The Paulonomics Factor
By Donald L. Luskin
About Donald L. Luskin
Ron Paul can't win, but he could make a real difference in the economics debate.
Republican presidential hopeful Ron Paul sounds radical when he advocates the elimination of the individual income tax, a return to a gold standard, the wholesale downsizing of the federal government, and the abolition of the Internal Revenue Service and the Federal Reserve. The media and the other presidential candidates treat him as a nut. Indeed, Paul often enough opens himself up to that treatment in the flamboyant way he expresses himself. Sometimes he even seems to relish his image as a gadfly on the political fringe.
But it's time to start taking the ten-term Texas congressman seriously. He came in second in Nevada on Saturday. He beat both Rudolph Giuliani and Fred Thompson in Michigan (he also beat Giuliani in Iowa and South Carolina and Thompson in New Hampshire). And Paul now holds the record for the most money raised — $6 million — on a single day in a primary season by any candidate in history. It would be a real mistake to think of Paul as the Dennis Kucinich of the right.
Nut or not, Paul isn't going away. His message is combining intense opposition to the war in Iraq with a strong agenda for free-market capitalism. So it's drawing grass-roots support from both parties. Even if it's a bridge too far for him to capture the GOP nomination, he could mount an insurgent run for the presidency with cross-party appeal and fundraising power, probably as the nominee of the Libertarian party (on whose ticket he ran for president in 1988). He could end up shaping the coming election as H. Ross Perot did the 1992 race — denying either major-party candidate the mandate of a majority of the popular vote, and shifting the center of gravity on important issues.
For many conservatives, what makes Paul seem like a nut is his absolute opposition to the war in Iraq and his insistence on immediate withdrawal of U.S. troops from the Middle East and most of the rest of the world. On the other hand, his views on abortion are perfectly in line with mainstream conservative values (although this side of Paul never seems to get any attention).
On the economics front, Paul is a delightful paradox. If you crack the nut shell and look objectively at what Paul is really advocating, conservatives will find that Paulonomics looks an awful lot like Reaganomics. Paulonomics emerges as a refreshing return to conservative roots: small government, low taxes, deregulation, and sound money. If Paulonomics seems nutty, that may say more about the sad state of events today, with "big government conservatism" having become the new touchstone.
The core concept of Paulonomics is the reduction in the size and cost of the federal government. Irking many of today's conservatives, Paul emphasizes how this should include scaling back what he calls American "militarism," beginning with a pullout of Iraq.
But embracing a more classic fiscal conservatism, Paul would outright eliminate what he believes are wasteful and counterproductive federal programs, such as the departments of Education and Energy. Nutty? Most Republicans wouldn't dare talk about eliminating the Department of Education in the age of "No Child Left Behind." But Paul reminded me in a recent interview that it wasn't so many election cycles ago that scrapping this department was an official plank of the GOP platform.
And if you mean it about cutting the cost of government, you've got to after the big-ticket items. As to the biggest-ticket items of all, Paul would decommission Social Security and Medicare by honoring obligations to those who are utterly dependent, but letting young people opt out of both systems entirely. Nutty? Let's be honest: Most conservatives want to do exactly this, but are afraid to say so in a political environment where even mandatory personal accounts are vilified as a "risky scheme," as Al Gore famously put it.
With all that and more gone from the federal budget, it's not so nutty for Paul to talk about eliminating the individual income tax and the intrusive bureaucracy that administers it. Paul points out that today's level of federal tax revenues, without the income tax, is sufficient to meet all the government's expenses as they stood not so many years ago. The problem is that the size, scope, and cost of government has grown so much. Would it be such a nutty trade-off to roll back the clock on government expenditures if it meant eliminating income taxes for all Americans?
Paul deplores the federal deficit, but insists the only way "to solve that problem is to cut spending, not to raise taxes — or to not lower taxes when you get a chance." As a first step he advocates the elimination of all taxes on capital — estates, capital gains, interest income, and dividends. He told me, "It's capital that you need to make capitalism work." He says the idea that most excites young voters is his proposal to eliminate income taxes on tips: "It's a big deal if you're a family struggling and if a second member of the family is working and trying to pay the bills." Nothing nutty about any of that.
Paul may be the anti-Reagan when it comes to foreign affairs and the military. But he out-Reagans Reagan in his unwavering opposition to the government regulation of business. He may have seemed like a nut when he was one of only three congressmen to vote against the Sarbanes-Oxley Act in 2002. But weren't the real nuts the conservative congressmen who got swept up in a witch-hunt against "corporate crooks," and voted to impose the most sweeping, burdensome, anti-competitive, and costly financial regulation in a generation?
Also from Donald L. Luskin
Paul is an advocate of free trade — to a fault. He believes deeply in unrestricted trade between people and nations. Yet he votes against free-trade agreements such as NAFTA and CAFTA because he believes that trade is a right, not a gift for Congress to bestow in certain circumstances. Without such agreements, the reality is that trade is probably less free than it is with them. Is Paul a nut for letting the perfect be the enemy of the good? Perhaps, but for Paul it's a point of principle. He told me, "I don't call them free-trade agreements; I call them managed trade agreements." Instead, Paul would like to see a simple policy of "low and uniform" tariffs for all products from all nations.
Perhaps the most unusual element of Paulonomics is the idea of abolishing the Federal Reserve. For Paul, this is another way to eliminate government interference and to lower taxes — in this case to lower what he calls "the inflation tax." Do we need the Fed to be a lender of last resort to aid in financial crises, such as the present sub-prime mess? Paul says no: "the lender of last resort is just the printer of last resort, the inflationist of last resort."
Most politicians fall all over themselves in public adulation of the reigning Fed chairman. But Paul has had the courage to grill these unelected economic central planners when they come before his House committee. He asks the tough questions that others fear to ask, and they're the same questions that are often asked by economic commentators on this website, including me. Most prominently, how is it the Fed continues to operate on the demonstrably false premise that rapid economic growth is, ipso facto, inflationary?
Paul, however, can be his own worst enemy on this subject when, in debates, he seems to blame all our economic challenges on inflation, or when he buys into some of the conspiracy theories that have surrounded the Fed in various forms since its inception. In a recent grilling of Ben Bernanke, Paul made an issue of the discontinuation of M3 monetary aggregate statistics, as though the Fed had done this in order to hide something. Okay, that was nutty.
But as a first step toward eliminating the Fed, Paul advocates "legalizing competition — allow gold and silver to circulate with the dollar, and take off all the taxes on gold and silver money."
Ah, gold! The mere mention of it in today's modern economy brands you as a nut, or at least an economic hick. But remember, American money was linked to gold in one way or another for most of our history, until 1971 in fact. In his first year in office as president, Ronald Reagan established a blue-ribbon commission to investigate a possible return to gold. It went nowhere, but was Reagan a nut to ask the question? More fundamentally, is there anything nutty about money that would be, as Paul advocates, "convertible and redeemable in something of real value"?
For all his apparent extremism, there's no other candidate who has managed to excite both Democrat and Republican voters by combining an anti-war message that irritates conservatives with a free-market message that irritates liberals. Nutty? Or brilliant?
If I'm right and Ron Paul doesn't just fade away as the primary season progresses, he'll make a real difference. His anti-war message would make life difficult for Hillary Clinton, by drawing away the most pacifist elements of the Democratic base. But it's on the economics side where I think he could make the biggest impact. In an election year in which bigger government, higher taxes, and protectionism seem to have so much momentum, Paulonomics may be just what is needed to rebalance the debate in favor of growth.