'We Are All Clueless Now': The eclipse of economics.

'I want to keep our prosperity going," said Al Gore in his June announcement speech, "and I know how to do it." He also promises to make the economy "fairer."

Some may detect a certain hubris here-though Gore at least didn't claim to have invented the economy. He has a wonderful knack for reversing the truth, as when, on Impeachment Day, he proclaimed Bill Clinton a "great president," or when he mistranslated e pluribus unum "out of one, many." His latest claim comes at the moment when, for the first time in decades, neither party has anything resembling a true economic policy.

Each party, of course, continues to have policies that it defends on economic grounds (such as free trade) or that will have effects on the economy (such as increasing the minimum wage). But there was a time when the parties also had a policy on the economy as a whole. From World War II through the '70s, Washington pursued a policy of stabilizing the economy with Keynesian economics, running deficits to stimulate the economy during recessions and surpluses to cool it down during booms. Deficits were, of course, easier for politicians to deliver than surpluses, but the theoretical consensus was strong and bipartisan, as evidenced by Richard Nixon's famous 1971 remark, "We are all Keynesians now." At the high tide of Keynesianism, its believers imagined that they could "fine tune" the economy so as to avoid any major ups and downs.

This consensus was upended by the "stagflation" of the '70s: Policymakers confronting a recession and inflation simultaneously didn't know whether to step on the brakes or the accelerator. (Note the machine-age metaphor, always misleading and now almost comically out of date.) At the same time, intellectual developments such as monetarism, rational-expectations theory, and supply-side economics challenged the Keynesian consensus. So the parties developed new economic policies, with Republicans promoting tax cuts and tight money and Democrats promoting an "industrial policy" whereby the government would use subsidies to protect America's manufacturing base. By the early 1990s, industrial policy had morphed into "public investment": The government would increase the economy's productive powers by spending more on education, child care, mass transit, and the like.

The turning point for both parties came in 1993, when the public-investment crowd lost out to the deficit reducers within the Clinton administration. Bill Clinton decided to attack the deficit by raising taxes. But while a Keynesian might have done this to cool off an overheating economy, Clinton argued that reducing the deficit would actually stimulate a recovering economy by bringing interest rates down. That Clinton's tax increases had this effect is still the official wisdom in Washington.

In our new post-deficit era, both parties have agreed to continue on autopilot, which means using surpluses to pay down the national debt. But this is more a budget policy than an economic one. It was adopted without any intellectual groundwork. The supply-siders were mocked for having sketched their theory on cocktail napkins, but the napkins of the debt reductionists are blank. Clinton merely stumbled into the policy for political reasons. The economic glosses on debt repayment contradict each other: It's supposed to stimulate the economy, presumably through lower interest rates, but it's also supposed to cool it down. Hence the complaints that Republican tax cuts would dangerously overheat the economy.

If Republicans don't have good answers to this critique, it's because they too have lost sight of economics. Their mistake was to overstate the case against Clinton's tax increases in 1993. Instead of predicting that his bill would reduce growth, cause some women and older men in upper-income households to stop working, and depress savings rates-all of which indeed resulted-they said that it would plunge the economy into a recession. When this didn't happen, and the economy after a few years of subpar growth started chugging along, Republicans were embarrassed (as much as politicians get, anyway) and, more important, left with nothing to say.

Next, Republicans embraced the cause of deficit reduction as their own after they took over Congress in 1995. They did this less because it made any economic sense than because it held their factions together: Perot-style populists and good-government types thought balancing the books was important in its own right, while conservatives thought they could cut government in the name of cutting deficits. All of a sudden, Republicans were echoing Clinton's claims about deficits and interest rates and forgetting what they had said from the early 1980s until just two years before (that deficits have a negligible effect on interest rates). Once again, economics was subordinated to budget policy.

At the same time, the conservative intelligentsia was losing interest in economics. Here the crucial development was the loss of faith in Jack Kemp. Conservatives grew disenchanted with him for many reasons, but one of the most important was the sense that he placed too much emphasis on economics. He believed, so the indictment ran, in Homo economicus, the rational economic calculator found only in academic models, and ignored the role of culture. Conservatives began to reject as hopelessly inadequate Kemp's notion that enterprise zones and deregulation could rescue the inner cities.

They argued (rightly) that the nation's most pressing problems were not economic but moral, cultural, and spiritual-a point that has become all the stronger the more prosperous Americans have felt. As George W. Bush put it in a speech to lunchgoers at the Manhattan Institute in October, "Too often, my party has focused on the national economy, to the exclusion of all else-speaking a sterile language of rates and numbers, of CBO this and GNP that. Of course we want growth and vigor in our economy. But there are human problems that persist in the shadow of affluence." Bush's remarks represented (as they often do) the solidification of a Republican consensus.

The supply-siders' counterattack-beginning, again, roughly five years ago-was doomed by its own rigidity. They attacked social-conservative initiatives, such as the $500 child tax credit and marriage-penalty relief, as distractions from the campaign for a reduction in marginal tax rates. The implicit assumption was that the purpose of a tax code is to raise revenue for the government while doing the least harm to the economy. Any departure from this ideal they criticized as "social engineering." But why shouldn't policymakers also try to mitigate the harm done by taxes to families? The tax burden on families has increased for decades, as inflation ate away the personal exemption; the child tax credit only began to undo the damage. And the supply-siders' main criticism of marriage-penalty relief was that it cost too much in revenues that should have gone to other tax cuts-the sort of zero-sum, it's-the-government's-money thinking that they usually oppose.

Not content merely to attack their allies, supply-siders walked into a cul-de-sac of their own. Tax reform replaced tax cuts as their rallying cry. Here was an economist's dream: the chance to devise a new tax code from scratch on the basis of principle, with no concessions to interest groups, liberal tinkerers, or even public sentiment. But a dream is not a policy, and politicians were happy to give lip service to tax reform while punching new holes in the tax code for their friends. Republicans thus oscillated wildly between grand abstractions and low deals, with voters in the dark about what they stood for.

And this is, more or less, the situation today. Nobody in Congress any longer plays the role in developing a Republican economic policy that Bob Kasten, Jack Kemp, or Vin Weber once did. Dick Armey and Phil Gramm are academic economists, but the former has his hands full running the House, and the latter concentrates more on tactics than on vision. Bill Archer crafted a pro-growth tax bill, but he's retiring from the House. Perhaps freshman congressman Paul Ryan of Wisconsin will emerge as a supply-side leader for the next generation. Meanwhile, supply-siders such as (National Review's) Lawrence Kudlow are hoping that if Republicans take the White House, the next administration will build on the foundation laid by Archer (perhaps naming Archer Treasury secretary?).

It's not yet clear what Bush's economic policy is going to be. His top economic adviser, Larry Lindsey, might best be described as a fine-tuning supply-sider. Where pure supply-siders favor cutting tax rates permanently, to improve incentives and thus raise the long-term rate of economic growth, Lindsey would cut rates temporarily, to give a jolt to a weakening economy. (Lindsey has been an economic pessimist for the last four years.) Unlike most supply-siders, Lindsey balks at tax cuts that appear to favor capital. This may be a political judgment based on an outdated view of workers, many of whom are now accumulating capital themselves. Or it may be a point of principle: Lindsey has recently been quoted as objecting to Steve Forbes's flat tax because it doesn't tax capital. (This is, strictly speaking, not true: Forbes would tax capital, but not multiple times, as the current tax code does.)

Missouri Republican Jim Talent argues that the lack of focus on economic policy reflects a healthy perspective on the power of politicians: "There's been a general reevaluation of the relative importance of monetary and fiscal policy. Haven't the monetarists won?" It's not nearly as important to cut marginal tax rates as it was 20 years ago, when they were punitive. We may now, however, be ascribing too much importance to the Federal Reserve. On the stump in Iowa, Forbes has been blaming low farm prices on Alan Greenspan's tight-money policies. Actually, farm prices have been falling for centuries; this is not only the result of civilizational advance, but a prime component of it. Conducting monetary policy by reference to the price of corn is a peculiar idea-especially coming from Forbes, one of the few currently prominent Republicans who still has a well-thought-out economic worldview.

Before he dropped out of the presidential race, Dan Quayle, too, took up the anti-Greenspan line. There is a legitimate case against Greenspan, particularly against his suggestions that the economy and stock market might be doing too well. But the criticism of Greenspan raises a political dilemma for conservatives: Until now, they have been saying that Greenspan, rather than Clinton, was responsible for the strong economy. If they turn on Greenspan, they will have to find a new line-or change the subject. Gov. Bush promises "prosperity with a purpose," seemingly conceding that Gore does in fact know how to deliver prosperity, but suggesting that this is no great accomplishment.

Political risks aside, the lack of an economic policy may not be such a bad thing. It made sense for conservative intellectuals to shift their gaze from economics to the culture of poverty, national character, and other topics. In the current economic environment, it makes sense to focus on tax cuts that promote social rather than economic goals-such as cuts that make it easier to save for college or health care. Maybe a revival of economic policy can await the next recession.

But ideas don't come out of the blue when serious trouble strikes; generally, they have been germinating for some time. The danger posed by the intellectual disarray regarding economics is that the next time we're in a crunch, our political elites will have no idea what to think or do. Our prosperity might be more dependent on dumb luck than is comfortable to think.