Charles Wheelan, Ph.D. The Naked Economist

All hell is breaking loose on Wall Street, and one of the more subtle things the crisis has exposed is a growing ideological rift in the Republican Party that's starting to border on intellectual incoherence.

Wanting It Both Ways

The traditional small government, "hands off" wing has always argued for minimal regulation and healthy dollops of personal responsibility. This line of thinking suggests that the appropriate response to the Lehman collapse is for investors and executives to exercise more caution in the future. That's how markets work.

Yet there's now a competing populist strand of the party that seeks to protect the "little guy" against greed and incompetence. John McCain was quoted in the New York Times earlier this week as saying that our economy has been put at risk "because of the greed by some based in Wall Street and we have got to fix it."

The problem is that you can't simultaneously embrace markets and personal responsibility and then, when those markets have a car wreck, argue that it's the government's job to protect us against rapacious Wall Street traders.

Fault Lines Exposed

This is just a tiny example of a phenomenon that's been developing through the Bush presidency and into this campaign. Do you remember Sarah Palin's rousing convention speech? Forget the "First Dude," the hockey mom thing, the eyeglasses, and even whether she did or did not support the "Bridge to Nowhere."

Instead, just pay attention to what she said and what it means for the growing contradictions within the GOP. For those who were paying attention, Palin raised two issues that should have exposed the fault lines that will eventually consume her party.

First, do Republicans favor small government, or do they think that government should provide more assistance for families with children who have special needs? Because you can't have it both ways.

A Dual-Sided Speech

In her critique of Barack Obama, Palin told the adoring crowd, "Government is too big ... [Obama] wants to grow it." That's a legitimate point. And it's consistent with Ronald Reagan's famous assertion that the nine most dangerous words in the English language are "I'm from the government and I'm here to help."

The Republicans are supposed to stand for less government -- lower taxes, less regulation, and, as a result, more personal responsibility and self-reliance. That's one of the most important and defensible tenets of the party.

But wait! Was that the same ostensible conservative telling the audience, "To the families of special-needs children all across this country, I have a message: For years, you sought to make America a more welcoming place for your sons and daughters. I pledge to you that if we are elected, you will have a friend and advocate in the White House."

Whose Special Needs?

Why are families who have children with special needs any different from farmers at risk of losing their land, workers who need health insurance, employees hurt on the job, families dealing with parents who have Alzheimer's disease, veterans eating out of trash bins, and so on. If you have those problems, then "a friend and advocate in the White House" is big government.

But if you happen to have a special-needs child, apparently that's different because Palin happens to share your challenge. And if one of her family members happens to get Alzheimer's, then maybe we'll have new programs for that, too.

Palin's speech suggested that, again, the Republicans want it both ways -- and it's no anomaly. This explains how the Republicans can talk about small government and then deliver huge new programs like Medicare prescription drug coverage, the largest expansion of entitlement spending in decades.

Or how the party of personal responsibility is fielding a ticket whose website calls for "aggressive federal action to help keep 200,000 to 400,000 families from losing their homes."

Governing Through Inefficiency

The second point is more subtle but ultimately more damning of the Republicans: How can the government be inefficient and ineffective at most things it does -- and yet perfectly able to decide who should be held indefinitely at Guantanamo Bay without even rudimentary legal protections?

Governor Palin told the convention, "Al-Qaeda terrorists still plot to inflict catastrophic harm on America ... [Obama's] worried that someone won't read them their rights." The Republicans have consistently promised to get tough on terrorists -- no problem there. A terrorist organization with a nuclear weapon is arguably the most dangerous threat we must confront. But Palin was also mocking our basic legal protections, and that's a huge, scary mistake.

Believe it or not, the reason her position makes so little sense is rooted in economics. Researchers have long recognized that any time we test or screen for something -- whether it's detecting prostate cancer or keeping hijackers off airplanes -- there's an unavoidable tradeoff. The more sensitive the screen, the greater the risk that you tell someone they have cancer when they don't, or that you'll stop a guy in the airport security line because he has a big belt buckle and not a hand grenade.

But if you design a less sensitive test to avoid "false positives," then occasionally you won't catch a tumor or the guy trying to board an airplane with a semiautomatic weapon -- a "false negative."

Missing the Tradeoff

The challenge of terrorism is that both false positives and false negatives are unacceptable. We can't let just a few terrorists slip in. But if we design a system so sensitive that it will catch every person who has the potential to do us harm, then we're almost certainly going to snare plenty of people who've done nothing wrong.

Palin's smug line about reading terrorists their rights misses this inevitable tradeoff. The tougher we are on potential terrorists, the more legal protections we need to fix our inevitable mistakes. That's not politics, it's basic logic. Should we send everyone who sets off an airport metal detector straight to prison and leave them there indefinitely?

There's a philosophical inconsistency to the GOP position as well. The Republicans are skeptics about the limits to what government can or should do. Again, this is a reasonable position; without market competition, the government tends to be slow, inefficient, and largely unaccountable.

But how can the party that so vociferously (and effectively) maligns government be willing to entrust so much unchecked power to that very same government when it comes to arresting people and holding them without trial? Would you let the Post Office or the IRS or FEMA send people away indefinitely? If not, why should we entrust any other bureaucracy with that power?

Identity Crisis

Remember, this is the party that has historically opposed gun registration for fear that the government might someday swoop in and take away guns from its citizens. Where's that paranoia and distrust of authority when we need it most?

Yes, the Democrats have heaps of problems of their own. A reasonable person can agree with everything I've written here and still conclude that the Republicans are less dysfunctional than the Democrats.

But that doesn't answer the question that's been festering since the Reagan presidency, and has been highlighted anew by McCain's nod to the Palin wing of the party and by his response to the Wall Street carnage: Who are the Republicans, and what do they stand for?