One of the critical differences between conservatives and
liberals is that the former think the overall level of taxes and spending is
important, economically, whereas the latter think only the difference
between the two matters. When taxes exceed spending, resulting in a surplus,
this is good in the liberal view. When spending exceeds taxes, resulting in
a deficit, this is bad. Conservatives, however, are concerned whenever
spending or taxes increase, regardless of whether one happens to be higher
than the other.
Two years ago, revenues were close to $2 trillion, while
spending came to just under $1.9 trillion, leaving a surplus of $127
billion. Liberals were happy. But last year, revenues fell to just over $1.8
trillion, while spending rose to about $2 trillion, resulting in a deficit
of $158 billion. This made liberals unhappy.
Conservatives saw the matter differently. They saw taxes in 2001
as taking 19.9 percent of the gross domestic product -- well above the
historical average of about 18 percent. Spending came to 18.6 percent, well
down from 10 years earlier when it was 22.3 percent. But almost the entire
decline was accounted for by lower defense spending, which fell from 5.4
percent of GDP to 3.1 percent, and lower interest on the national debt,
which resulted mainly from lower interest rates by the Federal Reserve.
These two items alone accounted for 3.5 percent of the 3.7 percent decline
in spending as a share of GDP.
Thus, domestic spending (all the rest) was virtually unchanged.
The decline in defense was worrisome, while the decline in interest was
meaningless. Economists view the latter as nothing but a pure transfer with
no significant economic effects. In fact, they often deduct interest
payments from government spending in order to calculate the primary
deficit -- the one that really matters for financial markets.
Consequently, conservatives were not particularly elated when
the budget was in surplus in 2001 and not particularly upset when it fell
into deficit in 2002. Insofar as the former was the result of high taxes and
inadequate defense spending, it was a bad thing in the conservative view.
And if the latter resulted from lower taxes and higher defense spending,
that was OK.
Of course, conservatives didn't always feel this way. During the
1950s and 1960s, they often obsessed about deficits and even supported
higher taxes and cuts in defense spending for this reason. But deficits
never went away because liberals always spent up to the point where deficits
became politically intolerable. This gave conservatives the reputation of
being tax collectors for the welfare state.
In 1978, this began to change, as conservative intellectuals,
especially the great economist Milton Friedman, argued that the conservative
concern for deficits had simply led to higher and higher taxes and bigger
and bigger government, with no offsetting benefits whatsoever. In a seminal
article in the summer 1978 issue of Policy Review, Friedman argued
forcefully for cutting government any way possible, even if it led to budget
deficits. Said Friedman, "I would far rather have total federal spending at
$200 billion with a deficit of $100 billion than a balanced budget at $500
billion."
Friedman's authority helped convince many conservatives to
support the burgeoning tax revolt, even though it might result in deficit
spending. They also discovered that if deficits became large enough,
liberals would finally be forced to cut spending.
What conservatives learned is that there really is no downside
to deficits as long as they result from lower taxes rather than higher
spending. No Republican candidate was ever defeated for supporting tax cuts,
even if they led to large deficits. And as long as the Federal Reserve
maintained a noninflationary monetary policy, and the United States imposed
no restrictions on international capital flows, interest rates could come
down even as deficits went up.
By contrast, liberals paid a heavy price for deficits because
they could no longer credibly support big government spending programs for
every real or imagined problem in society. Moreover, much of the spending
that bought liberal votes was cut under the pressure of deficits. Domestic
discretionary spending fell from 4.7 percent of GDP in 1980 to just 3
percent in 1999. Over the whole period, such spending was $1.5 trillion
lower than it would otherwise have been.
As a consequence, liberals lost support among swing voters
because they had nothing to offer them. This made such voters more receptive
to the conservative tax-cutting message.
Now the Republican Party has completely adopted the Friedman
mantra, which he repeated in The Wall Street Journal on Jan. 15: cut taxes
any time, anywhere, and don't worry about deficits. This has forced
Democrats to become "deficit hawks" for lack of any other issue. The
evidence suggests that it won't do them much good politically.
Notebook