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Confessions of a supply-side deficit hawk
By W. James Antle III
There is a divide within the Republican Party on what constitutes the most important object of prudent fiscal policy: tax cuts or balanced budgets. We are seeing this division play out in the debate over President George W. Bush's economic stimulus package. The White House and the Republican congressional leadership believe it is crucial that we cut taxes to stimulate economic growth. Yet Sens. George Voinovich (R-OH) and Olympia Snowe (R-ME) provided the Democrats with the votes they needed to cut the latest Bush tax cut proposal in half based on their concern about the deficit.
Both sides of this debate can be said to have a storied ideological pedigree within the GOP. Historically, Republicans have been viewed as the party of fiscal responsibility and sound money. They have resisted increases in federal expenditures on the grounds that the federal budget should be balanced annually and the national debt should be low. They applied the principles of personal financial prudence to macroeconomics and public finance.
This ultimately made the GOP the logical home of conservatives, who believed in smaller government for its own sake and the importance of abiding by constitutional strictures. Conservative opposition to deficit spending was an outgrowth of their opposition to growing the federal government beyond its constitutionally authorized size and cost. These conservatives similarly believed that it was important for producers to retain and enjoy the fruits of their labor, necessitating a low tax burden.
Faced with the stagflation of the 1970s and the inability of Keynesian economic prescriptions to deal with it, a group of free-market conservative economists came to propound a theory known as supply-side economics. Whereas Lord Keynes' theories were based on the idea that recessions were caused by insufficient demand that could be rectified by increased government spending, supply-siders held that the key to economic growth was stimulating the supply side of the economy through improved incentives. The best way for discretionary fiscal policy to influence these incentives was by lowering marginal tax rates, thus raising the opportunity cost of leisure while increasing the marginal value of labor.
Congressman Jack Kemp (R-NY) and Sen. William Roth (R-Del.) became persuaded by this theory and offered the Kemp-Roth tax cut in 1978. Their bill would have cut marginal income tax rates by 30 percent across the board. Although the bill failed, it became the centerpiece of Ronald Reagan's economic agenda during the 1980 presidential campaign. After Reagan defeated President Jimmy Carter, he won the passage of an across-the-board 25 percent tax-rate cut. The result was an unprecedented economic boom that ended the years of stagflation.
But this was not the end of the story. Contrary to President Reagan's campaign promises, which reflected the traditional Republican advocacy of balanced budgets, persistent deficit spending and a doubling of the national debt followed. Many traditional Republicans joined the Democrats in blaming the tax cuts for the deficit and calling for a deficit-reduction strategy that included both new tax revenues and spending restraint. The Reaganites for their part countered that deficits were largely economically harmless and should be tolerated while supply-side tax cuts worked their magic (although the president himself remain at least conceptually committed to the idea that balanced budgets were desirable and rightly contended that pro-growth tax policies would lead to a greater tax yield in the long run). The deficit hawks and the supply-siders would find themselves in frequent conflict for many years thereafter.
It is here where we run into the worst excesses of both sides of this debate. Deficit hawks would like to imitate the failed economics of Herbert Hoover, who raised taxes in order to balance the budget during the Great Depression. These record income-tax rate and tariff increases further damaged the economy and actually prolonged the Depression, without helping public finances overall. More recently, George Bush (41) signed into law a deficit-reduction tax increase that worsened the 1990-91 recession, failed to cut the deficit and played a major role in costing him his reelection in 1992. The budget-balancing affects of Bill Clinton's tax increase are wildly overstated. By raising taxes to balance the budget without regard for the counterproductive impact on economic growth, Republican deficit hawks are actually emulating the fiscal policies of such liberal Democrats as Michael Dukakis, Mario Cuomo, Jim Florio and Gray Davis.
Supply-siders for their part have become so nonchalant about the deficit that they tend to ignore government spending entirely. Jack Kemp used to decry aggressive attempts to cut spending as "root canal politics." Lawrence Kudlow has suggested that efforts to shrink government would be politically detrimental to cutting taxes. Some even go so far to say that the deficit is a positive good and that as long as tax cuts continue, growth in federal expenditures should not be particularly worried about. In this excuse making for big government, some supply-siders have in effect become little more than conservative Keynesians.
While deficits are often preferable to tax increases and their impact on interest rates in the context of the entire economy and world borrowing can be overstated, they are not a positive good. The Reagan boom would have been even greater without them. Just like taxes, government borrowing takes money out of the private economy and on balance should be minimized.
Allowing government to grow beyond the public's willingness to pay for it in direct taxes is a sure path to endless government growth. Concern for the deficit is a valuable check on federal spending. It must be remembered that high, economically self-defeating marginal tax rates stem from excessive spending. Cut the level of spending and progressively lower tax rates become sustainable. Even leaving aside their economic impact, it was the deficits of the 1980s that doomed supply-side economics and led to a partial reversal of the Reagan tax cuts. Deficit spending today will ultimately be the biggest threat to maintaining the Bush tax cuts.
Similarly, high taxes work against the deficit hawks' goals as well. Initially, they erode budgetary discipline and feed fiscally irresponsible public spending. Eventually, they depress economic growth which in turn actually reduces the growth of tax revenues. Balanced budgets are difficult, and usually not economically feasible, to achieve during slow or no economic growth.
The solution? Cut both taxes and spending. Shrink government to the point where it is only performing its constitutional functions and reduce taxes to accelerate economic growth. True fiscal responsibility involves keeping taxes, spending and borrowing low.
Within Republican politics, the supply-siders and the deficit hawks need each other. But in terms of a rational fiscal policy, the American people need both of their good ideas too.
James Antle III is a senior editor for Enter Stage Right.
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