Issues analysis
A conservative economic approach
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Patrick Garry, RenewAmerica analyst
November 20, 2014

The traditional conservative economic approach has often been a reaction to an intrusive and suffocating liberal approach. It has advocated less government regulation and more tax cuts, relying on the reasonably free hand of the private sector to provide the right mix of economic benefits. Conservatism's primary thrust has been to oppose and roll back various government-imposed drags on the economy. And the primary conservative measurement of economic health has been at the macro level – e.g., looking to GDP growth or national income growth, irrespective of whether this growth might be concentrated in the higher income segments of society.

When conservatives have taken a more micro focus, they have tended to look at the financial situation of businesses or entrepreneurs – the presumption being that if the job creators are thriving, the job occupants and seekers will also be thriving. But given recent economic developments during the Obama era, conservatives may need to broaden their focus so as to ensure that the goal of economic mobility and opportunity is available to all members of American society, particularly those occupying the lowest rung of the income ladder.

A political strategy for an age of political transformation

The conservative political losses of 2006, 2008, and 2012, combined with the liberal losses of 2010 and 2014, suggest that American politics is in a period of confusion and uncertainty. And such periods are often preludes to periods of political transformation. Thus, for conservatives to seize the opportunity afforded by the Republican political victories of 2014, they must articulate a positive governing vision specifically geared to the most pressing concerns of the age; they cannot merely rely on reacting against all the Democratic misdeeds of the Obama years.

To articulate this positive agenda in a politically transformative time requires a transformative debate within conservatism, just as the conservative triumphs in the 1980s required the transformative debates of the 1970s. This debate needs to finally address and banish the "party of the rich" image that has been hung on conservatism since the 1930s. And the best way to refute this image is to articulate an economic policy that looks directly to the needs of middle and working-class America.

The path to a governing majority is not the interest-group path that liberalism has taken since the 1960s. No party or creed can achieve a permanent governing majority simply through collecting a coalition of interest or demographic groups. As history has shown, the political alignment of these groups are never immutable. Therefore, something more is needed, something only conservatism can provide – a unifying governing agenda that can extend across demographic and interest-group lines.

An economic approach focused on working-class mobility

At the crux of the conservative view of America is the promise of economic mobility and opportunity for individuals at every step of society's economic ladder. An old adage once pronounced the idea that what was good for General Motors was good for the country. But given the distortional effects of globalization, automation, and increasingly multinational corporations, the new conservative directive should be: what is good for the American worker is good for America. And the conservative hierarchy of economic values should be: first, economic freedom, since only economic freedom can lead to true economic security; second, economic opportunity and mobility, because only true mobility can lead to a freely chosen state of economic security; and third, economic growth, since economic growth is the only way to ensure both security and economic mobility.

Liberalism stops short in its economic agenda, settling for a false promise of economic security – false, since true security can never be achieved without economic freedom, and can never be preserved without economic growth. Liberalism dismisses growth, as if it is something only the rich want. But in reality, growth is most needed by the lowest income classes. Because without growth, the only way lower income classes can advance is through wide-scale government-mandated redistribution, which has always proved disastrous for any society that has pursued it.

In The Moral Consequences of Economic Growth, Benjamin Friedman demonstrates the importance of economic growth to a healthy democratic society. Economic growth leads to a rising standard of living, which in turn fosters greater social tolerance, commitment to fairness, and dedication to democracy. On the other hand, economic stagnation produces a zero-sum politics, which then decreases a society's spirit of generosity and weakens cultural confidence.

Liberal economic policy and the erosion of work

The current crisis in America revolves around an economy of tepid growth. Median household income in 2013 was 8 percent lower than in 2007, the last year before the recession began. Indeed, throughout the recovery after the recession, median household income continued to fall. Although incomes of the wealthiest individuals increased significantly, the median family income declined by 5 percent between 2010 and 2013. But as predicted by Friedman, this erosion of middle-class income has produced a very pessimistic public mood. According to the Pew Research Center, 79 percent of the public rate current economic conditions as only fair or poor. Just 22 percent think the economy will be better a year from now, and only 21 percent think the recession has ended.

During the Obama era, the integrity of work has been one of the most serious casualties. According to The Wall Street Journal, nearly seven million Americans are stuck in part-time jobs. They want full-time jobs, but those jobs are not available, largely because of such full-time job-depressing influences as the Affordable Care Act. There are still two million fewer full-time workers than there were in 2007. And only 47 percent of all adults are working full-time.

The proportion of Americans in the labor force is at a 36-year low. For decades, wages constituted about 55 percent of total national income. But in the wake of the Great Recession, that measure dropped to 50 percent. High-wage industries have lost a million positions since 2007, and the highest job-growth is occurring in low-wage, low-skill, part-time industries.

Even after the end of the Great Recession, tens of millions of working-age Americans remain jobless, working part-time involuntarily or having dropped out of the workforce. According to the Bureau of Labor Statistics, almost 91 million people over age 16 are not working, which is a record high.

Other indications of the current economic malaise

The decline in job creation corresponds with a decline in new business start-ups, which in many industries is near a 35-year low. Indeed, if the rate of start-up formation after the Great Recession had been equal to what it was during the Reagan recovery, 760,000 additional jobs would have been added in just one year. But job creation during the present age has been inhibited by government action. The National Federation of Independent Business reports that worries about the expansion of the regulatory state and the burdens of bureaucratic red tape under President Obama have become small businesses' primary concerns. And over the course of the Obama presidency, these concerns have more than doubled.

The Obama administration has attempted to spur economic growth and prosperity through government spending. Such spending has increased so much that the federal debt held by the public, as a share of GDP, has grown from approximately 30 percent in 2001 to nearly 80 percent in 2014. But, as demonstrated by the decline in median household incomes, government spending does not produce economic growth. This is a lesson that has long been known, since the multiplier for government spending is less than 1, which means that a dollar of government spending produces less than a dollar of economic growth.

For decades following World War II, the U.S. economy grew at an average annual rate of 3.3%. But the growth rates for the Obama years are: 2009 – minus 2.8%; 2010–2.5%; 2011–1.8%; 2012–2.8%; and 2013–1.9%. The Obama economic policy has essentially relied on three approaches: a huge boost in government spending, which was supposed to create new jobs; a tax on the wealthy, which was supposed to address the growing inequality; and a reliance on the Federal Reserve zero-interest rate policy, which hasn't increased median family income, but which has fueled a record stock market and significantly added to the wealth of the already-wealthy.

A contrast to the liberal approach

The Left does not have any growth ideas for the economy. The minimum wage, for instance, is no growth measure. It will benefit those lucky individuals who keep their minimum wage jobs, but it will decrease the number of such jobs in the future. And it may end up keeping minimum-wage workers at their current wage level for longer periods of time without salary raises. Furthermore, since the holders of minimum wage jobs may not be individuals from low-income families – they may be children or spouses of a primary earner who makes a higher income – the minimum wage may not be effective at helping poor families.

A better means of helping low-income families would be to expand the Earned Income Tax Credit, which directly targets low-income families rather than just low-wage workers. Moreover, since the EITC operates through the tax code, it has the benefit of being financed disproportionately by those with the highest incomes; on the other hand, raising the minimum wage operates as a burden on those employers who hire low-wage labor. And normally, such employers are not wealthy individuals.

Instead of an increase in the minimum wage, a better way to help low-income people would be to reduce the costs of energy, education, and healthcare.

The minimum wage reflects the Left's focus on minute, insular, government-controlled measures to address the much bigger problem of economic stagnation. Another such measure is the recent move to prohibit so-called tax inversions, through which U.S. corporations seek to merge with foreign corporations, thereby taking advantage of more favorable tax laws abroad. But this approach does not address the fact that the U.S. has the highest statutory corporate rate in the 34-member Organization for Economic Cooperation and Development. Moreover, the vast majority of OECD countries do not impose taxes when their companies reinvest their foreign earnings at home.

The Left talks about making the tax code more progressive as a way of remedying the growing inequality. But this is not a true remedy; it just looks like one. Income taxes cannot be cut for the nearly fifty percent of individuals who do not pay any taxes. And since the top five percent of taxpayers already pay about 64 percent of income taxes, it becomes nearly impossible to wring anything more out of those taxpayers without them moving their income to some tax-protected haven. This reality is demonstrated by the Obama tax hike, which although designed to soak the rich, instead gave the middle-class a bath.

It is often argued that liberalism advocates a redistributionist economic program. But that is not the most accurate description of the liberal aim, since all the government programs since the 1960s have not been too successful at actually achieving an income redistribution toward the poor and working class. Instead, the best description of the liberal agenda is one of public sector enhancement.

Economic versus government growth

The growth of government, either in power or influence or scope of activity, lies at the core of the liberal agenda. Entitlement reform is opposed because it might shift some responsibilities or activities toward the private sector. Deregulation is not supported because it might result in reforms that would diminish the role or power of government. Taxes are not cut because the reach of government might be scaled back. Given the historic failure of liberal policies to produce either vibrant economic growth or a just and sustainable income distribution, the only rational description of the liberal agenda is a desire to expand the size and influence of the public sector and those who occupy it.

The conservative economic program focuses on the private sector, because, as history has demonstrated, only the private sector can provide the kind of growth needed by those on the lower income steps of the economic ladder. This is not to say that the private sector can provide perfect economic results if the government just stays out of the picture; it is just to say that the private sector is the engine of economic growth. Like any other engine, it may need tune-ups and repairs; but the tune-ups and repairs serve the needs of the engine, because only an engine can power the vehicle.

Economic growth should be measured not in terms of the stock market or how much wealth is being acquired by the wealthiest segment of society; nor should it focus on corporate profits. It should focus on the opportunities for advancement available to working Americans, not the level of government benefits or the ability to survive without work. What is needed is a growth that provides economic mobility to working class Americans. And what fuels growth is production. While liberalism looks to what individuals can consume, conservatism looks to the ability of individuals to produce, because production is the foundation of consumption.

Conservative policies

One way to promote growth is to reduce the tax code's bias against saving and investment. Cutting taxes on savings spurs investment, which grows the economy and expands economic opportunity, from the entrepreneur to the entrepreneur's employees. Investment raises the productive capacity of every worker, and such investment can be spurred by reforming the R&D (research and development) tax credit, which facilitates the research that drives business innovation.

Despite record profits, U.S. businesses are not investing in new plants and are not hiring new employees at the pace they normally would. History shows that workers do well, and have rising incomes, when investment taxes fall. But the high corporate tax rate is holding the economy back. It also keeps trillions of dollars locked offshore, preventing U.S. companies from reinvesting overseas profits back in America and creating jobs here.

Conservative economic policy has to be something different than simply across-the-board tax cuts. These made sense in the early 1980s, when the top tax rate was 70 percent and inflation kept pushing people into higher tax brackets. However, the top rate is now just 39.9, and nearly half of all Americans pay no income tax at all.

Instead of blanket tax cuts that primarily benefit the highest income taxpayers, the more productive tax policy would be, for instance, to increase the federal tax credit for children, thereby helping to ease the burdens and sacrifices that parents incur in raising the next generation of workers and taxpayers.

Government can help the economy by relieving the debt burdens that suffocate the economy and simplifying the regulatory structure so that small business can comply with the law without having to hire compliance experts that only big corporations can afford. Currently, the federal tax code favors a debt culture over a production culture. It does not tax dollars spent on consumption, but it does tax asset returns that result from savings. Nor does it provide many incentives for saving. Moreover, since the recession, monetary policy has tried to boost consumption through low interest rates – but this discourages savings by producing minimal interest returns.

Conclusion

As conservatives formulate a governing strategy during a period of political transformation, a primary focus should be a sound, fair, positive economic policy. Rather than simply trying to gather a sufficient number of interest or demographic groups for a governing majority, conservatives should articulate a political philosophy capable of bridging all those different interest groups that the Left tries to fragment through an array of individualized benefits. There can be no unifying political philosophy without such an inclusive economic policy.

A basic difference between conservative and liberal economic policies is the difference between growth and status. Conservatism seeks to encourage and maintain a growth culture within the economy, whereas liberalism seeks to provide government benefits based on a static individual status. But this latter approach ensures a continuing level of strife and conflict built into society, which in turn will ensure the constant presence of government as the final and central arbiter.

Under the conservative approach, growth provides the best security and harmony for society – a growth that produces a rising standard of living for everyone. The liberal approach, however, seeks an unsustainable security through government mandates and penalties. It envisions individuals as government beneficiaries, whereas conservatism sees individuals as individual actors able to take advantage of what upward opportunities the economy offers. And it is the job of government to ensure that these opportunities remain open and accessible.

© Patrick Garry

RenewAmerica analyst Patrick Garry also writes a column for RenewAmerica.

 

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They that wait upon the Lord shall renew their strength. —Isaiah 40:31