Beyond Tax Cuts

Below you’ll find “Beyond Tax Cuts,” an NR essay published in December of 2008. I think it holds up pretty well.

Michael Pollan, best known for his polemics against the food-industrial complex, has made a minor villain out of Earl Butz, Richard Nixon’s secretary of agriculture. Faced with a sharp spike in inflation, the Nixon White House sought to win the political allegiance of housewives by taking sweeping steps to lower agricultural prices. Butz slashed regulations and trade barriers while increasing subsidies. The result: Family farms closed down, huge agribusiness concerns expanded mightily, production soared, and domestic food prices fell dramatically. For Pollan, Butz’s machinations lie behind the current obesity epidemic and a broader coarsening of American life. But there is a very real sense in which Butz ended the specter of hunger in the United States. Apart from the subsidies, there is much to admire in his approach: His package of reforms delivered a better quality of life to millions of Americans. 

Now, Richard Nixon is hardly a model for Republican domestic policy. His crude Keynesianism and his embrace of wage and price controls are rightly condemned by conservatives, not least because such recklessness helped set the stage for stagflation. But Earl Butz’s approach deserves another look. 

We sometimes forget that strengthening the free market often requires policy activism. Standing pat has its place, but anti-market forces can turn the inaction of the other side to their advantage. This will become very clear in the first few months of an Obama White House. Aided by his shrewd enforcer, Rahm Emanuel, Obama looks set to reshape the American state in ways that will permanently ratchet up the size of government and the cost of living. And until the bill comes due, it is a safe bet that a majority of voters will cheer him on. For now, Republicans can only react to what Obama does. Over the longer term, the party needs to develop a strategy that, like Butz’s agricultural reforms, will have a significant impact on the quality of life of working-class and middle-class voters. 

American workers are, as we all know, feeling anxious and vulnerable. And when we think of the political implications of this souring of the American mood, we tend to think, correctly, that it helps the Democrats. Barack Obama’s victory is not, as some self-described progressives dearly hope, a mandate for robust social democracy. Just as Bush did not win in 2000 and 2004 because of his supposed commitment to free markets, there’s no reason to believe that voters carefully evaluated Obama’s economic program and found it persuasive. Rather, Democrats won because recent developments have sharply reduced the number of Americans who are optimistic about their economic prospects. As the Pew Research Center has found over the years, economic optimists tend to be Republicans. That is, people who believe that they control their own economic fate, and that the future will likely be brighter than the past, tend to vote Republican by overwhelming margins. This is true among blue-collar workers as well as affluent professionals.   

As Thomas B. Edsall noted in his ill-timed Building Red America, published just in time for the massive Republican congressional defeat of 2006, blue-collar Republicans differ from blue-collar Democrats in a number of respects: They are more likely to be in intact families, they are less likely to belong to labor unions, and they generally believe market competition is a good thing. To put it crudely, blue-collar Republicans see themselves as economic winners — which is why the current downturn is bad for Republicans beyond the important fact that it has happened on a Republican president’s watch. Remember the old saw that FDR made working-class voters rich enough to vote Republican? In a similar vein, the broad prosperity of the 1990s, a shared legacy of Clinton and a Republican Congress, buoyed Republican fortunes. 

As economic optimism erodes, there is a danger that we’ll fall into a vicious circle in which economic pessimism drives policy shifts that make it even harder for American workers to get ahead. In 2003, economists Alberto Alesina and George-Marios Angeletos published a provocative working paper titled “Fairness and Redistribution.” Their argument was that our beliefs about fairness shape our beliefs about redistribution. If you believe that the system works and that hard work is rewarded, you will favor low taxes and low levels of redistribution. If, in contrast, you believe that the system is broken and corrupt and that only insiders and cronies are rewarded, you will favor high taxes and high levels of redistribution.

The irony is that a system in which the state plays a larger role in the economy is a state in which rent-seeking behavior is more pronounced. So a belief in the unfairness of the system often becomes a self-fulfilling prophecy. If the United States really is sliding into crony capitalism, as Thomas Frank and other liberals have forcefully argued, the solutions on offer from the Left — which promise a bigger, more active government — create new opportunities for privileged insiders to make large fortunes by trading on their political connections. 

How can Republicans escape this trap? It is important to keep in mind that inequality matters less than the prospects for economic advancement, and that a high and rising cost of living damages those prospects. The next Republican domestic policy needs to address multiple barriers to upward mobility, not just one. In 1980, a punishing federal income-tax burden was the key obstacle faced by middle-class families. At the time, a median-income family of four was paying 11 percent of its earnings in federal income taxes. Today the figure is less than 6 percent, but they’re still giving up too much of their paycheck in other ways. And now the obstacles to prosperity are more diffuse, which makes them tougher to understand and to unravel.   

The Democrats have a keen understanding of this new landscape. During the 2004 campaign, Howard Dean blasted Republicans for what he called “the Bush tax hike.” Though your federal income-tax burden might have dipped, Dean argued, you were paying more in state and local taxes and for health care under Bush. So in effect, unless you were very wealthy, you didn’t see any real benefit from the tax cut — or so the argument went. 

Luckily for Republicans, Dean was hardly the perfect messenger. But the idea was potent all the same: When Republicans focus almost exclusively on the federal income-tax burden, they talk past the public. Today’s median-income family of four may be paying less than 6 percent of its earnings in federal income taxes, but health-insurance premiums generally amount to far more than that. And because those higher premiums haven’t produced a higher quality of service, many Americans feel like they’re running in place. That’s how you feel when you’re paying higher taxes for the same unsafe streets and the same unresponsive bureaucracy. It is hardly surprising that Republicans have remained fixated on taxes since 1980: Fighting taxes is far easier than, say, fighting health-care inflation. The trouble is that health-insurance premiums affect households at least as much as taxes do. 

If we think of middle-class prosperity as a bundle of goods, the challenge becomes clearer. Apart from health care, squeezed families are worried about housing, traffic congestion, and, more than 30 years after Butz left office, the price of food. Fortunately, there are pro-market policies that can address all these challenges. To win back the White House, Republicans need to start fighting for them.  

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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