The Republican Dilemma: Growth or Green Eyeshades?

Commentary by Pete du Pont

Sixteen months into the conservative revolution that swept the field in the 1994 elections, the liberals are winning the war. They lost the battle at the polls but they are winning the war in the trenches of the Congress and the sound bites of the evening news.

The reason is that the argument in Washington - and thus on the television - has been about the deficit and the cruel spending cuts the Republicans have enacted to reduce it. When the Republicans propose reducing the rate of increase in spending for program A from 9% per year to 7% (when the annual inflation rate is less than 3%), President Clinton brands them harsh and heartless. In due course people across America begin to believe it, and then such a modest reduction in future growth is thought to be "extreme," and "going too far too fast."

Republicans shouldn't be surprised, for it comes with the territory. Being portrayed as mean spirited is the price to be paid for becoming the Green Eyeshade political party - that is, paying more attention to bookkeeping than to vision. When balancing the budget becomes your goal, and budget scoring becomes your god, you lose.

Once upon a time the Republicans were the party of growth. Ronald Reagan ran and won on a program of 30% income tax rate cuts. It worked. Eighteen million net new jobs were added to the economy, economic growth rates averaged nearly 4% per year after the tax rates kicked in, and federal tax revenues rose by 26% during President Reagan's two terms.

A growth policy would work again. There is no way to reduce the deficit more efficiently and more painlessly than with a higher rate of economic growth. And there is no way of reducing the need for welfare spending more rapidly and more permanently than by achieving higher incomes for everyone.

A successful fiscal policy must include two vital elements. Slowing the growth of government spending is one. But encouraging economic growth is a higher priority, for it also creates jobs and increases take home pay, as well as reducing the deficit through greater tax receipts.

Such a policy should begin with enactment of the core pro-growth tax reduction programs of the Contract With America.

Cutting and indexing the capital gains tax would quickly stimulate growth by unlocking billions of dollars of assets. Expanding the use of Individual Retirement Accounts (IRAs), and repealing the Social Security benefits tax would increase growth, too. Raising the amount that retirees can earn without loss of benefits would expand the supply of elderly workers, help employers meet their demands for skilled labor over the next decade and increase federal revenue.

Second, instead of pursuing deficit reduction as the primary goal of economic policy, Republicans should advocate a policy of aggressive deregulation to encourage economic growth. Free farmers from acreage restrictions so they can grow more crops while phasing out subsidies, thus reducing spending. Deregulate communications to unleash high-tech growth. Replace welfare programs with work to increase labor output at the lower end of the economic scale. Allow parents to choose the best schools for their children to spur long range economic growth by improving the skills of the workforce. Begin the transfer of retirement saving from the Social Security system to individually owned marketplace IRAs. They would grow both the retirement income of older Americans and the savings pool of the nation to fuel even more prosperity.

Finally, pick up on the growth ideas of the Tax Reform Commission: repeal the existing tax code and replace it with a single-rate, progressive flat tax. The resulting explosion of growth would create millions of new jobs and billions of dollars in increased personal income. The Hall-Rabuska flat tax proposal was estimated to increase economic growth a full percentage point per year. Although that increase may seem small, a percentage point increase in the growth of the economy translates into six million jobs and two trillion dollars in real economic productivity over eight years. It would also increase government tax revenue by nearly $700 billion, allowing Republicans spooked by the deficit to reduce it.

That is an economic program worth expending political blood and treasure to enact.

Let the liberals take the other side - that the tax reductions are growing the economy too fast, creating too many jobs, and giving people too much freedom and too much money.

Republicans can reply that Democratic proposals to reduce the economic growth rate from 4% to 3.5% are cruel and heartless. The evening news will be filled with shots of disappointed men and women who had been counting on putting a new roof on the house or their daughter through college. Congressional Budget Office scorers could be furloughed as non-essential employees. And the deficit would go down. And who knows, even the Green Eyeshade Republicans might be happy.