In the Agora: Whither Fiscal-Conservatism?

August 02, 2007

Whither Fiscal-Conservatism?

During the 2004 Presidential campaign, many commentators remarked about how Howard Dean was a "fiscal conservative," including Dean himself. This bothered me because it seemed like the bar for being a fiscal conservative had been set pretty low. To give the devil his due, Dean did have an impressive record of 11 balanced budgets in a notoriously, er, Left-leaning State. But this is mere fiscal responsibility, not conservatism. To be sure, responsibility with public finances is admirable, and we should welcome its embrace by the Democratic Party. Fiscal conservatism does include responsibility, but it also holds something more. It includes shrinking government by keeping taxing and spending to the lowest levels. This is imperative because of an inherent deference to the market and non-profit sectors and an awareness of the distortionary nature of government interference in the economy. Of course, some Democrats may acknowledge, even in a limited sense, both of these reasons, but in public discourse from the Dean campaign onward, fiscal conservatism only means balanced budgets (Dean hardly made shrinking the size of Vermont State government a priority).

If I can strain this analogy a bit further, the GOP could have sued for trademark infringement. Except trademarks expire through non use.

And in this respect, Republicans are playing it smart. The public's demand for government is actually quite high, and so government is big. Their last, half-hearted suggestion that even made an appearance of scaling things back, Social Security reform, went nowhere. To switch parties for a second, Harry Browne had a standard line he presumably thought would win him converts: think of your favourite Federal program -- would you give it up if it meant you never had to pay income tax again? My guess is that most Americans would say No. Despite animosity toward things like the Bridge To Nowhere, Americans like government programs, especially the big things that count the most: national defense and entitlements. The GOP aren't going anywhere making a full-on assault on spending until those cultural attitudes change.

One thing they can knock around are taxes. Cutting taxes has been pretty popular, but Republicans didn't just do it for the votes. There's also the theory, backed by some luminaries, that if you cut off the revenue stream, you can starve the beast. Pretty sneaky, eh? Except some tentative new research says it doesn't work. From the Economist's Free Exchange:

The fact that government spending has grown at practically bacterial rates since then has done more than a little to discredit the idea among moderate conservatives. But that could be an anomaly, caused by some odd political circumstances or the War on Terror. Now a new working paper by the husband and wife team of David and Christina Romer, both of the University of California-Berkeley, tests the Becker and Barro premises with a fresh look at the data, and discovers that the beast continues to eat quite well in the wake of tax cuts.

In this careful (and data-packed) study, the Romers take a look at federal tax and budget trends since 1947. In doing so they noticed that not all tax changes or spending hikes were good candidates for a strong statistical test of the starve-the-beast premise. Some tax increases over this period -- like the creation of the federal fuel tax to pay for the interstate highway system -- were positively correlated to increases in spending. In this sort of case, the tax changes are driven by the spending decisions, not vice versa. In fact, keeping them in the analysis skews the results. So, argue the Romers, these sorts of tax actions need to be tossed out of the dataset to give the starve-the-beast theory the best chance of success. Yet, even after doing this and adding a lag-effect variable, the Romers found no statistically significant drop in total government spending after taxes were cut. In fact, what they found instead was a slight (but statistically insignificant) rise in spending relative to the trend.

As spending continues to skyrocket and the Bush tax cuts grow less popular, fiscal conservatism seems headed toward defeat at the national level. What role can it now play except pleading for . . . a balanced budget?

Posted by Zach Wendling at August 2, 2007 08:29 PM

Comments

I hope that the citizens of Minnesota get a refund for the gas tax that paid for that highway bridge.

Posted by: Dave S. at August 2, 2007 10:18 PM | permalink

After the last 6 years, being even in the vague neighborhood of fiscally responsible is downright fiscally _reactionary_.

Posted by: philosopher at August 2, 2007 10:46 PM | permalink

I hope that the citizens of Minnesota get a refund for the gas tax that paid for that highway bridge.

That's about as ill thought-out a comment that I've read anywhere in a while. According to the Minneapolis St Paul Star Tribune (this is just for YOU, Anonymous), "Minnesota's annual shortfall in transportation funding has been estimated at at least $1.8 billion a year."

There had just been an unsuccessful bi-partisan effort in the state legislature to override Gov Pawlenty's veto of a transportation bill passed by both houses that would have provided less than half that amount...

Posted by: JohnS at August 3, 2007 07:18 AM | permalink

Great post. I fear that our country may be headed the way of the old quote that says:

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

Posted by: Eric Seymour at August 3, 2007 09:40 AM | permalink

Minnesota spent 1 billion on a single light rail line since the I-35W bridge failed inspection, not to mention that Minnesota has probably spent billions more on other social programs.

We must limit government to the few market failures out there such as rule of law and national security. Government should do few things and do them well, instead of doing many different things badly.

Posted by: Matt at August 3, 2007 11:52 AM | permalink

August 02, 2007

Whither Fiscal-Conservatism?

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