Reading the GOP Primary Tea Leaves

I certainly am not a political expert, but several people have emailed to ask what I think about the GOP nomination fight for Biden’s seat in Delaware. So here’s some amateur punditry indicating why I am reasonably happy about the “sure thing” GOP candidate losing last night to a “Tea Party” insurgent.

1. Republicans often can do more damage than Democrats. Big government GOPers are toxic, not just because they vote with the left for more statism, but also because they give a bipartisan veneer to bad policy. The Democrats, for instance, desperately want to lure some Republicans into supporting higher taxes. They know that a budget summit agreement creates a win-win situation. They get (at least on paper) more money to spend, and they get Republicans to cut their own throats in terms of electoral appeal. Castle is the type of Republican who would get easily tricked into selling out taxpayers in this fashion.

2. Political consultants are wrong to think that moderates make the most effective candidates. That may be true in some circumstances, but there are two factors suggesting this is not a good rule to follow. First, elections often are driven by turnout, and conservative/small government candidates often generate more enthusiasm than middle-of-the-road squishes. Second, elections generally are not decided by two candidates fighting over the “median voter.” Instead, the deciding factor is whether candidate A or candidate B succeeds in making the election revolve around wedge issues that put their opponent on the wrong side of the electorate. As such, it’s quite possible for O’Donnell to win, particularly given the national mood. Remember, Jimmy Carter’s people wanted to run against Reagan, who they thought would be another Goldwater. History showed that Reagan’s strong principles were a big benefit to his campaign.

3. My main point is that nobody, regardless of ideology, should give money to party committees. The Republican National Committee, National Republican Congressional Committee, and National Republican Senatorial Committee (as well as their Democratic counterparts) are bloated, inefficient, and intellectually vacuous. The NRSC, in particular, wins this year’s prize for being the most ineffectual party committee. Heck, this may be the most incompetent performance in modern political history. Here’s a blurb from a column in the Washington Examiner.

O’Donnell isn’t the central issue. The central issue was the Republican Party. Insiders have so consistently made it difficult for conservative candidates (and their supporters), this result shouldn’t be all that surprising. They did it to themselves. How toxic have they made this environment, that the grassroots of their own party rejects anything they do? The NRSC has created its own backlash, for example, by once supporting politically disastrous Florida Gov. Charlie Crist over conservative favorite Marco Rubio, or going to bat for Alaska Senator Lisa Murkowski over conservative military vet Joe Miller. It’s what therapists call a “broken relationship.” Those who believe the Buckley rule, that conservatives should vote for the “rightward-most viable candidate,” know that the the party establishment rarely followed it. If it had, it might have been taken seriously when addressing O’Donnell’s shortcomings. Instead, party leaders are beginning to find that people are refusing to follow, not in preference for another leader, but out of disdain for the status quo. They don’t care to win at any cost. They just don’t want to be stuck with someone they think is a loser.

P.S. Mike Castle apparently refuses to endorse Christine O’Donnell. A sore loser and a squish is not a very appealing combination.

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The Laughable German Version of a Conservative

By choosing not to use the economic downturn as an excuse for more wasteful spending, Germany may have avoided Obama’s big mistake, but that does not mean German conservatives and Angela Merkel are supporters of economic liberty and individual freedom. Not even close. A good (or should I say “bad”) example of Merkel’s statist mindset is her push for a tax on financial transactions. And not just a German tax. She wants a global tax. And not just for the typical political reason of wanting more of other people’s money. Merkel has a megalomaniacal view that “every product, every actor, every financial market participant should be regulated.” Ludwig Erhard must be spinning in his grave.

“We will continue to work for a tax on the financial markets,” Merkel said in a stormy debate in parliament on her government’s 2011 budget. “The finance minister is doing this in several discussions and we are going to try to persuade as many countries as possible. Unfortunately, the world is not always as we would wish … but we are not going to give up,” she added. At a meeting of European Union finance ministers earlier this month, members of the 27-country bloc clashed over the idea of imposing a tax of financial market transactions in Europe. The proposal, driven by France and Germany…, has run into stiff resistance from several countries, notably Sweden and Britain. At the level of the Group of 20 developed and developing nations, there is still more discord, with Canada and emerging market economies leading the battle against it. A G20 summit takes place in South Korea in November. “We are sticking to the principle that every product, every actor, every financial market participant should be regulated so that we have an overview of what is happening on the financial markets,” Merkel said.

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Overwhelming Evidence for Less Government Spending

Alberto Alesina of Harvard’s economics department summarizes some of his research in a column for today’s Wall Street Journal. He and a colleague looked at fiscal policy changes in developed nations and found very strong evidence that spending reductions boost growth. This, of course, contrasts with the lack of evidence for the Keynesian notion that growth is stimulated by a bigger burden of government spending.

Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery. …recent stimulus packages have proven that the “multiplier”—the effect on GDP per one dollar of increased government spending—is small. Stimulus spending also means that tax increases are coming in the future; such increases will further threaten economic growth. Economic history shows that even large adjustments in fiscal policy, if based on well-targeted spending cuts, have often led to expansions, not recessions. Fiscal adjustments based on higher taxes, on the other hand, have generally been recessionary. My colleague Silvia Ardagna and I recently co-authored a paper examining this pattern, as have many studies over the past 20 years. Our paper looks at the 107 large fiscal adjustments—defined as a cyclically adjusted deficit reduction of at least 1.5% in one year—that took place in 21 Organization for Economic Cooperation and Development (OECD) countries between 1970 and 2007. …Our results were striking: Over nearly 40 years, expansionary adjustments were based mostly on spending cuts, while recessionary adjustments were based mostly on tax increases. …In the same paper we also examined years of large fiscal expansions, defined as increases in the cyclically adjusted deficit by at least 1.5% of GDP. Over 91 such cases, we found that tax cuts were much more expansionary than spending increases. How can spending cuts be expansionary? First, they signal that tax increases will not occur in the future, or that if they do they will be smaller. A credible plan to reduce government outlays significantly changes expectations of future tax liabilities. This, in turn, shifts people’s behavior. Consumers and especially investors are more willing to spend if they expect that spending and taxes will remain limited over a sustained period of time. On the other hand, fiscal adjustments based on tax increases reduce consumers’ disposable income and reduce incentives for productivity. …Europe seems to have learned the lessons of the past decades: In fact, all the countries currently adjusting their fiscal policy are focusing on spending cuts, not tax hikes. Yet fiscal policy in the U.S. will sooner or later imply higher taxes if spending is not soon reduced. The evidence from the last 40 years suggests that spending increases meant to stimulate the economy and tax increases meant to reduce deficits are unlikely to achieve their goals. The opposite combination might.

Alesina’s research echoes the findings in dozens of other studies, a few of which are cited in this Center for Freedom and Prosperity video I narrated.

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