In light of the unending debate on government’s economic intervention, we publish this contribution from Thomas Palley, Ph.D. in Economics from Yale University. Mr. Palley is the founder of Economics for Democratic & Open Societies, a partner organization of Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, January 9, 2006 edition, page S1/5.
Thirty years ago the economic debate between Democrats and Republicans was framed in terms of the case for bigger versus smaller government. Democrats emphasized market proclivities toward monopoly and inequality, failure of markets to efficiently provide public goods, market incentives to pollute, and above all the tendency of markets to produce less than full employment. Republicans countered that such market failures were over-stated. More importantly, using government to solve market failures could lead to even worse problems of government failure associated with bureaucratic inefficiency, policy misjudgments, and private capture of regulatory agencies. In an imperfect world, Republicans argued that it is better to live with the problem of market failure and opt for small government, than try and solve it by resort to big government.
This bigger versus small government debate was one of real substance, with strong arguments on both sides. Though differences were sharp, all agreed on the need for “good” government. But a funny thing happened on the way to the forum. Over the last three decades the Republican Party has morphed from a party of “small government” into an “anti-government” party. This morphing has had profound political consequences. Whereas the party of small government favored good government, the anti-government party actively promotes bad government knowing that it feeds popular anti-government sentiment.
The drift toward bad government began with the Reagan budget deficits of the 1980s. Conservatives had historically been against large budget deficits, calling themselves fiscal conservatives. Indeed, a core complaint against bigger government was that it promoted over-spending and large deficits. However, the Reagan era introduced a new political line whereby massive budget deficits could finance short-term political gains while simultaneously imposing long-term financial handcuffs on government.
In the short-term, large spending programs (such as weapons procurementAnd highway construction) reward the political base. At the same time, large deficits rack up large government debts on which interest must be paid. These interest payments continue long into the future, thereby pre-committing future tax revenues and leaving less room for future discretionary spending. Moreover, the interest accrues to bondholders who belong disproportionately to the Republican base. Lastly, such pre-commitment is especially potent if deficits are racked up at a time of high interest rates, as happened in the 1980s.
The same logic that encourages anti-government advocates to push irresponsible spending policy holds with even greater force for tax policy. Tax cuts usually go predominantly to the well to-do because they have the income and pay top tax rates. However, this skewing is profoundly worsened when the focus is cutting taxes on unearned income (interest and dividends) and wealth transfers (the estate tax). Additionally, tax cuts worsen the budget deficit by reducing revenues, thereby tightening the financial handcuffs on future spending policy. Most pernicious of all, there is an incentive to push bad tax policy, and even the most complicated poorly designed tax cuts are deemed desirable. They too reward the political base and handcuff future policy. But they also fuel resentment of the tax system, strengthening popular anti-government sentiment.
All of the above features have been clearly visible under the Bush administration. It has pushed grossly inequitable tax cuts, and created large structural budget deficits. At this stage of the business cycle, the budget should be close to balance. Instead, it is stuck around three percent of national output, which promises to sabotage future government finances. The budget has become a pork barrel, exemplified by the Medicare drug benefit. Rather than looking for the simplest most cost effective way to provide a drug benefit for seniors, the administration chose a complicated costly scheme that bars government from using its size to get discounts, limits price competition and rewards the pharmaceutical companies who are part of their political base. If one were absolutely cynical, it is even possible to view incompetence and misconduct in high places as logically fitting in with the anti-government agenda. Such behaviors discredit government and undermine public trust.
Restoring the sensible bigger versus small government debate of the past calls for outing the “soft treason” of the anti-government agenda. But there is a strange irony to this unhappy tale. While the small government Republican Party was morphing into an anti-government party, an important segment of the bigger government Democratic Party was morphing into small government Democrats. That means the old small versus big government debate between Rockefeller Republicans and Kennedy Democrats is now played out between right and left of the Democratic Party, which explains why Democrats are so divided. It also means that Democrats need to recapture confidence in their historic political identity as much as do Republicans.