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November 24, 2009
When Ideas Become Ideology
Joseph J. Thorndike

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The New American Economy: The Failure of Reaganomics and a New Way Forward. By Bruce Bartlett. 2009 Palgrave Macmillan: New York. 272 pages, $28.00.

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The Oxford English Dictionary defines ideology as "a systematic scheme of ideas, usually relating to politics or society." More specifically, the word describes a system of ideas "held implicitly or adopted as a whole and maintained regardless of the course of events." An ideology, in other words, is a set of ideas freed from the burden of evidence and rational argument.

In fact, we shouldn't attach too much stigma to ideology. It's probably fair to say that ideas can't exist -- or at least make sense to anyone -- without an ideological superstructure around them. But what happens when a system of ideas distorts its constituent parts? What happens when ideas become ideology?

Nothing good, according to Bruce Bartlett. In his recent book, The New American Economy, Bartlett provides an intellectual history of economics in the 20th century. In particular, he describes the rise and fall of Keynesianism, followed by the rise and fall of its successor, supply-side economics. Both schools developed in response to particular historical circumstances, Bartlett says. In the hands of their adherents, however, both schools were eventually unmoored from their economic context and transformed into ideologies.

Intellectual Tides

Bartlett begins his story, for reasons of historical importance and contemporary relevance, with the Great Depression. As the country was faced with staggering and intractable deflation, John Maynard Keynes offered a set of ideas -- including some already popular among academic economists -- to stem the downward spiral in prices. In particular, he urged a program of expansionary, debt-financed spending.

Keynes's prescription was bold, to be sure. Some even called it radical. But as Bartlett explains, it grew out of conservative impulses. Keynes was intent on saving capitalism not simply from itself, but from its many enemies, too. Economic radicalism was on the rise in the 1930s, especially in the years just before the publication of Keynes's magisterial General Theory. Socialism, in all its variants and international flavors, seemed a plausible alternative to many observers. But not to Keynes. The collection of economic ideas subsequently labeled as Keynesianism was conceived to stem the rising tide of radicalism.

What's striking about this argument is not its content but its necessity. Even a passing familiarity with Keynes and his political activities confirms that this giant of 20th-century economics was anything but a radical. That doesn't mean he wasn't mistaken for one, both by contemporaries and later observers. But his ideas were transparently designed to protect the status quo, or at least its essentials.

Bartlett points out that Keynesianism never really caught on during the 1930s, at least among politicians. Franklin Roosevelt, in particular, was never reconciled to the need for deficit spending, clinging instead to the ideal of a balanced budget (at least in theory if not in practice). In many respects, FDR was even more conservative than Keynes, at least when it came to fiscal policy. Only under the pressure of World War II did he really embrace Keynesianism, and even then by implication rather than declaration.

What makes Keynes seem radical, at least in retrospect, is not his ideas per se, but their application in the decades after World War II. When economic prescriptions are successful "they tend to be treated as all-purpose answers for every economic problem," not just the ones they were designed to solve, writes Bartlett. Keynesianism worked in the 1930s because it was designed to stem deflation. But when applied in the nondeflationary postwar decades, it fostered inflation.

Enter the Supply-Siders

Eventually, when inflation became serious enough, ideas emerged to cure the new problem. Supply-side economics rose to prominence amid the stagflation of the 1970s, offering hope in the face of Keynesian failure. The essence of the supply-side prescription, Bartlett explains, was lower tax rates and tighter monetary policy. When implemented in the 1980s, these policies effectively stemmed inflation and encouraged growth.

But history and politics eventually caught up with the supply-siders. Flush with their success in stemming inflation, they forgot that economic ideas are rooted in time and circumstance. They lost sight of the idea that historically specific solutions should be applied to historically specific problems. Just as the Keynesians grew overfond of spending, the supply-siders developed an unquenchable thirst for tax cuts.

The unfortunate result of the supply-side intoxication? The presidency of George W. Bush. "In the end, his administration represented a bastardized version of supply-side economics that had more in common with the caricature of it depicted by its opponents than anything approximating its core principles," Bartlett declares. Some elements of the Bush tax program had merit, including lower rates on capital gains. But the proliferation of credits and rebates was indefensible on any but the most craven political grounds, Bartlett writes.

Bartlett figured prominently in the supply-side revolution of the 1970s and 1980s (which makes his apparent apostasy all the more galling for today's supply-siders). Not surprisingly, then, his discussion of supply-side thinking and its evolution is among the most valuable sections of the book.

In sketching the intellectual history of the movement, Bartlett offers only the high points. His account, thank goodness, is a few hundred pages short of a real intellectual history (as befits a book aimed at a popular, or at least popular-wonky, audience). But he touches on the contributions of numerous key thinkers, including Adam Smith, Montesquieu, and Jean-Baptiste Say.

Bartlett amply demonstrates that economists have long understood the deleterious impact of high tax rates. In fact, he begins his story with a quote, much beloved by conservatives, from the 14th-century Muslim philosopher Ibn Khaldun: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."

Many later economists have made the same point. As Bartlett notes, "The ground was well plowed long before the first supply-sider showed up making the case that excessive tax rates can reduce government revenue and that, conversely, lower rates can, under certain conditions, raise revenue." But supply-siders offered a valuable service in giving this argument currency.

Eventually, however, even a good idea runs out of steam -- or relevance. Supply-side ideas have run their course, according to Bartlett. Having remade the world, the supply-siders should declare victory and go home:

    In my opinion, it is time for supply-side economics as a distinctive school of thought to go peacefully into the night. It is an idea that once had validity and made a real contribution to improving economic policy -- but which became increasingly divorced from that contribution as time went by, and eventually found itself as a mere slogan without anything meaningful to say about current economic problems.

What was valuable, in other words, has been absorbed by the mainstream. What's left over is largely bunk, at least in current circumstances.

Bartlett ends his book with a look forward, making the case -- as he has in other venues -- for a value added tax designed to stave off a funding crisis for the modern welfare state. It is not an enthusiastic prescription. He claims, credibly, to still favor a smaller government, with lower taxes and fewer services. But ever the empiricist, he sees scant evidence that such a prescription has any political viability. After decades of trying to starve the beast, Republicans have only managed to prove the futility of that approach. And having apparently made their peace with large government, at least when it comes to spending, it's time for Republicans to accept the tax implications of their decision.

Bartlett makes a fine and reasonable point. And the economic crisis of the past two years may well have brought an end to the supply-side tax regime. But ideologies, unlike ideas, are tenacious. They answer pressing political needs long after they fail to help with economic ones. Over the last 15 years, the Republican Party has transformed tax cuts from a prescription drug into a recreational one. Kicking that habit may prove hard indeed.

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Joseph J. Thorndike is a contributing editor for Tax Notes.