James Leroy Wilson's blog

Thursday, April 09, 2009

"Market-based Solution" Republicans

Robert Stacy McCain provides an entertaining account of Republican failure on domestic policy. I've been thinking about this as well. What I'm not so sure is the degree to which Austrian economists really did influence conservative heroes such as Ronald Reagan, as McCain claims.

It seems to me that what Reagan's party endorsed generally was not the free market but rather domestic neoconservatism. My intention is not even to use "neoconservative" as a pejorative here. The first person I had heard described as a neoconservative was Jack Kemp, who as a New York Congressman was an author of Reagan's first tax cut bill and always struck me as a conscientious, well-meaning chap.

Kemp also struck me as the leader of Reaganism on the domestic front. And that he would borrow more ideaas from Milton Friedman rather than die-hard free-market economists like Hayek and Mises. The crucial difference that I've perceived between Friedman's "Chicago school" of economics vs. the Mises-Hayek "Austrian school" was the role of money. Friedman made peace with the Federal Reserve paper money monopoly; the Austrians believed that for money and the market to function properly, money had to be treated as a commodity like everything else.

But with this concession to government control, Friedman would try to find ways to make life better through new styles of government intervention, rather than reduction in intervention. He who controls the money supply makes the policy, and Friedman acknowledged that the government controlled the money and that policy should be through the government. The Austrians, on the other hand, would hold that the government shouldn't even control the money, and that therefore "policy" should be a market process.

As a result, what Friedman and Kemp endorsed was not necessarily the free market, but using the government to subsidize "market-based solutions" to social problems. These would include:
  • the negative income tax, which became the Earned Income Tax Credit
  • "privatization," - not in the sense of government withdrawing it jurisdiction in a particular sphere, but in which government services are hired out to private contractors at taxpayer expense
  • school vouchers
  • "enterprise zones" where businesses could enjoy tax advantages by establishing themselves in poor neighborhoods.
  • and most significantly, economic "stimulus" through tax cuts even though they are not accompanied by spending cuts.
I'm not saying that Kemp and Friendman endorsed all of the above equally or with the same detail in how they unfolded in real life. But the mindset behind these ideas was the same: market-based solutions.

Something can be said in favor of each proposal as being "less bad" than high-tax, high-spending, highly-regulated paternalism. But nevertheless, they still amount to Intervention Lite, aka Keynesianism Lite. And while people will have more money in their pockets, they will have to do the government's bidding and their children will have to pay for the increased national debt.

In contrast, the Austrians would say:
  • Cut taxes anywhere and everywhere, and redistribute taxes to nobody
  • Real privatization in which the government withdraws its power over a particular sphere such as education, not contracting out government services to profit-seeking private firms at taxpayer expense; this would only breed corruption and crime.
  • Instead of vouchers, get the government out of education as much as possible as soon as possible, with the savings returned to the taxpayers with tax cuts.
  • The entire country should be an "enterprise zone," not just certain parts. Such selectivity will lead to economic miscalculation and market distortions.
  • Deficits are bad, inflation is bad, and government spending is itself bad because it takes from what would have been spent in the private sector. Cut taxes, but cut spending to at least the equivalent amount as well.
The free-market Austrian approach is fundamentally different from the "market-based solutions" approach of the domestic neoconservatives. I know of self-described conservatives who ten years ago were crediting Fed Chief Alan Greenspan instead of Bill Clinton for the strong economy which resulted in budget surpluses. In doing so, they gave their free-market argument away.

For, it could be asked, why is the government, via the Federal Reserve system it created, even in charge of money? If they say that money operates by different rules than other goods, they entrap themselves. For anything can be turned into money, into paper certificates of ownership that can be exchanged: gold, silver, oil, crops. The options are almost limitless. But if you've lost a limb or have cancer, your economic options have narrowed and your "demand" for certain goods have been increased substantially. This is why advocates of socialized medicine claim that the health care industry can not operate under the same principles of the market.

They are wrong, but it is hypocritical for "market-based solution" Republicans to rely on the Fed as the fount of prosperity, and then claim that other aspects of the economy, such as health care, should not be socialized in the same way they want money socialized.

Aside from Ron Paul, a full-fledged apostle of Austrian economics, has abolishing the Fed and creating a free market in money, ever been a priority of Republicans? Did Goldwater, Buckley, or Reagan endorse it? Without the Ron Paul Presidential campaign, would Tax Day Tea Parties even be planned?

I like McCain's piece. But I suspect that it could add to the confusion wherein both liberals and conservatives confuse "market-based government solutions" and the Republicans who support them, with the free market.

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