Conservatives and the American Economy
GEORGE A. (SANDY) MACKENZIE
In the fourth quarter of 2008, the U.S. economy looked as if it were on the brink of collapse. Real GDP had fallen by 6.3 percent at an annual rate, and the unemployment rate had reached 7.2 percent by December and was headed up. The severe problems of the subprime mortgage market had infected the broader mortgage market and because of the securitization of mortgage loans and the international spread of mortgage-backed securities were threatening to bring down the U.S. and international financial systems. Both U.S. and other credit markets seized up, and the global economy was pushed into its worst downturn since the Second World War. Real GDP began to grow again in 2009 but its growth was too weak to bring down unemployment, which had risen to close to 10 percent.
The difficulties facing the global economy have discredited the conservative approach to economic and regulatory policy. The regulatory neglect of derivatives like credit default swaps and collateralized debt obligations (CDOs) has been particularly severely criticized in light of the destabilizing role these instruments played in the financial collapse. The budget of the new Obama administration made a decisive break with the past, not simply because it countenanced large deficits to stimulate the economy, but because its structural reforms were so ambitious. The notion that tax cuts are a good way to stimulate the economy and expenditure increases are a bad way has not died, but most economists, liberal or conservative, accept the need for stimulation and are now more accepting than formerly of hands-on regulation. As one wit put it, there are no libertarians in a financial crisis.
Recent developments may well make us forget the successes of the conservative movement in influencing American economic policy in the past quarter century. The aim of this chapter is to assess the impact of the conservative movement and conservative thinking on the evolution of the American economy since the Reagan administration, which may have marked the apogee of the revival of conservative political and economic thought that began in the 1950s. This analysis proceeds in four stages. First, it offers a working definition of economic conservatism, notes some of the variants to the model, and outlines the conservative