Conservatives want to shrink government. The problem is they never get around to actually doing it.
The reason why is obvious: For the West's welfare states, most of government spending is made up, not of "waste," but of popular cash transfers. This makes cutting spending politically perilous.
In the U.S., the two eras of modern conservative dominance in Washington — the Reagan Era and the Bush II Era — proved adept at cutting taxes and, sometimes, reforming government and eliminating red tape. But cutting spending was always the last thing on the agenda. (It should be noted that for all the scorn heaped on him even by conservatives nowadays, George W. Bush bravely impaled himself on a Social Security reform plan.) Even the greatest worldwide conservative hero, Margaret Thatcher, did not get much done in that area.
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It seems like a catch-22. The very democratic mechanics that put populist conservatives in office also seem to make their favorite reforms impossible.
The problem is that brashly cutting spending hurts the economy, and for one very obvious reason: Every item of spending is someone else's income. If you cut government spending, by definition, you cut someone's income. That may be good policy, but it's going to mean that, all else being equal, national income is going to be lower.
What's more, if you cut spending, you will also affect the expectations of other economic actors: They will know that you're OK with making the economy worse, at least in the short run. And so they will spend less and save more, thereby slowing the economy even further. Pretty soon the country is in a recession, and you're deeply unpopular.
But what if there was a way out? What if there was a way to square the circle?
Fortunately, there is a way out, and one of the greatest conservative heroes of all time, Milton Friedman, laid it out in 1979.
In the 1970s, there was something that we've all but forgotten today: inflation. This is the key. If you have moderate inflation and hold down the growth rate of government spending to less than inflation in nominal terms, you shrink the government in real terms. All but painlessly.
Oh, sure, it's only a few percent. But these have a way of adding up. Say your government spends 50 percent of GDP, as is the case in most of Europe, and inflation stands at 5 percent. If the size of government only grows at the same rate as the real economy, after five years, the government will represent 41 percent of GDP.
Why five years? Because that is the term of a British Parliament.
It just so happens that the U.K. has a new Conservative majority. The government did an OK job of shrinking government, but they were always held back by promises to shrink the deficit and by their coalition with the left-wing Liberal Democrats. Now that they have a majority, it's time to show what they can really do.
They should start with the following plan:
First, implement a five-year budget holding government spending steady in nominal terms.
Second, pass a bill mandating that the Bank of England implement an ambitious target for nominal GDP that implies an inflation rate of 3 to 5 percent, financed in part through monetizing government spending.
Third — and only third! — massively cut taxes, focusing on capital gains, corporate taxes, income taxes across the board, and even wage subsidies (a negative payroll tax for low wages).
Wait, why tax cuts, you ask? Well, if you're going to hammer the economy one way, it's only right that you should boost it some other way to maintain the program's political viability.
So why should conservatives adopt this plan?
Because it's good policy, for starters. It would lift employment, boost the economy, and shrink Britain's overbloated welfare state, which desperately needs it.
Politically, it would be unpopular with pensioners who live on fixed incomes, and bankers — key constituencies to be sure, especially for a right-of-center party — but they would quickly become popular with pretty much everyone else, which means it would still be a political winner.
Lastly — and most importantly — they should do it because they can.
Ham-fisted austerity policies in the wake of the 2008 financial crisis gave shrinking government a bad name. Given Britain's parliamentary system, Britain's conservatives can implement a broad menu of policies and stick to them in the way that the U.S., with its fractious Congress, can't. In this way, they would provide a global showcase for how conservative governance can deliver on its two key promises: smaller government, and economic prosperity.
Come on, Cameron. The world's watching.
