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Financial crisis: the latest blow to free-market 'dogma'

Economic woes give plenty of ammunition to economists and lawmakers calling for new regulations and taxes.

By David R. Francis / October 6, 2008



The financial crisis and the trembling United States economy have dealt a hard blow to conservative economic ideology.

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It's "quite devastating to the conservative idea that the best policy towards markets is to leave them alone and let them self-correct," says Bernard Wasow, a senior fellow at the Century Foundation, a liberal think tank.

This is not to say every regulation is right, he adds. There is a middle ground in this area. But when government stays out of the financial markets too much, deregulated financial markets can "go over the cliff and take a good deal of the rest of the economy with them," he says.

It's "almost impossible now" for conservatives to mouth some of their "dogma," says Paul Waldman, a senior fellow at Media Matters for America, a nonprofit advocacy group set up four years ago to guard against what left-of-center analysts regard as conservative (alias Republican) mythology.

For instance, there's the thesis that tax cuts heavily targeted at the rich, such as those passed in the first term of President George W. Bush, will trickle down economic benefits to the middle class and poor. Rather, the rich have been getting richer and little extra income has flowed to those under the top 5 percent.

Or, Mr. Waldman continues, another conservative saying – "Government is dumb; markets are smarter" – sounds almost nonsensical these days.

As a result, progressives today sometimes have an "I told you so" attitude, he says.

Last month, the Economic Policy Institute, a liberal think tank in Washington, published "Tax-Cut Snake Oil," a 21-page paper by Harvard University's Jeffrey Frankel, who considers himself a "middle-of-the-road" economist. In it, Professor Frankel takes shots at the Laffer Hypothesis, which holds that cutting taxes actually increases tax revenues and creates a surplus by accelerating economic growth.

This view, notes Frankel, has been discredited by most professional economists. But it has been endorsed by Sen. John McCain, even though disavowed by his policy director, economist Douglas Holtz-Eakin. Frankel details how the major tax cuts of President Ronald Reagan in 1981-83 and the Bush tax cuts both contributed to record federal budget deficits. He offers quotes indicating that both Reagan and Senator McCain endorsed the Laffer theory at some point in time.

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