Which Party will Promote Fiscal Responsibility?

Martin Wolf , writing for the Financial Times (http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/) argues that if Republicans return to power, the accumulation of unsustainable government debt will continue. Wolf maintains that Republicans still promote “supply-side economics”, espousing the view that cutting taxes could balance the budget. He also points out that Bush-era tax and spending policy led to today’s extremely high deficits.

I think Wolf is onto something. Republicans are more concerned about cutting (or at least not raising) taxes than they are about fiscal responsibility. Few Republicans in Congress or the Senate are willing to propose serious spending cuts that would be necessary to bring the budget into balance (or even substantially reduce projected deficits). How many Republicans would consider cutting Medicare spending, for example? Rising Medicare costs as the baby boomers retire will be much larger than any recent economic stimulus spending.

Wolf argues further that Democrats are relatively fiscally responsible. Their support of tax increases does suggest that many of them care about fiscal responsibility. Nevertheless, just as the supply-siders exaggerate the incentive effects of tax cuts, those who believe that government can increase spending, as it will with health care reform and other progressive policy changes, and pay for it with tax increases, underestimate or ignore the negative incentive effects of tax increases.

Not only is it unlikely that the proposed tax increases will do much to bring down deficits, but it is doubtful that a big enough tax increase to make a dent in the deficit will succeed politically. And this is as it ought to be. Americans value freedom, but we cannot have the freedom to spend our money the way we want if government programs are absorbing a growing share of our income. Nevertheless, Democratic politicians play an important role in reminding Americans that tax increases will be necessary if the government is going to continue to spend as much as it has been spending recently.

The kind of fiscal responsibility that will preserve our freedom does not involve increasing taxes, particularly on the highest income groups who play such an important role in investment and entrepreneurial job creation. It does, however, require a commitment to make serious cuts in spending, including in some areas that are dear to many conservatives and Republicans, like national defense and Medicare. Keeping taxes low or reducing them without cutting spending is a recipe for a fiscal disaster that will eventually cripple the ability of government to perform even its necessary functions.