A vote against big government

Written by Bloomberg | Updated: Jan 27 2010, 02:23am hrs
Kevin Hassett

Before and since Scott Brown locked up his Senate victory in Massachusetts, Democrats have tried to portray him as an economically illiterate radical. Senator Charles Schumer of New York distributed a fundraising appeal that called Brown a far-right tea bagger, an accusation that rose to a chorus after his election. Among serious followers of policy, it didnt help Brown that he once posed nude for Cosmopolitan magazine.

The special election in Massachusetts sprung on everyone so quickly that somebody crazy certainly could have slipped through the cracks. A look at Browns platform and economic statements suggests exactly the opposite.

If a nonpartisan, above-reproach economist were assigned to review the academic literature and design thoughtful and prudent economic policies consistent with the most persuasive findings available, he would produce Browns platform.

Browns recipe for economic revival relies on the power of free enterprise. He told the WSJs Peggy Noonan: What made America great Free markets, free enterprise, manufacturing, job creation. Thats how were gonna do it, not by enlarging government.

This quote contains two powerful assertions: that free enterprise made this nation great and that enlarging our government will undermine our growth. A third key element of Browns political rhetoric has been to attack the ever-rising government debt as a threat to our economic future. The economic literature overwhelmingly supports these points.

Hungry government

Numerous studies have documented that larger government relative to GDP leads to significantly reduced economic growth. One study by Harvard University economist Robert Barro concluded that growth is inversely related to the share of government consumption in GDP.

More recent literature has found that this holds true even for US states. It is now widely accepted as an economic realitywhich makes it all the more puzzling that Obama and his economic team would push for a larger government when the economy is already weak.

As for the power of free enterprise, the Fraser Institutes annual Economic Freedom of the World report regularly documents that competition and entrepreneurship are key drivers of economic growth.

Fine, you might say, but reducing debt in the beginning of a wobbly recovery would be imprudent. This view assumes that the reduction would be designed poorly, front-loading the cut in government spending.

Take your time

It is easy to craft policies that reduce spending gradually over many years, restoring the budget to something fiscally sustainable without creating a near-term crater. Economists Francesco Giavazzi of Bocconi University in Milan and Marco Pagano of the University of Naples Federico II studied the impact of such policies in Denmark and Ireland and found that fiscal consolidations lead to near-term dramatic improvements in economic growth. Other studies have confirmed this result in a range of countries.

Brown also argues, citing John F. Kennedy and Ronald Reagan, that by cutting taxes we stimulate economic growth and encourage businesses to add jobs. He has advocated extending all of George W Bushs tax cuts from 2001 and 2003 that are set to expire this year. He has also said that he supports a 15% across-the-board tax cut, including corporate and payroll taxes.

Bushs targets

Here the evidence is mixed. It is impossible to read the corporate tax literature and not come away with the impression that a reduction would be quite favourable economically. But the evidence that the Bush tax cuts were a positive influence is weak, in part because Bush squandered revenue on economically questionable targets, such as eliminating the so-called marriage penalty, rather than on lowering marginal rates. Still, Browns focus on rates suggests that he understands this.

There is also a tension between the desire to reduce taxes and the desire to reduce the deficit. Brown has called mounting government deficits immoral, which means that cutting them will likely be a high priority for him and that he is unlikely to compromise on the debt in order to lower taxes. His call for strict spending limits also suggests debt is his priorityand also is in accord with the prevailing literature.

A 2008 European Commission staff review of successful fiscal consolidations found that those that relied on spending cuts worked, while those that relied on tax increases did not. Its safe to say that higher marginal tax rates quashed growth.

All of this makes a great deal of common sense, appealing even to voters in the bluest of blue states. That is why Brown won. It is also why the anti-free-market, economically illiterate economists and pundits attacking Brown are beside themselves.

The author is director of economic-policy studies at the American Enterprise Institute