Why the Economy Must Remain Job One: Botching Economic Policy Is No Way to Win the War on Terror

By Demuth, Christopher | The American Enterprise, June 2004 | Go to article overview

Why the Economy Must Remain Job One: Botching Economic Policy Is No Way to Win the War on Terror


Demuth, Christopher, The American Enterprise


Wartime can be bad times for economic policy. It's not just that military mobilization imposes heavy burdens on the private economy. The larger problem is that the political demands of war can cause government to grow across the board. This tendency has been conspicuous in the first years of the war on terror.

Since September 11, U.S. government spending and regulating unrelated to the war on terror has grown dramatically. Domestic discretionary non-security spending grew by 15 percent from 2001 through 2003 and will probably increase by more than 25 percent during President Bush's first term--a much faster growth rate than at any time during the Clinton administration. This spending category is limited to such things as unemployment benefits, education, grants to state governments, and a variety of energy, agricultural, commercial, and regional-development subsidies. It doesn't count higher spending on national defense, homeland security, and September 11-related projects such as victim compensation and physical rebuilding, nor does it count the Social Security and Medicare entitlements.

Total federal spending now exceeds $20,000 per household, the highest inflation-adjusted level since World War II. And it is bound to grow mightily in the coming years as the baby-boom generation begins to cash in on Social Security and newly expanded Medicare benefits. The December 2003 prescription-drug expansion of Medicare, the first major entitlement bill enacted without any taxes to pay for its benefits, adds at least $10 trillion more to the federal government's unfunded liabilities.

Government economic controls have also grown. Burdensome new regulations of the financial and energy sectors, and of management-shareholder relations, were imposed after the Enron scandal. A new independent agency has been created to regulate business accounting, with unilateral authority to set and collect taxes on all publicly held corporations. In the critical telecommunications sector, deregulation initiatives have been countermanded by Congress, and regulators are poised to restrict the growth of dynamic technologies such as Internet telephony. The new Medicare law extends federal regulation of the health-care sector in important respects, and will almost certainly lead to price controls on pharmaceuticals. America's deregulation movement, which since the late 1970s had steadily abolished New Deal era controls, has yielded to a new era of re-regulation.

Finally, U.S. leadership in trade liberalization--a bipartisan project since the early days of the Cold War--has essentially collapsed. The Bush administration's most important trade initiatives have foundered amidst rancorous international disputes. All but one of the Democratic Party's 2004 Presidential hopefuls (emphatically including Senator John Kerry) have been adamant protectionists, a sharp departure from the free-trade policies of Democratic Presidents from Bill Clinton on back. In response to attacks over "outsourcing," the Bush White House has distanced itself from defenses of free trade.

These developments have prompted some sharp criticisms of President Bush by his conservative supporters. Yet George Bush is, philosophically, a strong conservative and free-market man--as are most of the members of the House of Representatives, which has collaborated in the surge of federal spending and regulating in vote after vote. Although President Bush came to office committed to new spending initiatives in education and health care, his proposals were much more temperate, and much more infused with free-market reforms, than the programs that have been enacted.

In truth, government growth has resulted not from any change in Republican Party doctrine but rather from the necessities of political mobilization following the attacks of September 11.

First, the onerous demands of mounting the counterterrorism campaign, the wars and occupations in Afghanistan and Iraq, and the new homeland-security programs, have absorbed most of the time and energy of the Administration. …

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