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America’s Exceptional Fiscal Conservatism

WASHINGTON, DC – In most countries, to be “fiscally conservative” means to worry a great deal about the budget deficit and debt levels – and to push these issues to the top of the policy agenda. In many eurozone countries today, “fiscal conservatives” are a powerful group, insisting on the need to boost government revenue while bringing spending under control. In Great Britain, too, leading Conservatives have recently proved willing to raise taxes and attempted to limit future spending.

The United States is very different in this respect. There, leading politicians who choose to call themselves “fiscal conservatives” – such as Paul Ryan, now the Republican Party’s presumptive vice-presidential nominee to run alongside presidential candidate Mitt Romney in November’s election – care more about cutting taxes, regardless of the effect on the federal deficit and total outstanding debt. Why do US fiscal conservatives care so little about government debt, relative to their counterparts in other countries?

It has not always been this way. For example, in 1960, President Dwight D. Eisenhower’s advisers suggested that he should cut taxes in order to pave the way for his vice president, Richard Nixon, to be elected to the presidency. Eisenhower declined, partly because he did not particularly like or trust Nixon, but mostly because he thought it was important to hand over a more nearly balanced budget to his successor.

The framework for US macroeconomic policy changed dramatically when the international monetary system broke down in 1971. The US could no longer maintain a fixed exchange rate between the dollar and gold – the cornerstone of the postwar Bretton Woods system. The arrangement collapsed because the US did not want to tighten monetary policy and run more restrictive fiscal policy: keeping US voters happy was understandably more important to President Nixon than maintaining a global system of fixed exchange rates.