Obama's Gift to GOP Is Challenge to Supply Siders

Feb. 6 (Bloomberg) — Cut the tax rate on capital gains to 5 percent. Halve the corporate tax rate. Fund a new, super-strong Securities and Exchange Commission to monitor anything that's traded, including the haziest derivative.

Buy homeowners out of mortgages they can't afford, and protect the rights of lenders. Make Social Security solvent by curtailing the annual growth in benefits. Forget one "S" word, stimulus, and learn to use two "R" words — rent and recession.

Too costly, you might say, or too extreme. But the ideas above are neither costlier nor more extreme than the almost-trillion-dollar stimulus package moving through Congress. And they are more likely to bring long-term growth than the legislation advanced by President Barack Obama. Republicans know it, which is why they voted against the administration plan.

Still, there's no great GOP hero yet making the case for putting growth first. Not even the modern-day supply siders, who so long served the Republicans by stressing the importance of low marginal tax rates for producers in setting the pace of economic growth.

Consider the recent appearance of the lion of the supply siders, Larry Lindsey, on "The Daily Show With Jon Stewart." Lindsey — author of a landmark study that showed the 1980s Reagan tax-rate cuts brought in more revenue than predicted — made his case for a payroll-tax cut as stimulus.

Lindsey would halve the payroll tax, to give $1,500 to the average worker making $50,000. Buried in the plan is a genuine supply-side component: Higher earners would benefit from paying less in Social Security taxes, and the payroll tax cut would also reduce the cost of employment at a time when companies are deciding if and when to hire.

Obama Lite

Two problems. First, the supply-side aspect truly is buried. To the average TV viewer, a payroll-tax holiday is hard to distinguish from Obama's proposed worker-tax rebate and so comes off as Obama Lite. It's all about the worker — in other words, a demand-side reform.

Second, a payroll-tax cut sends the message that suspending Social Security payments is acceptable at a time when the Social Security program itself is moving into deficit. Lindsey proposes a carbon tax as an offset. But the gist of his proposal is that entitlement shortfalls matter less than the current crisis. The opposite is true.

It's clear why Lindsey offered his plan: it is doable. Still, maybe Republicans should be thinking, not doing, at this point.

There's evidence they are doing some thinking, especially when it comes to two philosophies, one newer and one that updates supply-side theory by going back to its roots.

Public Choice

The first, known as public choice theory, holds that stimulus packages pretend to be about growth but, in reality, simply feed the government monster. Public choicers, many of whom come out of Virginia's George Mason University, deem the phrase "reform government" an oxymoron. To them, government isn't better than the private sector. Public and private are opponents in a perpetual power struggle, like two kindergartners battling it out on a mat.

Public choicers warn that politicians will always exploit an emergency to further unrelated goals. Rahm Emanuel's statement of last fall — that "you never want a serious crisis to go to waste" — validated their nightmares. In their view, sometimes even a nasty but stable institution — such as a super SEC — is preferable to a protean one, such as the Troubled Asset Relief Program.

No Fantasy

Public choicers seek certainty from government, not constant fiddling. "Economists often fantasize that if only politicians would put us in charge of the economy, we could fix it. But the economy is too complex," says Russ Roberts, a professor at George Mason. The hero of the public choicers is Roberts' colleague, James Buchanan, who won the Nobel Prize in 1986.

The second philosophy can loosely be called classical economics. It is there the concept of supply side — as opposed to demand side — originates.

Classical economics says producers matter as much as consumers, sometimes more. It says government medicine is sometimes worse than any economic ill. It says setting prices — even low ones for struggling securities — can do more to bring recovery than any number of deals brokered by the Treasury, Federal Reserve or Federal Deposit Insurance Corp.

To the classical folks, entitlement reform matters because it will make the U.S. more competitive internationally. They acknowledge that outgrowing today's deficits will be harder than outgrowing deficits was in the Gipper's day.

'Creative Destruction'

Appalled classical thinkers, led by John Cochrane of the University of Chicago Graduate School of Business, generated an anti-TARP petition last fall. Some of these scholars are "Austrians," or followers of Joseph Schumpeter, who viewed recession as necessary "creative destruction." Others prophesy that the trend of forgiving borrowers will cut the supply of mortgages later.

Right now, the public choicers, with their emphasis on the abuse of crises by politicians, seem more timely. They note that the Democrats will have a hard time reconciling a promise to put a leash on K Street with a stimulus package that feeds lobbyists as none before.

The consolation in being out of power is that you have time to try out improbable ideas, or refurbish old ones. Such time is the gift that President Obama has given Republicans, and they may well thank him for it.

(Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression," is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2009 Bloomberg

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