Why spending matters

By W. James Antle III
web posted July 17, 2000

George W. Bush's "compassionate conservative" gambit appears to be paying off on at least two fronts. First, Gov. Bush has maintained a comfortable and steady lead over the vice president in the polls. Second, his is a more philosophically consistent "kinder, gentler" Reaganism than his father's.

Bush has been able to appeal to the center while still substantially relying on conservative principles. His core campaign agenda consists of tax cuts, free-market reform of Social Security and missile defense. This is a refreshing change from the frantic left-right scampering that characterized Republican presidential campaigns in 1992 and 1996, when the senior George Bush and Bob Dole kept shifting dramatically to alternately shore up the base and woo swing voters. If the pollsters are to be believed (and when is the last time CBS News and the New York Times dissembled on behalf of Republican candidates?), it is playing well in Peoria.

So it is very tempting for conservatives to look the other way on government spending, where Bush and leading Republicans generally are becoming increasingly slack. Perhaps taking Jack Kemp's long-time counsel to conservatives about eschewing "root-canal politics," Bush has not proposed reducing or abolishing any government program of any size. He has not made any spending cut a prominent agenda item of his campaign. He has come to the defense of the Department of Education, which the Republican platform has been vowing to abolish for 20 years.

Moreover, Bush has called for at least $65 billion in new spending initiatives on a whole host of issues ranging from education to mass transit to health care. This is of course pocket change compared to Al Gore's new expenditure proposals, and should definitely be weighed against the many conservative stances Bush has taken during this campaign. But the fact that we have a Republican candidate who is not calling for any spending cuts and instead is calling for spending increases at a time when the federal budget approaches $2 trillion is very disconcerting indeed.
Bush can be forgiven for not wanting to duplicate the public reaction against Newt Gingrich's budget during the infamous 1995 government shut-down debacle. It is less easy to understand why conservative intellectuals and journalists are so eager to cast aside fiscal responsibility.

Ramesh Ponnuru and John J. Miller opined in National Review On-Line that conservatives should ignore Bush's new programs and focus instead on his tax cuts and Social Security reforms, because the success of these proposals will make it easier to limit government later. Lawrence Kudlow similarly praised Bush for adhering to Ronald Reagan's "smart politics," recalling that the Gipper wisely rejected the counsel of his "more libertarian economic advisers" who suggested he "roll back the New Deal."

Indeed, by communicating conservative principles in a way that resonates with a broad cross section of America and emphasizing growth and opportunity, Bush does seem to be emulating Reagan's successes. But in their refusal to challenge federal spending and income redistribution directly, Bush and his conservative partisans appear ready to repeat Reagan's failures as well.
It is true, as supply-siders maintain, that tax cuts and deregulation help the private sector create more resources for everybody. It is also true that the economy ultimately grew its way out of the 1980s and ‘90s deficits, in no small part due to the incentives put in place by President Reagan's economic program and what Kudlow calls the New Investor Class. Supply-side economics, aside from some of its adherents' failure to understand the economic folly of excessive monetary expansion and lax credit, is generally right in its economic diagnosis but often leads to incorrect political conclusions.

Every conservative worth his salt knows how Reagan slew the inflationary beast, cut tax rates and unleashed an engine of growth that created more than 21 million jobs and added the equivalent of a West Germany to our GDP. They might even note that this expansion actually reduced the deficit from 6.3 percent of GDP in 1983 to 2.9 percent in 1989. Yet few know that Reagan's reluctance to roll back spending as aggressively as tax rates jeopardized rather than expedite all this.

Had federal spending grown no faster than the rate of inflation between 1979 and 1989, even with Reagan's tax cuts and defense build-up we would have had a budget surplus large enough to repeal the corporate income tax or cut every Americans' Social Security taxes by one-third. There would have been no large-scale government borrowing or budget deficit to speak of, a smaller national debt, significantly lower taxes and a top marginal income tax rate of 28 percent.

Instead, spending grew even faster than the rate at which the Reagan boom boosted tax revenues. More public debt was amassed than was necessary to win World War II and taxes inevitably reversed their descent – even before the elder George Bush was elected president. The deficits at their peak absorbed 71 percent of available investment funds and thus worked against lower tax rates. Moreover, the deficits were ultimately responsible for why we today have seen the top marginal tax rate creep back up to 39.6 percent.

Liberals love to assert that the savings and loan disaster was the result of President Reagan's deregulation, glossing over the prominent Democratic role in that crisis (consider that four of the Keating Five were Democrats, with John McCain being the sole Republican). But in fact, the whole situation is more attributable to exorbitant federal subsidies of depositors, the real estate industry and homeowners. If Reagan is to be faulted at all for the S&L crisis, his complicity to challenge that spending on middle-class interests is where the blame should lie.

Ultimately, Reagan's unwillingness to challenge spending in the S&L matter and allow the free market to do its work played a major role in the collapse of the real estate market at the end of the 1980s. His refusal to contain Medicare (with the massive cost-shifting its spending and regulations caused) contributed to the surge in health-care costs that ate away at many workers' wages. These factors, even before his successor's pledge-breaking tax hike, began the economic contraction of 1990 and undermined public confidence in all the marvelous things his administration actually had done for the economy.

Even with today's large surpluses, compared to the deficits Reagan inherited from Jimmy Carter, the stakes are similar for George W. Bush. As David Frum noted in his indispensable book Dead Right, post-Great Society government cannot forever be maintained with pre-Great Society taxes. Either big government or low taxes have to give way.

Tax rates are well below the stupefying 70 percent Americans in the top income brackets were faced with in 1981, so Bush's tax cuts will have considerably less Laffer Curve effect. There are substantial transitional costs to be reckoned with in moving toward a more private-savings model of Social Security. Even smaller federal programs have a life of their own.

Although budget frugality is the least popular aspect of conservative and Republican policies, without it all our other endeavors – at least as far as economic policy is concerned – are doomed to failure. It is not compassionate conservatism that indulges in spending binges and accepts big government. It is a foolish, as well as profoundly unconstitutional, conservatism. And ultimately it is counterproductive conservatism.

W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. His commentaries now also appear regularly in OpinioNet.

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