'We Are All Clueless Now': The eclipse of economics - neither party has a clear economic policy

National Review, Nov 8, 1999 by Ramesh Ponnuru

'I want to keep our prosperity going," said Al Gore in his June announcement speech, "and I know how to do it." He also promises to make the economy "fairer."

Some may detect a certain hubris here-though Gore at least didn't claim to have invented the economy. He has a wonderful knack for reversing the truth, as when, on Impeachment Day, he proclaimed Bill Clinton a "great president," or when he mistranslated e pluribus unum "out of one, many." His latest claim comes at the moment when, for the first time in decades, neither party has anything resembling a true economic policy.

Each party, of course, continues to have policies that it defends on economic grounds (such as free trade) or that will have effects on the economy (such as increasing the minimum wage). But there was a time when the parties also had a policy on the economy as a whole. From World War II through the '70s, Washington pursued a policy of stabilizing the economy with Keynesian economics, running deficits to stimulate the economy during recessions and surpluses to cool it down during booms. Deficits were, of course, easier for politicians to deliver than surpluses, but the theoretical consensus was strong and bipartisan, as evidenced by Richard Nixon's famous 1971 remark, "We are all Keynesians now." At the high tide of Keynesianism, its believers imagined that they could "fine tune" the economy so as to avoid any major ups and downs.

This consensus was upended by the "stagflation" of the '70s: Policymakers confronting a recession and inflation simultaneously didn't know whether to step on the brakes or the accelerator. (Note the machine-age metaphor, always misleading and now almost comically out of date.) At the same time, intellectual developments such as monetarism, rational-expectations theory, and supply-side economics challenged the Keynesian consensus. So the parties developed new economic policies, with Republicans promoting tax cuts and tight money and Democrats promoting an "industrial policy" whereby the government would use subsidies to protect America's manufacturing base. By the early 1990s, industrial policy had morphed into "public investment": The government would increase the economy's productive powers by spending more on education, child care, mass transit, and the like.

The turning point for both parties came in 1993, when the public-investment crowd lost out to the deficit reducers within the Clinton administration. Bill Clinton decided to attack the deficit by raising taxes. But while a Keynesian might have done this to cool off an overheating economy, Clinton argued that reducing the deficit would actually stimulate a recovering economy by bringing interest rates down. That Clinton's tax increases had this effect is still the official wisdom in Washington.

In our new post-deficit era, both parties have agreed to continue on autopilot, which means using surpluses to pay down the national debt. But this is more a budget policy than an economic one. It was adopted without any intellectual groundwork. The supply-siders were mocked for having sketched their theory on cocktail napkins, but the napkins of the debt reductionists are blank. Clinton merely stumbled into the policy for political reasons. The economic glosses on debt repayment contradict each other: It's supposed to stimulate the economy, presumably through lower interest rates, but it's also supposed to cool it down. Hence the complaints that Republican tax cuts would dangerously overheat the economy.

If Republicans don't have good answers to this critique, it's because they too have lost sight of economics. Their mistake was to overstate the case against Clinton's tax increases in 1993. Instead of predicting that his bill would reduce growth, cause some women and older men in upper-income households to stop working, and depress savings rates-all of which indeed resulted-they said that it would plunge the economy into a recession. When this didn't happen, and the economy after a few years of subpar growth started chugging along, Republicans were embarrassed (as much as politicians get, anyway) and, more important, left with nothing to say.

Next, Republicans embraced the cause of deficit reduction as their own after they took over Congress in 1995. They did this less because it made any economic sense than because it held their factions together: Perot-style populists and good-government types thought balancing the books was important in its own right, while conservatives thought they could cut government in the name of cutting deficits. All of a sudden, Republicans were echoing Clinton's claims about deficits and interest rates and forgetting what they had said from the early 1980s until just two years before (that deficits have a negligible effect on interest rates). Once again, economics was subordinated to budget policy.

At the same time, the conservative intelligentsia was losing interest in economics. Here the crucial development was the loss of faith in Jack Kemp. Conservatives grew disenchanted with him for many reasons, but one of the most important was the sense that he placed too much emphasis on economics. He believed, so the indictment ran, in Homo economicus, the rational economic calculator found only in academic models, and ignored the role of culture. Conservatives began to reject as hopelessly inadequate Kemp's notion that enterprise zones and deregulation could rescue the inner cities.