Thursday, October 2, 2008

A New Era of Democratic Socialism has Begun in the United States

British Prime Minister Margaret Thatcher and President Ronald Reagan symbolized the end of socialism as a prominent economic philosophy. Its demise was reinforced in the collapse of the Soviet Empire, the emergence of market economies in Central and Eastern Europe, and the opening up of China’s economy under the leadership of Deng Xiaoping.

Reagan’s achievements were first undermined in 1991 by President George H. W. Bush when he approved an increase in the top marginal rate of income tax from 28 to 31 percent. Although President Bill Clinton added two higher rates of 36 and 39.6 percent, he agreed to welfare reform and limited increases in federal spending, resulting in record budget surpluses. Clinton himself proclaimed that the era of big government was over. Federal Reserve Board Chairman Alan Greenspan worried about the fed’s ability to conduct open market operations if the federal government redeemed all its debt.

The “compassionate conservatism” of President George W. Bush, coupled with record spending of a Republican Congress (2001-06), marked a return to the era of big government. The financial crisis of 2008 solidified the new era, socializing large chunks of the financial sector and who knows how much more to come. Assuming passage of the “financial rescue” bill by Congress, the projected deficit for fiscal year 2009 (October 1, 2008—September 30, 2009) might reach one trillion dollars.

What are those who espouse free markets and limited government in ostensibly conservative think tanks to do? Defending free markets in the light of massive government involvement to resolve the financial crisis that emerged under a Republican president and Congress does not appear promising in the foreseeable future.

The residue of genuine free-market analysts, along with a younger generation of similarly inclined scholars, will still have plenty to do, researching and recording the inevitable shortcomings and defects of the new American socialism. After a decade or two, free-market, limited government policies may once again look attractive.

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