Political sentiments go through cycles. I have been listening to a growing number of people declaring the end of the Republican Party dominance and the Reagan Revolution. Following eight years of George W Bush, I am not sure that the defeat of the current crowd would be much of a loss to the Republican Party I joined in 1964, but whatever else the end of this era means, it means replacement of Republican leadership in government (certainly the congress, and probably the White House) by Democrats. But what does it mean for the “Reagan Revolution?”
I am a Barry Goldwater Republican. I believe that we and our families and friends are largely responsible for our own well being, that government should be kept small and focused on what only it can do well, that free markets are the most effective way to create and allocate wealth, that the individual freedoms, checks and balances on government, and separation of church and state in our constitution and its Bill of Rights provide the best environment for my personal moral and material development and in which I can live in harmony with my neighbors, and that if I work hard (which almost always means serving the needs of others) I have the best chance of doing well for myself and family. I believe in a strong national defense (but not empire building) and international collaboration and cooperation in today’s globalized world. In order to keep them relatively honest, governments operate under significant disadvantages relative to private enterprises with free trade, but there are some things that only government can do or do best and therefore they should be done well.
I think that these principles best serve the establishment of a just and prosperous society for all. Over the years considerable evidence has been developed and presented to support these views. Developing an economic and civil society that reasonably approximates these ideals has made us (and the increasing number of countries that have adopted similar principles) the enormously wealthy country that we are today. Even the poorest in our midst live better and healthier lives than the average person in the rest of the world. This is not because every one is “successful” and does well in free market capitalist economies, but because allowing the clever, energetic, and hard working among us to benefit from their efforts generates the enormous wealth from which the losers or handicapped can be compensated or looked after (charity—for which America is famous—and social safety nets.) Goldwater/Reagan republicans helped advance these principles and Clinton’s New Democrats largely embraced them as well. So what era is coming to an end and why is it happening?
While it seems pretty clear that American politics has started to swing to the “left,” I think that the next political cycle will take the form of corrections of some problems and excesses of the Reagan Revolution, not an abandonment of our general preference for market over government production and distribution. Bill Clinton’s New Democrats moved the center of the Democratic Party to the right of Richard Nixon. Even if the swing left overshoots that new center, it is likely to remain to the right of LBJ and Hubert Humphrey.
Important and fundamental arguments between communism and capitalism or socialism were won by the champions of free markets long before the collapse of the Soviet Union (though that was the final nail in the coffin). As a student at UC Berkeley in the mid 60s, it was a rather uphill argument that prices (incentives) mattered and that therefore the market generally allocated resources efficiently and that public policy needed to build on and take seriously the incentives it created for people to behave this way or that. This is no longer questioned by any serious person. Consider Barack Obama’s recent statement that “the market is still the best way to allocate resources productively, that some of the [regulatory] excesses of the 60s and 70s may have hampered economic growth, [and] that we don’t want to return to marginal tax rates of 60 or 70 percent.”
Nonetheless a significant number of people are uneasy or unhappy about the economy and not just because of the current housing crisis. Middle and lower level incomes have stagnated over the last decade (when excluding the large increase in benefits, where most of the increases in wage costs have gone) as salary increases have increasingly gone to those with higher educations. These insecurities and rising health costs have turned many sour on immigration and trade, both of which have benefited us and the rest of the world enormously. Public sentiment does not always favor Democrats. In the face of dramatically increased gasoline prices, “Americans want to lift the moratorium preventing drilling on the Outer Continental Shelf by an overwhelming margin of 2 to 1. While a Post/Kaiser/Harvard survey of low-wage workers found that “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush,” it also found that “More than half said that government programs aimed at helping working families ‘aren’t having much impact,’ while another 2 in 10 said they are actually making things worse.”
As public sentiment swings back to the left what the public wants (domestically), I think, are largely free but better regulated markets and a better social safety net (health care and pensions). Those like me who think that too much regulation stifles beneficial market innovation and worry about the work incentive stiffing effects of excessive or poorly designed safety nets need to take note of these sentiments. The freedom for me to lead my life largely as I choose and to enjoy the fruits of my labor depends heavily on the willingness of my neighbors (fellow citizens and residents) to accept those rules of the game. Our society functions as it does because of a broad social consensus on the rules of public behavior. This consensus rests in part on each player’s confidence that if he fails there is a safety net that makes it worth his taking the risk of playing. We need to compromise what we consider first best for society (and Republicans and Democrats tend to differ on what this is) to the extent needed to preserve that broad consensus.
Republicans tend to emphasize opportunity and self reliance and keeping government small (it is hardly that), short shifting attention to effective safety nets and efficient government. This is coming back to bite us.
President George W Bush seems to have forgotten that once elected he governs for the whole country, not just those who voted for him. Presidents are elected, presumably, because the majority of voters supported the policies they advocated during the campaign. But once elected it is incumbent on the President to make those compromises with his preferred policies needed to gain broad public support. Instead Karl Rove and company set about turning the government into an adjunct of the Republican Party. Bush’s shoddy governance put inexperienced political hacks in positions needing professionals. The illegal hiring practices of Monica Goodling under Attorney General Gonzales, himself a disgrace to the office, “by letting politics influence the hiring of career prosecutors and immigration judges at the Justice Department,…” is but one of many examples of the over politicization of the executive branch of government that is polarizing our country.
In addition, small government Republicans like me often fail to give enough attention to the public’s interest in good government. Small government still needs to be efficient and responsive to the public’s needs in the areas we have assigned to it. President Bush’s impulse to reorganize (e.g., the intelligence agencies, and what is now known by the un-American name of “Homeland Security) rather than improve accountability and transparency have made the government less efficient and no smaller.
Congressman Barney Frank, Chairman of the House Financial Services Committee, epitomizes the best of the new left wing reaction to the Reagan Revolution. Frank is fully aware of the virtues of the market and enterprise and the need to get the incentives right, but insists that market excesses and rough edges should be removed with limited and well focused regulation. His collaboration with Republican Treasury Secretary Henry Paulson to fashion a Housing Rescue and Foreclosure Prevention Law (now called the Housing and Economic Recovery Act of 2008 (HERA)) enjoyed sufficient bipartisan support to gain the President’s signature on July 30. The bill’s many provisions were generally sensitive to moral hazard problems and market incentives, for example by placing the decision to refinance “nonviable” mortgages fully in the hands of the lenders. In exchange for a certain but limited loss to lenders, borrowers would gain better and more manageable monthly payments rather than be foreclosed. There were things for both Republicans and Democrats to like and to dislike in this bill.
Frank is a pragmatist who is willing to sacrifice his version of “the best” for “the good.” He sees a major victory for his preference for limited, market friendly regulations in the Federal Reserve’s new rules (Regulation Z – Truth in Lending) to prohibit “unfair, abusive or deceptive home mortgage lending practices.” For example, the new rules “Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.” “For years Greenspan refused to regulate mortgage lending, and now at last under Bernanke they have done so with common sense restrictions,” said Frank. When you cut through all of the complex financial instruments by which wide spread investors provided money to home owners in mortgages, the subprime mortgage crisis resulted largely from mortgage defaults by borrowers who should never have received housing loans in the first place. The new Fed lending regulations, while adding some costs to acquiring a mortgage, probably would have prevented the crisis we are now in. According to Frank, “We forced some mortgages on people who should really be renters. Not everyone is suited to be a home owner.” These are not the sentiments of a wild eyed socialist and this is not a return to the heavy handed economic (as apposed to prudential) regulations of the 50s and 60s when government regulated, e.g., capital flows and interest rates on bank deposits. When asked why congress refuses to pass the no brainer free trade treaty with Columbia, which Frank has visited several times, he replied that “it has nothing to do with Columbia, nor the failure to recognize the benefits of trade. No trade liberalization deal will be passed by this Congress until more attention is given to compensating the losers. And don’t forget that today when someone losses their job, they also loss their health insurance.”
For the next few years, maybe even a decade, until the next swing back in the political center, we can expect more regulation and more extensive safety nets. If we collaborate with market friendly Democrats like Frank, we can not only fix some of the genuine deficiencies with existing arrangements, but we can probably prevent some of the worst excesses of the over extension of government, until it is our turn again. This would be a worthwhile contribution to the welfare of the Nation.
 Greg Anrig, “McCain’s Problem Isn’t His Tactics. Its GOP Ideas.”, The Washington Post, Aug 3, Page B01; Sidney Blumenthal, “Did American Shift Too Far to the Right?” New America Foundation, July 31, 2008; Grover Norquist, "The Next Republicanism" New America Foundation, May 15, 2008; Steven Pearlstein, "Wave Goodbye to the Invisible Hand", The Washington Post, August 1, 2008, Page D01.
 52% of low income workers said they felt somewhat to very insecure. “Nearly half of low-wage workers said their personal financial situations have deteriorated under President Bush…” Michael A. Fletcher and Jon Cohen, "Hovering Above Poverty…" The Washington Post, August 3, 2008, Page A01. See also: The Economist, "Cheap and Cheerful: The long-term rise in American inequality may have been smaller than it appeared”, July 24, 2008; Alan Reynolds, "Has U.S. Income Inequality Really Increased?" CATO Institute, Policy Analysis no. 586, January 8, 2007.
 Fletcher and Cohen, Op cit, Page A13.
 Secretary Paulson, who worked closely with Frank in developing the bill and urged the President to sign the resulting law stated that "There were parts of this legislation that just got passed that a number of us found objectionable, unnecessary, extraneous, too much government involvement," David Cho and Neil Irwin, "Credit Crisis Triggers Unprecedented U.S. Response", The Washington Post, August 9, 2008, Page A01.
 Barney Frank in private conversation August 1, 2008.