Jerry Taylor and Peter VanDoren of the Cato Institute have a very controversial but interesting article on the national budget in NRO. They argue that under the Bush Administration conservatives are getting the shaft while big-government liberals are really winning the day.
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.
Taylor and VanDoren make the argument that tax cuts are being used as a "symbolic surrogate" for what is really needed – reducing the increasingly high levels of federal spending. They also demolish the argument that tax cuts are a way of starving the government of revenue:
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.
Taylor and VanDoren have a point here. The idea that the Bush Administration wants to use tax cuts to starve the government of revenue doesn’t work. First, the idea itself doesn’t work. Second, if that were true it would be politically stupid – the short term effects of such a plan would be devastating.
If anything, the Bush Adminstration’s stategy seems to be to please as many people for as much time as possible. Unfortunately, that strategy can’t last forever. Bush as the public trust on the war on terrorism, and narrowly has the public on his corner economically, but he’s not yet made the difficult decisions that will need to be made.
Bush must cut spending. It’s as simple as that. You can’t have a $400 billion deficit and raise the level of federal spending well beyond the rate of inflation. That’s exactly what a liberal would do, and it just doesn’t work.
Bush needs to go back to his original campaign promises – which means getting Social Security reform back on the table. He needs to push for real Medicare reform, not more entitlement spending that’s guaranteed to add at least another $100 billion to the deficit. He needs to push for real and substantive tort reform. He must hold every single federal agency to a rate of funding no more than the rate of inflation until the budget is balanced.
None of those decisions will be easy, but they are all necessary. The only way in which the budget can be brought to a manageable level is by controlling spending. Tax cuts will help rebuild the economy, but they only fix one aspect of the problem. As Taylor and VanDoren note:
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.