An Unwelcome Revolution

Written by David Frum on Saturday January 31, 2009

With the election fo Barack Obama, American voters are about to get the sharpest left-turn in public policy since the middle 1960s.

What did Americans want when they voted for Barack Obama in November?

Some wanted an end to the war in Iraq. Some wanted the middle-class tax cut Obama offered. Some wanted a president who seemed more careful or a better listener than George Bush or John McCain. Some were inspired by Obama's personal story -- some liked his youth, others his race.

But in politics, it's not what the voters want that matters -- it's what they get.

And what American voters are about to get is the sharpest left-turn in public policy since the middle 1960s.

This week, the House of Representatives passed a huge domestic spending bill. The bill is priced at $819-billion (all figures in U. S. dollars), but the true final number could be closer to $900-billion.

This spending comes atop the money for the bank bailout. That number is currently set at $700-billion, but Treasury officials are warning it could rise to $2-trillion.

Together, these two measures put the United States on the way to its biggest budget deficits since the Second World War, at least twice as big (relative to the overall economy) as the budget deficits of the 1980s.

Many economists argue that this spending is essential to combat the sharpest downturn in the world economy since at least 1974, maybe since the Great Depression. They say: The U. S. government can borrow almost infinitely at a time when nearly nobody else can. It should use this borrowing power to put money into the hands of people to spend, jolting the economy back toward growth.

But if all you wanted to do was deliver money as rapidly as possible, here's the fastest way to do it: suspend the worker share of the payroll tax the U. S. government collects to finance Social Security. The government taxes all payrolls at a flat rate of 12.6% up to an income cap, currently $106,800. Half this money is deducted from worker salaries. (Another 2.6% is collected to finance Medicare, again half from worker salaries. The Medicare tax has no income cap.)

Suspending the collection of the worker share of this money would put extra money into the hands of every American worker immediately -- next week if Congress could act fast enough. Up to $560 per worker per month. This tax relief would favour lower and middle income workers over the more highly paid. Warren Buffett would receive the same maximum $560/month as his bookkeepers would.

This measure would be relatively cheap, too. Suspending the worker share of the Social Security tax would cost the Treasury about $30-billion per month at current levels of unemployment, according to the liberal Center on Budget and Policy Priorities (which, as it happens, opposes the measure). If that number is accurate, the United States could continue a payroll tax holiday for almost three years for less cost than Congress' stimulus program.

Or alternatively, Congress could offer a big investment tax credit, incentivizing more productive and rapid private-sector investment rather than slower and almost certainly less effective government spending.

Meanwhile, many of the items included in the stimulus will only just be ramping up three years from now. The basic rule of government spending is that the government can spend quickly -- or it can spend honestly -- or can spend effectively -- but never all three at the same time.

Stimulus proponents know this of course. They champion the stimulus -- as President Obama was careful to do in his inaugural address -- not just as an anti-recession measure, but more as a way to reshape the US economy.

The post-stimulus economy will feature more spending by government, a more ambitious government role in health care, larger and longer unemployment coverage, and bigger transfers from Washington to the states, especially to more liberal states whose generous social programs have come under pressure in the recession.

It's a turn away from the more competitive, more open, more dynamic economy of the past three decades toward a more regulated, more protected, and more statist future.

The U. S. political system is ferociously hostile to change. But there are moments once in a generation when crisis creates an opportunity for a new approach. Back in the 1970s, the combined impact of the energy shock, stagflation and the humiliation of the Iranian hostage-taking opened the door to Ronald Reagan's conservatism -- and conservatives have held the advantage in U. S. politics ever since.

A generation later, the situation is reversed, and Democrats seem determined to make the most of it to undo as much of Reagan's work as they can.

Most of the time, politicians try to follow public opinion, but in 2009 as in 1981, they are leading it. They are testing how far they can go, how fast, before something stops them.

Originally published in the National Post.