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A Challenge to the Free Market

Is George W. Bush a conservative? Have his administration’s policies reflected conservative principles?

In both 2001 and 2003 President Bush successfully proposed large tax cuts. The President has also provided federal support for “faith-based” social programs ranging from soup kitchens to job training to prison education. And although there is no new legislation to show for it, Mr. Bush has consistently opposed both abortion and same-sex marriage.

But are lower income taxes, government funding of religious groups, and opposition to abortion and homosexuality all there is to American conservatism? What about some of Mr. Bush’s other initiatives? At home, the new Medicare prescription drug benefit is not only a large-dollar government entitlement but the first such program ever put in place without any provision for funding it. The No Child Left Behind Act mandates in exacting detail when states must test their schoolchildren, what should be on the tests, what criteria determine if a school is “failing,” and what its school board has to do when that happens. Abroad, the President has committed virtually the entire military capacity of the United States, along with approximately $1 trillion of government spending, to effecting regime change in Iraq and Afghanistan, followed up by extensive US-funded nation-building efforts of just the kind that Mr. Bush derided when he first ran for president.

Most recently, the Bush administration, armed with new authority it had requested from Congress to use taxpayer money for the purpose, took over the huge mortgage-lending firms Fannie Mae and Freddie Mac. It then approved the Federal Reserve’s $85 billion rescue of insurance giant AIG. At Mr. Bush’s urgent request, Congress has also approved a further $700 billion to aid a wide variety of financial firms by taking off their hands (in exchange for cash) many of the mortgage-backed instruments and other bad credits that they had earned so much money creating.

Nor is the question of who’s a conservative limited to Mr. Bush or his administration. During his first six years as president, Republican majorities in both houses of Congress consistently supported whatever expanded spending programs, new government directives, and foreign adventures the administration proposed. Indeed, the 258 members of Congress who signed the “No New Taxes” pledge in the early years of this decade (almost all Republicans) turned out, on average, to vote for more domestic spending than those who didn’t.1

These lapses from conservative principles have not gone unnoticed. Christopher DeMuth, who is about to step down after twenty-two years as president of the right-leaning American Enterprise Institute, noted in 2006:

In recent years, with the Republicans in charge of both houses of Congress, domestic expenditures (even excluding post-9/11 “homeland security” spending) have been growing faster than during the previous two decades of divided government, and the incidence of pork-barrel projects has reached an all-time high.2

According to Mr. DeMuth, the Medicare prescription drug benefit, enacted in 2003, alone added $20 trillion to the government’s unfunded liabilities. His conclusion:

The 2001–2005 period marks the transformation of the Republican Party from its traditional role as a win-or-lose guardian of limited government to that of a majority governing party just as comfortable with big government as the Democrats, only with different spending priorities.

Other familiar conservative voices have expressed the same consternation. Bruce Bartlett, for example, one of the original advocates of so-called supply-side economics in the Reagan years, was the author of the enthusiastic and influential 1981 book Reaganomics: Supply-Side Economics in Action. His 2006 book is titled Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. Anyone listening to this year’s presidential election, especially during the Republican primaries, could not fail to be aware that many Americans who think of themselves as conservatives agree with Mr. DeMuth and Mr. Bartlett that something is amiss. The unwillingness of many Republican congressmen to vote for the Bush administration’s $700 billion bailout, and the widespread criticism of the program by conservatives, only provide further confirmation of such attitudes.

James Galbraith likewise thinks that President Bush—and, for that matter, most other Republican officeholders today—may continue to espouse conservative principles in their rhetoric but have ceased to follow them in their policies. In his new book, The Predator State, Galbraith argues that this departure is not just one president’s, or even one administration’s, failing. Instead he argues that Mr. Bush and other Republicans have ceased being genuine conservatives because the conservative policy agenda has ceased to be helpful, or in most cases even relevant, to today’s issues. In effect, he argues, true conservatism is bankrupt as a source of usable policy ideas. What is left is merely conservative rhetoric, disconnected from any actual policy implications: “The fact is that the Reagan era panoply of ideas has been abandoned as the intellectual basis of a political program.”

Not that Galbraith, following in the footsteps of his father, the late John Kenneth Galbraith, whom he frequently invokes here, views the disappearance of conservatism from American policymaking as any great loss. The question is what should replace it. Galbraith therefore is not addressing conservatives, either the disappointed true believers or the pragmatically lapsed policymakers, but liberals—or at least those who used to call themselves liberals before conservatives’ campaign to demonize the label succeeded (the currently fashionable usage is “progressives”). Specifically, he argues that liberals today remain intellectually anchored to the ideas that conservatives continue to recycle in their rhetoric but ignore in practice. They are willing, for example, to accept “regulation only where it can be shown that ‘markets fail.’” The reluctance of liberals to reject this form of fundamentalism has, he believes, crippled their attempts at policymaking. His goal is to change both their thinking and their policies.

Galbraith, an economist who teaches at the University of Texas, focuses his argument primarily on economic issues. His leading examples of principles in which American conservatives once believed, but which they no longer pursue in practice, include free trade, a balanced federal budget—Ronald Reagan’s notion of the government as a responsible household (from which Reagan’s own policy was the most dramatic departure)—and keeping inflation in check by limiting the increase in the supply of money. In each case, he shows, President Bush, members of his administration, or his appointees at agencies like the Federal Reserve have either quietly dropped these ideas or made a virtue of rejecting them.

For Galbraith, that today’s conservatives have left these and other once favorite policies behind is good news. The problem, as he sees it, is twofold. First, conservatives, relieved of any sense of obligation to their traditional principles, have simply turned government policy into an instrument of private financial gain, on a grand scale, for themselves and their allies in the business and political lobbying world; hence the “predator state” of the book’s title. Although he did not foresee the current financial crisis in what he wrote, the Bush administration’s eagerness to bail out troubled banks, while mostly leaving troubled homeowners to their own devices, only bolsters his argument. The second problem, as he sees it, is that liberals have so little to offer in place of conservative policies: “Liberals have yet to develop a coherent post-Reagan theory of the world, let alone a policy program.” In this book he seeks to provide both.

The alternative worldview Galbraith proposes rests on the belief that markets—the private interplay of supply and demand, unencumbered by interference from government—generally do not achieve the favorable outcomes, for consumers as well as business, that elementary economics textbooks and conservative politicians and their supporters claim. According to the standard view, free markets are supposed to allocate scarce resources efficiently and distribute the goods and services that they produce to whoever values them most. Galbraith believes they fail, often spectacularly, at both tasks.

The “cult of the free market,” as Galbraith calls it, has important political consequences. What has happened, he writes, is that the political world has become

divided into two groups. There are those who praise the free market because to do so gives cover to themselves and their friends in raiding the public trough. These people call themselves “conservatives,” and one of the truly galling things for real conservatives is that they have both usurped the label and spoiled the reputation of the real thing.

In contrast, he argues, liberals, who do not actually believe in the efficacy of markets, nonetheless continue to

praise the “free market” simply because they fear that, otherwise, they will be exposed as heretics, accused of being socialists, perhaps even driven from public life.

Only if liberals acknowledge forthrightly the failure of markets to deliver what’s promised on their behalf, he argues, can they begin to construct both the coherent theory and the alternative policy program that he believes are urgently needed.

Here Galbraith self-consciously echoes his father’s famous critique of what had become, by the early post–World War II era, conventional economic thinking. In many respects, the question posed by this argument is from which end of the conceptual spectrum to begin in thinking about how our economy works. The standard textbook view of a market economy pictures atomistically small buyers and sellers—specifically, small enough that none can have any effect on the price of what they’re buying or selling—interacting with one another on a strictly individual basis, with no cooperation or collusion and hence no room for any strategy to influence the market as a whole.

The analysis then advances, by degrees, toward a more realistic description that takes into account some of the relevant features of the modern economic world: that sometimes these buyers or sellers are large enough to affect prices, even acting on their own; that they often cooperate among themselves, sometimes via organizations explicitly established for that purpose (trade associations and labor unions, for example); that some large actors in markets also have the ability to determine not just whether they will buy or sell any particular product but whether it will be produced at all; that sellers can use advertising to influence buyers’ behavior; that government at many levels not only sets the “rules of the game” but also often intervenes in favor of individual buyers or sellers (for example, the AIG rescue and the new bailout program); and that those private parties, not content to accept whatever decisions government may reach, sometimes seek to influence both the government’s rule-setting and its more targeted interventions, using means of influence both legal and not. What mostly distinguishes economists from one another, then and now, is how far their thinking goes toward taking these “complications” into account.

The elder Galbraith began instead from the opposite end of the analytical spectrum. His starting point was a world populated by three large and powerful entities: big business, big labor, and big government. These three interacted with one another in ways more readily characterized by negotiation, compromise, and (when necessary) muscle than by competition among atomistically small buyers and sellers. This interaction, importantly including the ability of one or perhaps two of these forces to block the third, was what Galbraith senior called “countervailing power.” Further, in line with the principles that he had inherited from John R. Commons and the other “institutional” economists of the previous generation, he argued that the specific forms of economic organization mattered: that the key business entities were corporations; that labor did its negotiating and lobbying through unions; and that both operated subject to specific laws and regulations. All this was what John Kenneth Galbraith, in his 1967 best seller, called The New Industrial State.

  1. 1

    William G. Gale and Brennan Kelly, “The ‘No New Taxes’ Pledge,” Tax Notes, July 12, 2004, pp. 197–209.

  2. 2

    Christopher DeMuth, “Unlimited Government,” The American Enterprise, January/February 2006, pp. 18–23.

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