God Bless Scott Walker, But...

By David Dodenhoff, Ph.D.

Getting a state or local politician to refuse federal money is about as easy as getting a raccoon to put down a fish carcass. Recently, though, Milwaukee County executive Scott Walker said “no” to economic stimulus dollars from Washington, D.C. Why? Because those dollars come with strings attached—a local financial contribution in the short run, and the likelihood of complete state/local financial responsibility in the long run. Walker believes that a period of fiscal crisis is exactly the wrong time for Milwaukee County to take on additional financial responsibilities.

He is right, of course, but that won’t stop political opponents from charging that Scott Walker turned his back on millions of “free” federal dollars when Milwaukee County residents were suffering mightily. Thus, Walker has knowingly taken a political risk for no other reason than that it was the right thing to do. This is rare behavior indeed—behavior that deserves recognition and respect.

Walker, however, has his own idea for stimulating economic growth: tax cuts. Unfortunately, this prescription is wrongheaded on several different levels.

First, consumers and businesses are sitting on their money because they are uncertain about the future. Putting (or, more accurately, leaving) more money in their pockets is unlikely to address that uncertainty. Furthermore, historically speaking, tax cuts today tend to be followed by tax hikes tomorrow, the latter in the name of fiscal responsibility. Particularly in the context of massive, unprecedented budget deficits, many individuals and businesses will recognize that tax relief is not “free money” (the same thing that Scott Walker recognizes about federal stimulus dollars). They will have to relinquish that money eventually, either in the form of a tax increase or as payment for services that government used to provide but no longer does. In light of that, many will choose simply to hold on to the money, collect interest on it, and wait for the government to ask for it back.

Second, Walker’s reliance on historical example—in particular, the argument that President Ronald Reagan’s tax cuts “led to economic prosperity”—is incomplete and at least partly misleading. President Reagan did pass tax cut legislation in 1981. But when a steep recession and significant budget deficits emerged in 1982, Reagan agreed to tax increases in that year, in 1983, and in 1984. So, the prosperity of the 1980s occurred in the wake of both tax cuts and tax increases. The latter were disdained by conservatives, who argued that tax hikes would strangle the recovery in the crib. Those conservatives turned out to be wrong.

Fast forward to 1993. A recently-elected Bill Clinton proposed to raise taxes—and postpone a middle class tax cut—as part of his first presidential budget. Conservatives argued, once again, that this would choke off a fragile economic recovery. Once again, they were wrong. The economy continued to grow after the Clinton tax hike, ultimately surpassing the 1980s expansion on virtually every measure. It also outperformed, significantly, the economy of the current decade, despite major tax cuts during the Bush administration.

By now, conservatives ought to realize that, at least in the short run, there is not a clear, consistent, linear relationship between tax policy and economic growth.

Third, the argument that government can, and should, “do something” about the recession is at odds with conservative economic thought. Most conservatives, taking their cue from the Austrian school of economics, believe that the economy is too large, too complex, and too dependent on the knowledge and actions of millions of individuals and institutions around the world to bend to the will of a handful of politicians and bureaucrats in Washington, D.C. If we are wrong on this fundamental point, then why not give those same politicians and bureaucrats complete control of health care, public education, and retirement? Why not, in other words, just concede that the American left is right and we are wrong?

On the other hand, if we are right—and we are; if you doubt it, think about government’s management of pre-9/11 intelligence, or intelligence about Iraq’s weapons programs, or massive illegal immigration across our southern border, or Hurricane Katrina, or the housing boom, or the subprime mortgage industry—what good does it do us, or the country, to promote tax cuts as a form of short-term economic stimulus? We are bound to fail, but we will have publicly embraced the myth that government can intervene quickly and effectively in a system as massive and complicated as the American economy.

Please do not misunderstand me. Conservatives should continue to advocate low taxes…and reduced regulation, free trade, a balanced budget, tort reform, a monetary policy targeting inflation, and a vastly simplified tax code that rewards investment and saving. The reason for supporting such policies, though, is not that they will jump-start the economy and jolt us out of recession. The reason is that these policies are consistent with maximum individual, institutional, and economic liberty, and (not coincidentally) will provide the context for a robust American economy in the long run.

-January 26, 2009