Hank Paulson’s bail-out of the financial industry will cost taxpayers $700bn. Some believe that the bail-out signals an abandonment of the Reagan Republican goal of limited government. That debate is under way.

Those who think Republicans have ditched their limited-government aspirations point to the Bush administration’s reflexive “throw money at it” response to every crisis. In 2001 the first response to September 11 was not to attack al-Qaeda, but to pass a $20bn domestic spending programme. The response to Hurricane Katrina was $85bn in public spending. The collapse of AIG, the insurance giant, cost $85bn; Freddie Mac and Fannie Mae a further $42bn. And now we have the pièce de résistance – the opening bid of $700bn for the financial bail-out of Wall Street. Got a problem? We throw money at it.

Under George W. Bush federal spending rose from $1,789bn in 2000 to an estimated $2,955bn for 2008; from 18.4 per cent of gross domestic product to 20.8 per cent. In 1996 Bill Clinton announced that the era of big government was over. Perhaps Mr Bush has, on behalf of the modern Republican party, raised the white flag in surrender to bigger government.

But today’s policies turn into tomorrow’s party platform if they are successful. Ronald Reagan redirected the modern Republican party away from Eisenhower’s accommodation to the New Deal and towards tax cuts, spending restraint, strong national defence and less regulation. In pursuing those policies, he helped win three presidential elections, captured the US Senate for his party for the first time in 26 years and left a legacy of a growing economy and a broken Soviet Union.

Mr Bush’s consistent bent towards spending, and failure to reduce the regulatory burden, saw him limp to re-election with 51 per cent of the vote and led to the 2006 loss of the House and Senate, won on behalf of Reaganism in 1994. Senator John McCain won the Republican nomination running as “Not Bush”. If he wins the presidency, it will be in large part because of his distance from Mr Bush.

Parties redirect themselves towards success and away from failure. When Mr Bush leaves the White House, the modern Republican party will snap back to being the Reagan Republican party. His experiment in big government Republicanism will be seen like Richard Nixon’s example before him – as an aberration, a detour in the march from Goldwater to Reagan.

The Democratic party is already the party of tax and spend. There is no future for the Republican party as a second party willing to spend and spend. The only alternative to tax and spend is reform and limit.

America may be stuck with a massive bail-out of the financial system. The question now is whether there will be any reform that can prevent a second or third failure. This financial mess is already an encore. In the 1980s the federal government’s guarantee to investors amid the savings and loans crisis created moral hazard. It encouraged banks to make riskier loans knowing they would reap any rewards and that taxpayers would be stuck paying for federally insured losses. This time the game was played with a similar federal guarantee standing behind two government-sponsored enterprises, Fannie Mae and Freddie Mac.

The waste of good taxpayer money to buy bad loans can be mitigated if it is accompanied by reforms that make a second collapse and bail-out less likely. Reforms would include having the president repeal the Clinton-era regulation that expanded the Community Reinvestment Act and pressured banks to make bad loans.

Mr Bush could, by executive order, redefine the basis on which capital gains taxes are calculated to being based on historical costs plus inflation. That would exempt the inflationary gains in houses, buildings and stocks from capital gains taxes and so raise the real value of those assets. Creating real wealth by reducing the tax burden on savings and real assets is an improvement on shifting money from sound investments to bad ones.

Mr Bush should also direct the Securities and Exchange Commission to make mark-to-market accounting for distressed assets voluntary. This accounting regime has forced companies to value assets at less than their intrinsic value, merely to reflect current market uncertainty. Finally, the financial records of Fannie Mae and Freddie Mac should be put on the internet to provide complete transparency to every e-mail, contract, and personnel and loan decision.

There are models of success. Welfare reform in 1996 was not about throwing more money at a problem. It led to a reformed and limited welfare system that freed millions from dependency. The Freedom to Farm reform in 1995 phased out farm subsidies in return for greater freedom for farmers.

Spending more money is what politicians do when they cannot be bothered to govern.

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Grover Norquist is president of Americans for Tax Reform and author of ‘Leave Us Alone: Getting the Government’s Hands Off Our Money, Our Guns, Our Lives’. This Commentary first appeared in the Financial Times, www.ft.com.