Supply-Siders’ Case for Austerity Carries No Shame
The scarlet letter these days is still an A, but it isn’t A for adultery. It is A for austerity.
Especially careful to eschew the A label are conservatives and supply-side economists, those who wrote legislation for Ronald Reagan or subsequent Republican leaders. Supply-siders prefer to be known as advocates of growth. Many conservative policy makers fear they will earn the disdain of the supply-side giants, the movement’s eminences, by pushing “budget cuts” instead of “growth.”
Among themselves, Republicans worry that the budget emphasis of Paul Ryan, the House Budget Committee chairman, will hurt the party by earning it the austerity label. The party will go down faster than Herbert Hoover in 1932. But there’s also an argument that Republican fear of the scarlet letter is exaggerated. And that the austerity concept is misunderstood.
Growth happens more easily when people believe that government is, and will remain, small. Austerity makes government smaller. Sometimes you have to have austerity first, so that you have trust, and growth can come later. Even some supply-siders say this.
Herewith, the case. Start with the nightmare the U.S. fears replicating: Europe. That financial disaster wasn’t just a crisis about pension obligations. It was a crisis of trust. First, markets and individuals trusted European governments when they said their budgets balanced over the long run. Stable governments with balanced budgets would leave the economy some room to grow and realize the advantages of a new continent-wide currency. Then the observers realized the governments were lying. Restoring trust is harder than killing it.
Europe’s Bad Example
The simplest way for European governments to restore voter and market trust is to cut national budgets dramatically. Even by half. Such deep cuts, however, are deemed politically impossible. The Europeans will do just about anything to avoid seriously reducing their budgets, including raise tax rates, so they can get more revenue on paper. These tax increases are the kind of austerity that supply-siders have historically deplored. It’s true that higher taxes deter activity, but partly because they give license for larger government by supplying cash for future spending.
The reality is that the smaller, more trustworthy government is best for growth, and to get there the budget has to be balanced. Balancing the budget proves authorities will sacrifice to earn trust.
If one instant plan for Europe is to halve national budgets, another is a two-step strategy: Budget cuts now, with lower tax rates at once, or codified to kick in shortly. The reductions now are austerity. But the austerity is the down payment by the government to show its good will. The tax-rate cuts promise the opportunity of growth.
Because the dollar remains the currency of reserve in the world, the U.S. situation can proceed slightly more leisurely. But only slightly. The best move to assure that the U.S. won’t be trapped like Spain or JPMorgan Chase & Co. (JPM) in coming years is to cut the budget now, and lock in a future of lower tax rates with a law passed at the same time as the budget. But to earn the trust, the budget cut -- the emblem of smaller government -- must be prominent.
It was disappointing to see Republican presidential candidate Mitt Romney the other day trash Congressman Ron Paul’s plan to cut a quarter of the federal budget. The reason Romney opposed the plan of the Republican from Texas, he explained, is that “taking a trillion dollars out of a $15 trillion economy would cause our economy to shrink [and] would put a lot of people out of work.”
Primacy of Trust
Unemployment now, yes. But there is also evidence that long-term unemployment will be just as bad if the U.S. doesn’t cut the budget in the short term. That evidence is called the 1970s.
Once you accept the primacy of trust and small government, you can look around and find some surprising advocates, even among star supply-siders. “If cutting spending is austerity, then I am for it,” Arthur Laffer told me this week. Laffer isn’t just any old tax cutter. He personally wrote the papers and articles that inspired much Reagan tax-cut legislation.
What he is saying now is that to belabor the austerity problem too much is counterproductive; after all, “all government spending is taxation,” he says. Milton Friedman said the same. On spending, right now, Laffer’s position is as austere and categorical as they come: “Any government spending that stimulates is dumb.”
To suggest that budget cutting should come even a nanosecond before tax cuts is to stamp on the tenderest Republican neuralgias. Republicans recall that when a law in the Reagan years included a schedule of delayed tax cuts, businesses postponed investment, and that cost the party politically.
But not enough to prevent Reagan’s re-election. The “politically impossible” concern is exaggerated, too. My own work on the 1920s covers a period when the government cut the budget more than Ron Paul suggests, in fact by half, with some tax cuts along the way and more promised. Voters and markets took the budget cut as a down payment and trusted that the country was headed in the right direction. As the government redeemed that faith with the tax cuts, commerce stirred. The economy grew without inflation. Could the tax cuts have come at the same time as the budget cuts? They did. Would it all have worked if the tax cuts preceded the budget cuts by years? No.
Today’s debate has a disingenuous aspect. Trust now matters. The real way to establish trust isn’t to trash austerity. It is to find a way to reduce the budget, not for the sake of budgeting alone but to prove that the leaders really want the government to be smaller. The tax cuts must come along, and fast, but commitment to smaller government matters most. If that’s austerity, it’s time to don the scarlet letter.
(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)
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