The economic policies of the today’s conservatives have come under sharp attack from a surprising< direction. These policies have been challenged by former leaders of Reagan’s economic team, and also by executives at the pinnacle of major financial services companies. These new critics reject the core principles of today’s conservatives: that tax cuts are always good, regardless of the circumstances, and that regulation is always bad.
David Stockman is one of the new critics. Stockman led the OMB under Reagan, and was Reagan’s champion for the “supply side economics.” He fought hard for Reagan’s tax cuts, believing they would reduce the deficit by stimulating rapid growth. But, in an op-ed last Sunday in the New York Times, Stockman blasted Paul Ryan’s budget, saying that despite “rhetoric about shrinking big government” it would in fact “do nothing to reverse the nation’s economic decline… .” Stockman noted that Ryan’s budget promises to offset reduced tax rates at the top by closing preferences and loopholes elsewhere, but he said the offsets can’t realistically be implemented. The only changes big enough to matter are politically impossible, he said. They involve entrenched special interests like defense contractors and sacred cows like the home mortgage deduction. As a result, the plan is an “empty sermon”… “devoid of credible math or hard policy choices.”
Another champion of Reaganomics brought similar charges. Bruce Bartlett held senior economics policy positions in both the Reagan and George H. W. Bush administrations, and was a senior fellow at the conservative Heritage Foundation. Bartlett has criticized those who give lip service to small government while enacting popular but wildly-expensive new programs. (The Medicare prescription drug legislation is an example.) Recently, Bartlett challenged those who oppose restoring top-bracket tax rates to where they were (39.6%) before the GWB tax cuts. Bartlett reminds us that the economy grew robustly under the higher Clinton-era tax rates, and the Federal government ran surpluses. He concludes that while higher taxes don’t promote growth they “play a very big role in reducing the budget deficit and are not necessarily a drag” on growth. Tax cuts, he says, can be either good or bad depending on circumstances, notably the level of federal debt and the stage of the business cycle (growth or recession.)
While Stockman and Bartlett challenge conservative dogma on taxes, executives at leading financial services companies reassess the doctrine on regulation. Sanford Weill, the former Chairman & CEO of Citigroup, stunned Squawk Box viewers by arguing that the deregulation of the financial industry went too far. In essence, he called for a return of the Glass–Steagall Act, which split banks from other financial institutions and barred speculation with federal-insured deposits. “I’m suggesting that [big banks] be broken up,” he said, “so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading, [without being] subject to a Volker rule.” (To be fair, the Glass Steagall Act was repealed under Clinton, but the ongoing attack on regulation is lead from the right.)
Meanwhile, John Bogle, the founder and genius behind Vanguard’s mutual fund empire recently called for reforms long-resisted by Wall Street: a fiduciary standard for money managers, a short-term transaction tax, lower leverage, greater transparency, and tougher punishment for financial crimes.
Why are Reagan-era conservatives and financial industry executives on the attack? They reject the phony conservatism that masks cronyism and corruption. Instead, their arguments flow from a consistent and principled conservatism in economic matters, one that involves three big ideas:
Companies must live or die according to their effectiveness in the market, without exception. That’s why true conservatives oppose letting companies hide behind legislation to avoid competition and insulate themselves from failure. A true conservative must oppose the practice of spreading weapons- procurement pork across 50 states to make programs un-killable; oppose federal subsidies to agriculture and energy industries; and oppose legislation that exempts pharmaceutical companies from negotiating prices when it sells to the Medicare and Medicaid.
Regulations are acceptable when needed to enforce market discipline. True conservatives prefer not to regulate business at all – but they recognize that sometimes regulations like Glass-Steagall are needed to prevent failed businesses from dumping losses on taxpayers. Moral hazard matters for CEO’s and directors just as it does for home mortgage borrowers.
As a nation, just as for a household, economic success requires that we live within our means, and not take what we can’t or won’t pay for. If we’re going to cut taxes, we have to be willing to cut government services. If we’re unwilling to cut services we shouldn’t cut taxes. To do otherwise, simply drives up the deficit and hurts the economy.
Many who call themselves conservative would disagree with these three ideas, as would those who call themselves progressive. These conservative principles don’t address sustainability, particularly where externalities are involved. And they don’t allow for investing to increase the productivity of future generations. But even so, principled conservative ideas about the economy offer some improvements over today’s compromised, coddled and anti-competitive markets.
(A version of this was posted earlier at usnews.com)