Thursday, January 29, 2009

The Rise of the "Conservative Keynesians?"

The Stimulus Bill passed the House, but without a single Republican vote. Liberals are screaming bloody murder and talking about how the GOP doesn't care about the American people.

Myself, I'm of two minds of the package. On the one hand, the federal government does have to act in some way. The old policy of trying to deal with monetary policy hasn't worked and neither has the so-called bailout of the financial sector. I do think some spending has to be done by the feds, but my concern is that this bill is not as much about trying kickstart and economy, than it is about trying tick off a liberal shopping list.

Conservative economist Martin Feldstein, who came out in favor of some kind of stimulus last fall, think what passed in the House yesterday was not a good bill. He thinks the proposed tax cuts will be either saved or used to pay down debt as they were last year. Saving and paying down debts are good things, but they don't jumpstart an economy. He has even more to say on the spending side when he says this:

On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment. Computerizing the medical records of every American over the next five years is desirable, but it is not a cost-effective way to create jobs. Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt?

The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the "Medicaid matching rate," a technique for reducing states' Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for "state fiscal relief." Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?

My guess is that all this money to the states will go to cover their own deficit shortfalls and not to creating new jobs. Feldstein says the infastructure projects would start too late to make a difference and instead suggest spending money on our military, since two wars have taken its toll on our Armed Forces.

So, yes, I think the GOP was correct in not supporting this bill. However, what they presented as an alternative was hardly innovative. The House GOP proposed more tax cuts. Tax cuts aren't bad per se, but it has become the cure-all for what ails. Economy bad? Cut taxes. Economy Good? Cut taxes. Okay, but don't you have any other ideas?

The thing is, we are going to have to do some government spending. Conservatives may not like this, but tough- desparate times call for creative thinking.

The problem is that we have boxed ourselves into thinking that all government spending is bad and wasteful. But it doesn't have to be that way. The GOP could present themselves as the responsible party in finding ways to spend wisely, instead of just offering a Christmas tree of goodies.

Now after basically messing it up for 8 years, Democrats will rightly make fun of the GOP for having seen te light when it comes to fiscal responsibility. But political parties can change, so who cares?

Over at New, a reader shared his own thoughts on the GOP and spending:

I am sure you have better things to do than to watch the Today Show, but here was the morning lede from last night's vote..."Republicans voted against the measure because there were not enough tax cuts." That's right. After all the Republican soul searching in the wake of two devastating elections they unify around small government and tax cuts. Truly innovative.

Now imagine if the GOP did not have such a knee-jerk opposition to spending and actually thought strategically. The lede could have been "Republicans voted against the measure because it did not include enough large infrastructure projects and lacked imagination." Instead of fighting Dems on the dollar amount of spending, knowing that we would lose that fight in any event, we could have stood with Obama and called for large high-tech infrastructure projects that would employ large numbers of minorities in construction and white collar suburbanites in development. These projects (high speed rail corridors as an example) would also capture the imagination of the green close-in suburbs that are turning viciously against the GOP and have the strategic benefit of jamming up the young Dem members (Webb/Warner/Hagan/McCaskill) who depended on these voters for their victories.

In essence the writer was calling for smarter spending with a more targeted stimulus instead of throwing money at the economy and hoping something will stick.

But, this means that the GOP has to accept that for now the way that we have managed the economy, through monetary and tax policy, is no longer in fashion. What worked in the 80s will not work now. It means that the GOP is going to have to do what the Democrats did in the 90s, accept the current political age and adapt.

For the Dems, that meant learning to be deficit hawks. For the GOP, it means learning to be conservative Kensyans.

In an article for Politico earlier this week, Reagan aide Bruce Bartlett tells conservatives that because of several factors, including the current crisis, the GOP has to reassess it's take on government spending. He notes, that the nation's love affair with tax cuts is over:

...Americans’ zeal for tax cutting — the Republicans’ best issue for the past 30 years — has clearly waned. A Wall Street Journal/NBC News poll shows Americans now favoring the Democrats on taxes, and polls by Gallup, Rasmussen, and Harris show an increased willingness to tax the rich and redistribute income.

Given this reality, conservatives must adapt. If they continue to insist upon rolling back the welfare state by using tax cuts to “starve the beast” or privatize Social Security and Medicare, they will fail. There is simply no appetite for big spending cuts or the radical restructuring of programs that benefit a huge percentage of Americans, especially when there has been a severe downturn in the stock market that has wiped out trillions of dollars in retirement savings.

This means, that Republicans have to go back to what they were during the New Deal years: managers of the so-called "welfare state."

Historically, Republicans have come back from electoral losses by accepting the fact that Americans mostly like government spending. Rather than make a futile effort to take away something most voters want, Republicans have instead worked to make the welfare state function efficiently, target benefits to those that play by society’s rules and finance those benefits without additional debt.

Thus, when Dwight Eisenhower won the presidency in 1952 with solid Republican majorities in both the House and Senate, he explicitly rejected any attempt to repeal the New Deal. Instead, he pushed efficiency and economy in government and emphasized that its bills needed to be paid. Balancing the budget was Eisenhower’s main concern.

Bartlett shares how Republican presidents from Eisenhower to yes, Reagan have learned to be managers of the welfare state.

The Democrats have given the GOP an opening. Such massive spending with little care for how this will affect the deficit, means the GOP can redeem themselves in the eyes of the public by being the party that is interested in balancing budgets and smart government spending.

Will the GOP follow this route? I think in times it will have to. Right now, people are looking to the government to solve this recession. They want unemployment benefits and the like. We the GOP can offer is responsibility over the Democrats' reckless spending.

As the saying goes, we are all Keynesians now. Republicans have to show they can do it better.


Mike at The Big Stick said...

One good point that McConnell made is that the money needs to be loaned to the states instead of given as grants. If given as grants we are going to see 'a lot of embarrassing spending'. Loans will force more accountability.

Philip H. said...

An interesting and well reasoned post. Sadly, I don't hink Republican leaders will agree just yet - most aren't really fiscal conservatives, but Social Darwinists in that they really do want to consolidate wealth and captiol, and then remove restrictions as to what private entities (be they rich people or rich corporations) can do with that wealth.

One of the Reasons for this ia that, to these Republicans, the "welfare state" isn't about the narrowly defined social programs that, collectively, constitute the Welfare System. Rather, Social Darwinist Republicans view any public or collectibe holding of resources (money, national park land, fishing rights) as welfare because it tkae away (in their minds) the incentive for hard work and competition that privtae holding of resources supposedly provides. As they undersatnd the world, if every dollar, every fish, every acre, and every job was held in private in some way, Americans would become more productive because we would all be forced to compete for every resource.

And as to Mike's comments about loans vs. grants - I ewonder how much "enbarrassing spending" the loans in TARP have prevented?

Steve Nizer said...

The stimulus was a bad bill, but it deserved at least some Republican support. As I mention on my blog, the House no longer has any liberal Republicans. The ones left are busy chasing Reagan's ghost.