Supply-Side Principles for the Hard Times

It is disappointing that the Republican Party has not institutionalized the supply-side principles of low tax rates, benign regulations, rule-based monetary policy, liberalized trade and prudent government spending. Republican politicians campaign for election on these principles, but when they get into office, they abandon them. President Bush has been a stalwart on pro-growth policies for our nation, but Congressional Republicans have been mute on what needs to be done going forward.

Even when they adhere to the principles in their voting records, many  Republicans are hesitant to evangelize on their behalf, which is necessary if they are to be institutionalized as the foundation of national policy. And they are not inclined to support pro-growth, supply-side policies during periods of national emergency, such as Katrina, when they are required most.

As Adam Smith said, “Little else is requisite to carry a state to the highest degree of wealth from the lowest but peace, easy taxes, sound money and a tolerable administration of justice, all the rest being brought about by the natural course of things.” Smith reminds us that the keys to recovery from nature’s wrath and governments’ incompetence are the same principles that President Reagan used to recover from the economic stagnation and social malaise of the 1970s. These principles are necessary over the long run to ensure lasting prosperity and essential during times of crisis to restore normalcy and increase prosperity.

Budget deficits have few long-term economic consequences unless they reach proportions far larger than anything we have seen or are likely to see, even with the war in Iraq and the national calamity of Katrina.  The deficit is the consequence of government spending too much on nonessential, often harmful programs and slow rates of growth.

“Prudent” spending means spending whatever amount of money is necessary to achieve the limited role assigned to government in our constitutional scheme.  Government should spend whatever it takes to deal with the aftermath of Katrina, but Katrina should not be used as a blank check to ratchet up government spending permanently through ill-considered new government programs.

We shouldn’t be bamboozled by the left’s exploiting of Katrina to lobby for bigger, more centralized government. It wasn’t just the hurricane that caused the calamity; it was a catastrophic failure of government at all levels. After ignoring warnings that the levees could not withstand a Katrina-style storm, and then after failing to deal with the calamity they had created, bloated bureaucracies were busy thwarting effective private-sector efforts. Illustrative of this serial government failure was the Federal Emergency Management Agency’s preventing Wal-Mart from sending truckloads of bottled water into New Orleans.  A bigger, more centralized government will only mean a bigger, more atrocious failure the next time a disaster hits.

We should not allow ourselves to be put on the defensive by left-wing cant about the need to raise taxes during periods of national emergency to “pay the bills,” exactly the opposite of what sound economic and fiscal policy prescribes. Federal debt held by the public has fallen as a share of GDP by more than one-fourth since midway through Bill Clinton’s tenure as president (down from 53 percent to about 35 percent), and it is slated to fall further during the next decade. Yes, Congress needs to get spending under control, but we shouldn’t raise taxes to cover the cost of a one-time event.  Doing so would only retard economic growth and make paying for Katrina more arduous over the long run.

The only rational way to pay for the current emergency is to strengthen long-run economic growth to ensure the revenues we need. That means not raising capital gains and dividends tax rates in a few years as provided for in current law and not allowing the death tax to spring back to life at 55 percent after expiring for a single year.  It means enacting fundamental reforms to the tax code that will make it possible to raise more revenues at even lower tax rates.  It means applying private-sector solutions and public-private partnerships to the problems facing those displaced by Katrina and then to all of America’s poor.

Supply-side economic principles are sound in both good times and bad. Along with Enterprise Zones and homesteading, these are the principles upon which the recovery and reconstruction of the Gulf Coast should be based and the only principles upon which long-run national prosperity can be attained.