Reasonable economic conservatism

Published 11:23 pm Monday, March 17, 2008

By By Tray Smith
Reagan’s ideology soon became conservative orthodoxy; today, politicians and pundits claiming to represent the interest of America’s center-right majority refer to themselves as “Reagan conservatives.” However, in their zeal to purify the Republican Party of all-things-not-Reagan, these activists have ironically alienated a significant portion of the moderate, independent and conservative Democrats whose votes President Reagan captured for the GOP. Reaganism has become a mere euphemism for extreme conservatism that stands as the antithesis of many of the values Reagan championed.
This is especially true of modern economic conservatives, who remain attached to the “starve the beast” theory of the fiscal policy Reagan promoted throughout his presidency. The policy aims to force the government to reduce spending by reducing its revenue, as a child does if his allowance is slashed. Unlike children, however, the federal government has an almost unlimited ability to borrow money, which provides it with a source of income even when it loses resources. Every time government revenues have been reduced through tax cuts, Congress has taken advantage of that source and avoided making difficult budget decisions. In hindsight, this outcome should have been obvious. The government decides, through the force of law, how much money it spends and receives. What sensible beast is going to starve itself?
Some economic conservatives proclaim the government does not need to pay for tax cuts, because the economic growth generated from tax reductions more than offset their cost. During the last fiscal year, government revenues were indeed greater than any year prior to the enactment of the Bush tax cuts of 2001 and 2003. If these fiscal conservatives were true to their goal of a smaller federal government, however, they would prefer using the additional revenues generated from tax cuts to offset additional tax relief. Instead, they support retroactively paying the fiscal burden of a half decade of lower tax rates. Far from starving the beast, the supply side economists support feeding it.
This paradox leaves them in a convenient political position. On one hand, they strive to reduce the burden of government by forcing tax cuts. On the other, they will offset the budgetary affects of those cuts with the money they generate.
Government borrowing was once defended on the premise that public debt will not be fiscally harmful if it is owned by members of the public themselves. However, every time a member of the public invests money in a government bond, he chooses to save his money in the secure hands of Uncle Sam rather than the riskier private sector. Had the government not needed his money, though, that individual would likely have looked to save his resources in private funds, stocks and bond markets, generating capital for entrepreneurs to invest. Unlike government bonds, which finance earmarks and bureaucracy, capital generates new jobs, increased productivity and innovative projects.
Similarly, taxes absorb significant amounts of income that could otherwise be applied to investments, charitable donations and material purchases, also so the government can finance earmarks and bureaucracy. Thus, the argument that supply side economists use so vehemently to reduce taxes repeatedly regardless of the affect those tax cuts have on deficits are the same arguments that make the deficits they disregard an economic threat. That economic threat is compounded by two grim realities that make higher taxes irrefutably preferable to deficit spending. First, at the end of 2006, 44 percent of all U.S. government bonds were held by foreigners, leaving the federal government financially dependent on occasionally hostile nations. Second, interest on deficit financed spending makes borrowing a more expensive financing option. Last year, the interest on the United State’s government’s debt alone was more than $400 billion, enough to balance the entire federal budget.
While taxes may be preferable over deficits, they are by no means the best option to finance government programs. The best option would be not to finance those options at all, and significantly lower the percentage of the nation’s wealth spent by Washington. (Last year, it was more than one in every $5.) Such an outcome requires transcending the partisan divide in Washington, where Republicans demand lower taxes and Democrats demand higher spending and everyone pays lip service to lower deficits without advocating budget cuts. It is the magnitude the entire federal budget has on the economy that impacts the nation the most, not the portion of that budget paid for by debt or taxes.
Fortunately, Republican Presidential candidate John McCain, who describes economics as his weakness, understands the importance of analyzing the entire budget. He voted against President Bush’s tax cut plans because they were not sufficiently offset by budget cuts, and he rightly claims that had his advice been followed, we would be talking about more tax cuts today. It appears the GOP may have nominated its strongest economic thinker since 1992. Even the Gipper would be proud.
Tray Smith is a political columnist for the Atmore Advance. He is a student at Escambia County High School and can be reached at tsmith_90@

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