what passes for conservatism today is just pure partisan opposition,” Bartlett said. “It’s not conservative at all.”
He became well-known several years ago for attacking the younger Bush, in a book called “Impostor.” But Bartlett has turned out to be more interesting than most people who publicly break from their party. In a series of columns for Forbes and in a book that comes out next week, “The New American Economy,” he has started to describe a new conservatism. He, in effect, is laying intellectual groundwork for a Republican Bill Clinton — the politician who curbs his party’s excesses.
You can argue that this sort of reassessment should not make conservatives feel insecure. In many ways, they have won. Obama, like Clinton, has proposed increasing the top marginal tax rate to a level that’s lower than it was for most of the Reagan administration. Most Democrats now acknowledge the central idea of supply-side economics: Tax rates matter.
The best parts of supply-side economics have been “completely integrated into mainstream economics,” Bartlett writes. “What remains is a caricature — that there is no problem that more and bigger tax cuts won’t solve.”
His conservatism starts with the idea that high taxes no longer are the problem, even if complaining about them still makes for good politics. Federal taxes this year are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.
As the economy recovers, taxes naturally will return to about 18 percent of GDP, and Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s OK.
For one thing, past tax increases have not choked off economic growth. The 1980s boom didn’t immediately follow the 1981 Reagan tax cut; it followed his 1982 tax increase to reduce the deficit. The 1990s boom followed the 1993 Clinton tax increase. Tax rates matter, but they’re nowhere near the main force affecting growth.
And taxes are supposed to rise as a country grows richer. This is Wagner’s Law, named for the 19th-century economist Adolf Wagner, who coined it. As societies become more affluent, people demand more services that governments tend to provide, such as health care, education and a strong military. Federal taxes a century ago equaled only a few percent of GDP. The country wasn’t better off than it is today.
Medicare, yes; taxes, no
Modern conservatism, Bartlett says, therefore should have two main economic principles. One, it should prevent government from getting too big. There is no better opportunity than the health-care system, given that the current bills don’t do nearly enough to slow spending growth. Instead of pushing the White House to do better, however, congressional Republicans are criticizing any effort to slow spending as an attack on Grandma. They evidently are in favor of big Medicare, just not the taxes to pay for it.
The second goal should be to keep taxes from being increased in the wrong ways. Supply-side economics is based on the idea that higher tax rates discourage work and investment, two crucial ingredients for economic growth. But higher taxes on consumption don’t have nearly the same effect as taxes on incomes or companies.
If anything, consumption taxes encourage savings, which lifts investment.
Bartlett likes the VAT
So Bartlett advocates a value-added tax — a federal sales tax — which most other rich countries have. Canada has a value-added tax that raises revenue equal to 2 percent of its GDP, and its economy has grown faster than this country’s over the past decade. Britain raises 6 percent of its GDP through such a tax, and Sweden raises 9 percent, and their economies have grown as fast as the U.S. economy.
Some people don’t like a national sales tax because they believe it inevitably will hurt the poor. There are many specific ideas for cutting hundreds of billions of dollars from the federal budget to keep taxes from rising much.
But Bartlett has a larger point. One of the country’s two political parties has no answer to an enormous economic issue — the fact that the federal government cannot pay for its obligations. This lack of engagement is a problem, just as it was a problem when Democrats were saying that welfare was working, teachers unions always were right and stagflation couldn’t happen.
For now, there is little reason to believe Republicans are on the verge of a Clinton-like reform. But it is difficult to see how they ultimately can stick to their current platform. At some point, the government will have to figure out how to pay for the baby boomers’ retirement. “Trends that can’t continue,” as Bartlett says, “don’t.”