In Part I of this article, I explained that conservatives cannot ignore the fact that there are income differences in our economy. I also explained that this does not mean we should use government as an active instrument to reduce income differences.
If this sounds cryptic and complex, I apologize. But it is the only way to technically sum up a point that is absolutely critical to any conversation about how we can use conservatism to make the world a better place.
In this Part II, I will explain this point in detail. I will outline how we can unify the need for a fiscally conservative government with the principles of national conservatism. (In doing this, I am of course not speaking for any other national conservative than myself.) First, though, let me provide some context.
In Part I, my focus was on the criticism that Steve Moore, an economist and supporter of the freedom-conservative movement, directed at national conservatism. I noted that there is a big gap between the world we conservatives would want to live in and the one in which we live today. This gap is put on full display as soon as we begin a conversation about what role government should play in the economy.
This role is often defined by conservatives who sympathize with the supply-side school in economics and who wish for an economically minimized government. There is nothing wrong per se with supply-side theory: it implies many good ideas regarding tax policy and economic deregulation. It is often associated with economist Art Laffer’s theory about tax cuts and economic growth.
Laffer, who got his theory implemented under President Reagan, firmly believed that government could close its budget gap by simply making ‘big enough’ tax cuts. As taxes went down, entrepreneurs, investors, workers, and consumers would all respond enthusiastically. More businesses would be founded, more jobs created, more money spent, and more capital formed for the future.
The new economic activity would grow the economy by so much that the lower taxes would generate more revenue than the previous, higher taxes did.
Back in the 1980s, Laffer’s theory was largely correct. The Reagan tax cuts laid the foundation for an economic boom that echoed all the way into the 1990s. However, since then, the effect of tax cuts has weakened, and there are mainly two explanations for why that has happened. One of them is put forward by David Stockman, President Reagan’s first chairman of the Office of Management and Budget. In his entertaining and informative book The Great Deformation (Public Affairs Press, 2013), Stockman suggests that the Laffer tax cuts depended on high inflation to work. As inflation declined through the ’80s and stayed low into the ’90s, the positive effect of the tax cuts wore off.
Another explanation is based on the fact that government spending continued to rise. As I explain in my 2021 ebook Tax Cuts Don’t Work, during the first two decades of this century, there was such a growth in spending that the combined size of federal, state, and local government outlays came very close to the 40%-of-GDP line. Based on comprehensive anecdotal statistical evidence, we have good reasons to believe that once government spending reaches that level, it is so costly to the economy that GDP growth slows down permanently.
One consequence of a permanently slower GDP growth is that a given tax cut that had generated good economic growth in the 1980s would no longer have nearly the same effect. The positive but not impressive effects of the Trump tax reform confirm this point.
These two explanations for why Laffer’s theory no longer works explain with clarity why the Reagan tax cuts were in a sense uniquely good. The problem with many conservative economists today, especially in America (Steve Moore is one of them), is that they cling to the Reagan-era experience as a perennial recipe for conservative fiscal policy.
Our problem today, in the 2020s, are considerably more complex:
1. We have a massive welfare state. In every member state of the European Union, government uses more than 70% of its spending to fund the welfare state. The rate is almost as high in the United States.
2. The welfare state is designed to reduce income differences. This holds true for the American welfare state as well as for the vast majority of welfare states in Europe.
3. A welfare state that redistributes income is a socialist welfare state. This means that the goal of the welfare state is to gradually reduce economic differences between citizens until those differences are no more. Conservatives should not ignore this point.
4. The ideological mission of the welfare state is an intrinsic driver of government growth. The very fiscal architecture of social benefit, or entitlement, programs is such that spending grows on autopilot.
There is one more point to keep in mind—one that makes a big difference when it comes to putting conservative theory to work:
5. Since these entitlement programs have existed for decades, people take them, and the taxes that fund them, into account when they plan their personal finances. This includes their workforce participation, their spending habits, and their inclination to start—or not start—a business. Even decisions on education and family are influenced by what benefits government provides.
All these five points tell us that we must reform the welfare state from the ground up to substantially, and permanently, change government spending. These points also tell us that such reforms cannot be put to work overnight, but demand a long, gradual implementation process.
In my experience, the long-term perspective on conservative reforms to government can be daunting, even discouraging, to many conservatives. However, it is essential to remember that the socialist welfare state is the legacy of decades-long work by left-leaning governments back in the mid-20th century. They wanted a gradual ‘socialization’ of Western economies without having to resort to communist-style confiscation of the means of production. By gradually ‘socializing’ people’s needs instead, the ‘democratic’ socialists could use taxpayers’ money to buy themselves perennial political influence; the fact that they also gradually reduced conservative influence was in their view a fringe benefit.
The only way to roll back reforms that have been cemented into the walls of the welfare state over several decades is to change the very formula that defines entitlement spending in the first place. Here are four guidelines for how this can be done. In my view, they resonate with the principles of national conservatism; again, I only speak for myself on this matter, not for other national conservatives.
1. Government: limited but not minimal.
Ideally, we should be able to live without anything more than a minimal government focused on protecting and perpetuating our nation. The needs of our families and communities would be a matter for whatever level of private organization is relevant, such as the household or the church.
In practice, human society does not work that way. We can secure the limited size of government, especially in terms of spending, by defining its role in society as protective of national security and foundational, civilizational values—not a provider of resources for the daily needs and wants of the citizenry.
2. Social benefits: a dignified last resort.
Today, it is common in both Europe and America to tie social benefits to a person’s income: the less you make, the more you get. On the tax side, the more you make, the more you pay out of every dollar or euro. There are exceptions, but this is the standard model.
Benefits are normally provided on a relative income basis: people become eligible for benefits not because of their absolute standard of living, but because of their relative standard of living. This means that the poverty rate remains unchanged even if people in all income groups make more money. Therefore, a nation’s overall economic progress can actually increase eligibility for social benefits. All it takes is that higher incomes rise faster than lower incomes.
This absurd mechanism, which is the result of the principle of economic redistribution, keeps an unrelenting upward pressure on government spending. The only way to end that pressure is to rewrite the eligibility criteria for social benefits: eligibility should be based on an absolute absence of means to self-sufficiency. Likewise, benefits should be based not on the person’s current or recent income, but on a basic, yet dignified, last-resort standard of living.
This basic benefits package does not change with economic growth. The admittedly tough consequence of this is that the more prosperous society gets, the bigger the loss of standard of living will be for those who have to rely on the basic social benefits package. However, that does not mean government completely withdraws from the social policy scene: with smart tax and regulations reforms, we can encourage private, church-based charitable organizations to step in and supplement the government program.
3. Taxes: a universal responsibility.
One of the most difficult problems in the modern welfare state is its funding structure. The standard welfare state relies disproportionately on those who earn the most and have the largest wealth to fund its outlays. The American welfare state is class-leading: the 20% of its highest-earning taxpayers provide two-thirds of the federal government’s total tax revenue.
By relying disproportionately on ‘the rich,’ a government cannot expect the same fiscal stability in its revenue as it tries to uphold in its spending. This contributes to the budget deficit stress that both the U.S. government and most European governments constantly live with. The aforementioned reforms to entitlement and social benefit spending are meant to reduce this stress from the spending side.
As the need for taxes declines with a gradual reduction in government spending, it is reasonable to reform the tax code accordingly. A more evenly spread tax burden is better from a fiscal-stability viewpoint, but it also engages a larger segment of the population in government affairs; if we all contribute, we all want a say in how the money is used.
Some conservatives believe that it is prudent to tax higher incomes at a higher rate than lower incomes. If we maintain this feature in the tax code, it can preferably be combined with innovative features that give the taxpayer a high degree of control over how the tax revenue is spent. The Charity Compact is one example.
4. Decentralization.
With the exception of national defense and other critical functions necessarily allocated at the highest level of government, programs funded by taxpayers should be placed as close as possible to their benefactors and their beneficiaries. This helps engage taxpayers in holding government accountable for how the money is spent, and it allows for the tailoring of benefits programs to the needs and preferences at the local level.
Decentralized programs tend to be more fiscally resilient; an excuse for running budget deficits at the national level is that the national government has its own central bank. Throughout the past several decades, since the legislative roll-out of the socialist welfare state began, a great many lawmakers both in Europe and in America have considered an ‘in-house’ central bank to be identical to an infinite line of credit. This is, of course, not the case, but if programs that provide social benefits are decentralized, the risk is minimized that lax fiscal attitudes are allowed to overwhelm those in charge of running said programs.
Taken together, these four points form a suitable framework for the redesign of government’s role in the economy. Every country will, of course, find its own version—that is one of many virtues of strong and resilient nation-states—but this framework can be helpful to those who have not yet done what Hungary has, namely put conservatism to work in their welfare states.
Reforming the welfare state is a decades-long project. It is difficult and requires considerable intellectual courage on behalf of conservative policy wonks, from think tanks to elected officials. But as the Hungarians have demonstrated, it can be done. All it takes is political leadership with patience and determination that puts the national interest above their own.
