RIGHT-WING HYPOCRITES?(tax policy of George W. Bush)(Brief Article)

Both President Bush and Vice President Cheney have argued that a tax cut is more urgent now because the U.S. economy may be heading into a recession. This claim has induced howling from liberal pundits, who smell hypocrisy. After all, Republicans have long rejected the notion, attributed to liberals' beloved economist John Maynard Keynes, that an activist government should try to adjust federal taxing and spending to micromanage the economy and keep the business cycle in check. So: Is the new Republican administration's effort to use a tax cut to stave off recession "Keynesian"?

Not at all, and here's why. Back in the 1960s, many economists believed economic fluctuations could be offset by tax policy. If people tend to consume a little bit less in a downturn, then government could, it was thought, stimulate consumption by cutting taxes. Then if we start to grow too fast, we can raise taxes in order to slow things down. If this theory worked, it would be a liberal's dream come true: A justification for big interventionist government.

It was Nobel-laureate economist Milton Friedman who first pointed out the problem with this type of policy: It only works if citizens are extremely shortsighted. Consider: If Uncle Sam gives you $1,000 today, but tells you that you will have to pay it back next year--with interest--how much will you change your behavior? If you're like most people, not very much. Keynesian theory would only work if you would slavishly increase spending by $1,000 today, and lower it by $1,000 tomorrow. Not very plausible.

Friedman's brilliant insight created an entire "school" of macroeconomics called the "new classical" school, which provides the intellectual foundation of today's conservative economics. The school, led by Nobel winner Robert Lucas, explored how much government policy can change things when consumers and firms form rational beliefs about ...