John Rapley - Foreign FocusAFTER THE anodyne 1990s, when the Democratic Party embraced the free-market principles of the Republicans, a major debate has now returned to US politics. It concerns how the US should try to stimulate its sluggish economy.
Curiously, hardly anybody is debating whether the federal government should do something. Former Treasury Secretary Paul O'Neill lost his job for saying government stimulus was unnecessary. Given the excesses built up during the 1990s boom, a few years of sub-par growth were probably what the US economy required. Trying to send it flying again will likely cause it to eventually crash back to earth.
Nevertheless, with elections less than two years away, everybody wants to be seen doing something. Last week, the Bush administration unveiled its package of tax cuts, the centrepiece of which will be the elimination of the tax on stock-market dividends. Not to be undone, the Democrats countered with a proposed stimulus package that would boost the spending power of lower-income Americans.
Underlying the debate are real differences of academic opinion. The Bush administration subscribes to neo-classical economics. Accordingly, it believes the best way to boost an economy is to put money into the hands of rich Americans, who will invest it and thereby augment the demand for labour, which in turn will increase consumption.
The Democrats, meanwhile, have shed the neo-classical leanings of the Clinton years and reverted to their traditional grounds in Keynesian economics. Their package is smaller, short-term and geared towards lower-income people. Its logic is that the problem in the economy is insufficient demand. Since the marginal propensity to consume rises as income declines, the key is to put money into the hands of the less well-to-do. The rich, they contend, will not invest if there is no demand. Instead, they will park the money in savings accounts, or worse, invest it abroad where returns are currently higher.
However, at a deeper level of this debate, there lies a profound ideological divide. In the 1930s, to counter the effects of the Great Depression, the Roosevelt administration greatly expanded the scope of the federal government; it implemented programmes designed to shore up consumption by less well-off Americans. This trend was continued by subsequent Democratic presidents, who also used federal power to roll back segregation during the civil rights era. Along the way, the states lost power.
This has always annoyed Republicans. In the US, conservative interests tend to be stronger at the state level, whereas liberals have made their greatest advances at the federal level. Shifting power back to the states has thus been a Republican priority since the end of World War II.
When Ronald Reagan became president in 1980, he began appointing conservative justices, a trend likely to be continued by President George W. Bush. Thus, when the states and federal governments have competed for jurisdiction, the court has tended to rule in favour of the states.
Beyond that, though, the Republican crusade against the federal government has made little headway. Most Americans, satisfied with programmes like Medicare and social security, do not share the Republicans' antipathy to the federal government. Thus, when the Republicans swept Congress in the 1994 elections and announced their revolution was about to begin, voters quickly rebuffed them and their leader, Newt Gingrich.
Mindful of these obstacles, President Bush has arguably come up with a clever, even devious approach. Declaring himself a "compassionate conservative," he renounced the polarising discourse of the war on the federal government. Instead, he pushed ahead with a programme of tax cuts, which he is now seeking to expand.
Of course, tax cuts lose the federal government revenue. As revenue has shrunk, exacerbated by the economic slowdown, President Bush is going back to Congress and saying the time for tough choices has begun. In the name of fiscal prudence, the federal government will have to be cut back. The Republicans have done through the back door what they could not announce on the front step.
Meanwhile, the Democrats allowed themselves to be backed into a corner, having gone along with tax cuts in their apparent desire to be pseudo-Republicans. Seeing the folly of that strategy, some have started to fight back, but they will now face an uphill battle. Often derided for his simplicity, President Bush has shown himself a skilful tactician.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
