It has been widely reported that economic growth and job creation will be the principal focus of President Obama’s 2011 State of the Union address, and the president’s comments in recent weeks add credibility to those reports. At first blush this sounds promising: Not only would a speech along these lines track public concerns, but it would also invoke a goal that both parties ostensibly share. Most conservatives say they are gung-ho for growth; most liberals understand that without it, not much else is possible. This sounds like a formula for a productive discussion, and maybe even meaningful agreement, across party lines.
But is it? One of the dominant realities of our time is that while the political parties both endorse growth as a goal, they no longer agree on the means to it. I say “no longer” because a rough-and-ready bipartisan consensus once prevailed. After Dwight Eisenhower defeated Robert Taft for the 1952 Republican presidential nomination, his “Modern Republicanism” made its peace with the New Deal. During his eight years in office, he launched major public works projects (the St. Lawrence Seaway and the Interstate Highway System), created the Department of Health, Education, and Welfare, and expanded Social Security. Although Eisenhower’s economic advisors were not notably Keynesian and his administration systematically practiced frugality, he resorted to increased spending and budget deficits to fight the slumps of 1953-54 and 1957-58.
Shortly after taking the United States off the gold standard in 1971, the next Republican president, Richard Nixon, announced that “I am now a Keynesian in economics.” (The sentence usually attributed to him—“We are all Keynesians now”—was in fact uttered by none other than Milton Friedman.) What happened next is a familiar story: The Great Inflation of the 1970s destroyed the Keynesian consensus and paved the way for today’s polarized economic debate. The next Republican president, who came to power in no small measure because of that inflation, proclaimed in his First Inaugural that “government is not the solution to our problem.” An iron cord of ideological conviction connects today’s Republican officials to Reagan’s proposition. Most cannot bring themselves to admit that for all its flaws, the much-reviled TARP may well have forestalled a global economic collapse, or that the stimulus package probably prevented output and employment from falling even farther than they did.
The issue extends beyond the effectiveness of government responses to economic emergencies. There is a venerable American tradition—with roots in the thought of Alexander Hamilton, Henry Clay, and the first Republican president, Abraham Lincoln—that insisted on the link between public investment and economic growth. One wonders whether today’s Republicans agree. Do they believe that there is a zero-sum relationship between government and economic growth—that as government shrinks, the economy expands more rapidly? Or do they distinguish between productive and unproductive public spending?
These are not theoretical questions. The Republicans’ House majority must now translate its pro-growth rhetoric into real economic policy. The new speaker of the House has pledged to reduce domestic discretionary spending by $100 billion—more than 20 percent—in this fiscal year. That potentially places a range of public investments, including education, basic research, and infrastructure, on the chopping-block. And after President Obama submits his FY2012 budget proposal, it will fall to Representative Paul Ryan, author of the spending-cutting “Roadmap,” to craft the Republican alternative.
Republicans may argue that they do believe in government action to promote growth—namely, tax cuts. After all, Keynes himself recommended tax cuts in 1933, and John Kennedy employed them as a growth stimulus in the early 1960s. There are two things to be said about this: First, when households are badly overleveraged, corporations are flush with cash, and a substantial portion of increased consumption leaks out through purchases of foreign imports (all conditions that exist today), tax cutting by itself is likely to be less effective than it was in the early ’60s. And second, it is a basic axiom of public choice theory that simply increasing the amount of privately held purchasing power will do nothing to remedy the market’s propensity to undersupply public goods. So if you believe that public goods exist and contribute to economic growth, you must also believe in government growth-promotion strategies that go beyond tax cuts.
We will soon find out whether this generation of Republicans believes that there is any justification for public investment—or whether they embrace a literal interpretation of the economic revelation announced 30 years ago.