First Principles January/February 2007

The Rancor Dividend

The new Democratic Congress just might help the White House mend the country’s broken fiscal policy.
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America’s fiscal policy today is plainly unsustainable, and, as the economist Herb Stein remarked, what is unsustainable will not be sustained. The question is not whether the current spell of chronic overborrowing will come to an end, but how.

The worst way would be through an outright financial crisis, forcing emergency spending cuts and tax increases, and (if the timing is unlucky) hitting the economy hard when it is already weak. This is not implausible: it could happen. But oddly enough, the recent midterm election results provide at least some hope for a better ending.

One of the lesser reasons for thinking so is the matriculation of quite a few new fiscally conservative members of Congress, and the rise to prominence of a few established ones. It is encouraging that the Blue Dog Coalition, a group of House Democrats oriented toward fiscal responsibility, is going to need a bigger room to host its weekly meetings: nine new pups bring the group to forty-four members. Some of the old Blue Dogs, such as Tennessee’s John Tanner, will be influential in important committees (Tanner is on Ways and Means) and are likely to press hard for fiscal restraint.

That’s good as far as it goes, but you would not want to rest too much on the Democratic instinct for prudence with the purse. It’s too early to know how most Democrats will approach the issue. It is one thing to deplore fiscal recklessness while campaigning (almost all of them did), quite another to do something about it. The newcomers are of varying stripes: partisans and “moderates” (a roomy category in its own right), economic conservatives and populist progressives. And, new arrivals aside, the old familiar Democrats will be operating under unfamiliar conditions—power and opposition are different worlds—and under recast leadership. Most of the new House committee chairmen will likely be focused on increasing their own influence, not championing fiscal restraint.

Happily, a larger dynamic may matter more than new people in new roles. William Niskanen of the Cato Institute, a libertarian think tank, has noted that in the past half century there have been only two long periods of rapid fiscal expansion: under the Johnson administration, and during the past six years. In both cases, a single party controlled the White House and Congress. At the other extreme, there have been two long periods of fiscal restraint, coinciding with the Eisenhower and Clinton administrations. In both cases, the opposition controlled Congress. Between these extremes, the same lesson generally applies: divided governments usually prove better than the unified kind at keeping spending in line with taxes, regardless of which party controls which branch.

“Divided government,” Niskanen observes, “is, curiously, less divisive. It’s also cheaper. The basic reason for this is simple: when one party proposes drastic or foolish measures”—including spending windfalls designed to reward partisan supporters—“the other party can obstruct them.”

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