TCS Daily

Midterm Exam

By James Pinkerton - October 31, 2002 12:00 AM

If it's the economy, stupid, then we free marketers had better wise up. When confidence in the economy weakens, confidence in economic leadership weakens, too. The perceived economic leaders of the country, of course, are President Bush and the Republicans in Congress; it is their policies - tax-cutting and (mostly) deregulating and (mostly) free-trading - that are going to be tarnished by dark times. To be sure, it's obvious to any libertarian that the economy is still hamstrung by the dead hand of the state, but unless we classic liberals make our argument to the larger electorate, the luster will come off laissez-faire. Indeed, separated from the power of our Adam Smithian ideals of beneficent prosperity for all, we could be left to wander, once again, in the wilderness of stagflation, in a world where the government waxes and the economy wanes.

In the meantime, the economic auguries aren't bright. According to a CNN/Time poll conducted October 23-4, a majority of Americans, 53 percent, think that economic conditions today are "poor" or "very poor," while 47 percent think conditions are "good" or "very good."

To be sure, some in the Administration talk up the economy. "The latest indicators look good," Treasury Secretary Paul O'Neill said last week. That led The Wall Street Journal's Alan Murray to upbraid O'Neill in his Tuesday column:

Really? Not the index of leading economic indicators, which has been down for four months in a row. Nor industrial production, which has been down two months in a row. Nor consumer confidence, which has been falling since midsummer. Nor automobile sales, off sharply from their summer highs. Nor sales at big retail stores, down last month. Nor durable-goods orders, which plummeted 5.9% in September. Mr. O'Neill often reminds people that his record as a forecaster is as good as anyone else's. Fair enough. But we're not talking about forecasts here; we're talking about facts.

Ouch. Of course Murray's stinging litany of ill-tidings went to print before the latest bad news - the announcement by the Conference Board of a 14.3 percentage-point fall of the Consumer Confidence Index, to its lowest level in nine years. What's going on? According to the survey, a weak labor market, the threat of military action in Iraq, and a decline in the financial markets had dampened both confidence and expectations. Such pessimism could infect Republican prospects in the 2002 midterm elections. As Dick Morris observed in a New York Post column published Tuesday, "Just when control of Congress hangs in the balance, President Bush is losing the popularity he so desperately needs to gain control of the Senate and keep power in the House." A big factor, Morris noted, was concern over the economy. "Bush has been hit with a continuous six-month fall in his ratings on 'managing the economy' - from 64 percent approval on April 30th to 55 percent on July 2nd to 48 percent on Oct. 22nd."

How did it come to pass that a pro-business Republican president - indeed, the first president to have earned an MBA - would let the economic issue slip through his fingers? It's not that Bush doesn't talk about the economy as he stumps the country for midterm candidates; he does. As Morton Kondracke observed in his most recent syndicated column, "In every state, he cites the amount of money taxpayers" would "'keep in their pockets'" if the 2001 Bush tax cuts were extended past their scheduled 2010 expiration date. That's good stuff. Still, it's obvious to the casual news consumer - and voter - that other agenda items take precedence.

Like what? Like war on terror and war on Iraq. Put simply, Bush has made his choice: national security, as he defines it, comes first. A review of 229 headlines from the Associated Press from October 15-28, featuring President Bush in the headline, shows that almost all dealt with foreign affairs, usually foreign war, e.g., "Bush: Saddam Makes U.N. Look Foolish" or "Bush: U.S. Can Bypass U.N. on Iraq." Only a few concerned domestic issues of any kind, and none mentioned "taxes" or "economy." Oh wait: except for three headlines that focused on Democratic attacks on Bush, to wit, "Daschle Criticizes Bush on Economy."

It's not as if the Democrats have much to say about the economy, at least not much that's coherent. House Minority Leader Richard Gephardt, for example, vows that he will raise spending, not raise taxes, and yet lower the deficit. A good Republican counter-campaigner would make short work of such silly populist posturing, but of course, Gephardt gets a bit of a pass from the White House because he signed on to the Iraq war resolution voted earlier this month. Indeed, each new day brings reminders that Uncle Sugar continues to offer sweet but unhealthy fare. Here's a headline in Tuesday's Washington Post: "With Venture Funds Scarce, Start-Up Firms Turn to U.S." That's right, unbeknownst to most, the Advanced Technology Program, a Clinton-era industrial-policy program surviving and thriving in the Bush Department of Commerce, is busy doling out some $184 million a year to entrepreneurs - or should they be called "bureaupreneurs."

Once upon a time - all of a quarter-century ago - free marketeers lined up to denounce such programs as "lemon socialism." These denunciations worked; leaders such as Margaret Thatcher and Ronald Reagan galvanized opposition to egregious boondoggling. Private investors didn't need help, they preached; they needed to be left alone. To be sure, in spite of their best efforts, big government stayed big in both the United States and Great Britain, but at least the government's "mission creep" into the free-enterprise economy was stymied. But now the state - expensively and expansively welfaring and warfaring, both - is back, and getting bigger, as Congress loses whatever fiscal discipline it ever had. And so even if Republicans win on Tuesday and control the 108th Congress, it's hard to see them wielding much of a mandate for market-minded policies.

Consider this headline, "Focus on safer rather than freer borders," in Monday's Financial Times, reporting on the recent summit in Los Cabos, Mexico, which continued:

The 21 members of the Asia-Pacific Economic Co-operation forum, which account for more than half the world's output, did pursue trade deals. But the emphasis was on safer, rather than freer, borders. Members agreed to stricter requirements for air and water transport, increased customer vigilance, suppression of terror financing, and other unspecified measures in telecommunications and energy.

There's a lot of big government packed into all those provisions, enough to keep even a Republican Capitol Hill busy for years, unspooling red tape and unleashing more bureaucrats.

As the late, great William Simon once wrote, it's time for truth. And the truth is that if these trends continue, economic freedom won't continue, at least not as we've come to know it. Free marketeers outside of the government recognize that even a Republican president, seeking "moral clarity" overseas, could become blind to economic problems at home. And so America could be carried back, on little 'crat-feet, to the bad old "stagflation" days of the 70s, as tough economic times create political demand for counter-productive economic policies that will not only worsen the slump, but also generate demand for even more snake-oily interventions that will do still more harm. That was the vicious cycle that the Gipper and Mrs. T saved their countries from a generation ago, even as other less fortunate countries continued to sink into funk.

Robert Bartley, the godfather of The Wall Street Journal's legendarily polemical editorial page, which led the charge against Carter-nomics in the 70s, recently returned from a trip to London, where he had attended a meeting of the Mt. Pelerin Society, the conclave of free marketeers first convened by Friedrich Hayek in 1947. Neo-Hayekians should have a lot to be happy about, he noted; after all, collectivism and communism have been intellectually vanquished. But yet as Bartley wrote in his October 14 column, "The prevailing mood might be summed up: If we finally won, how come we feel so glum?" His explanation was that even if central planning has been discredited, the unplanned bureaucratic welfare state continues to get credit with ordinary voters for all sorts of virtues it doesn't have, and so it continues to grow.

Unfortunately, some reliable allies of the past - allies who once beat back the statist hordes - seem to have mostly put down their rhetorical cudgels. In days gone by, there was always Jack Kemp, who never met a tax cut he didn't like - bless him. But Kemp, out of political office for a decade and pushing 70, is no longer much of a force. And Steve "Flat Tax" Forbes is back to running his magazine. And other journalistic organs, too, have shifted their attentions. And with Bartley in semi-retirement, the Journal's editorial page is now dedicated to militant foreign policy, eclipsing its interest in domestic issues; indeed, a recent Journal edit embraced "regime change" as the desired solution for the North Korean nuclear crisis, staking out an even hawkier stance than that of the Bush administration.

Meanwhile, Newsweek reports that another onetime champion of small government, Newt Gingrich, now working closely with the Pentagon, believes that defense and intelligence spending will have to rise by two percentage points of GDP, or some $200 billion. One wonders whether Bush's tax decrease could survive in the face of such a defense-spending increase. Didn't we have another president named Bush who got jammed up on a "no new taxes" pledge that he couldn't or wouldn't keep?

Many argue, of course, that whatever the political consequences, national security takes precedence over economic well-being. And maybe it must, although the fearful downside of a national-security state - in terms of its restrictions on personal, as well as economic liberty - need to be carefully weighed against the putative upside of the national security objectives.

But if so, then the enduring wisdom of Barry Goldwater needs to be remembered: "There are no final victories." Even in time of war, the arguments for economic liberty and against dirigiste governmentalism must be made all over again. Yes, it's time to haul out all the old arguments about the deleterious effect of high marginal tax rates, the dangers of federal "crowding out" of capital markets and, of course, the smothering effect of an overweening public sector upon private-sector activity, from investing and producing to importing to exporting.

We have to let the Washington DC Republicans know that their actions are being watched and scrutinized, that they will be held accountable by increasingly concerned voters. Like Democrats, Republicans are not immune to the pomp and perks of Powertown. But unlike Democrats, Republicans should know that the folks at home don't want them to expand the size and scope of government - even in wartime.

Are we up to this renewed challenge? Can we look past the campaign headlines and the partisan passions of the 2002 moment and see that three decades' worth of economic progress is in jeopardy? If so, then we must find a voice, a voice for free markets, a voice for freedom itself. If not, if we are muted for the sake of party loyalty and enthusiasm for foreign war, then we will be remembered as the generation of free marketeers who had a rendezvous with economic destiny - and missed the point entirely, leaving America and the world to sink back into the torpor, and torments, of the Leviathan State.



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