Magazine | December 31, 2009, Issue

Growth Is Not Enough

(Roman Genn)
Conservatives need to present a comprehensive economic agenda

On hearing that the unemployment rate had finally started to drop, conservatives and Republicans were stony-faced. On December 4, the Department of Labor reported its initial estimate that the economy had lost only 11,000 jobs the previous month, the fewest since December 2007. The unemployment rate had dropped from 10.2 to 10 percent.

John Boehner, the House Republican leader, issued a press release accentuating the negative. He quoted a Republican economist: “Any single report is inconclusive . . .” Jobs were still being lost; the unemployment rate had fallen only because some people had stopped even looking for work; fully 52,000 jobs were temp work. Speaking on Fox News, columnist Charles Krauthammer also dwelt on the “caveats,” noting for example that previous months’ reports had had to be revised and predicting that this one would be too. James Pethokoukis, another conservative columnist, posted on his Reuters blog “12 reasons the job market is worse than you think.” (“Single month dips are common . . .”)

The caveats are real, but there are caveats to the caveats. The initial reports about September and October turned out to exaggerate job losses. If the report about November is also revised upward, it could show job gains. Temporary work can be expected to surge in the early part of a recovery, when businesses start to see higher demand but remain nervous. The ratio of discouraged workers to people who are looking for work but can’t find it is not especially high right now. If the economy recovers — and the trend line of recent unemployment reports, along with a lot of other economic data, strongly suggests that recovery has begun — both groups will shrink.

The reaction to the jobs report shows that conservatives and Republicans are inclined to discount good news and play up bad news. This inclination may seem to be smart politics given the high unemployment rate and public dissatisfaction with the economy. But it could turn out to be unwise.

Republicans assume that unemployment will still be high in the congressional elections next November: that even if the economy recovers, it will be a “jobless recovery.” They further assume that unemployment numbers will doom the Democrats. Both assumptions are open to challenge.

Let’s take them in reverse order. The evidence that elections turn on unemployment is surprisingly weak. None of the major formulas that economists have used to predict presidential elections includes unemployment as a variable, although some of them do consider inflation, growth, and other economic statistics.

Many people ascribe the Republicans’ loss of 26 seats in the House elections of 1982 to the high unemployment rate at that time. At 10.8 percent, unemployment in November 1982 was higher than in any other election since World War II. The next-highest unemployment rate was 7.9 percent in 1976. But Michael Barone has estimated that 15 of the Republicans’ seats were really lost, even in that horrific economic environment, to redistricting. The party’s strength in the Senate was unchanged that year. And 1982 is the last congressional election in which unemployment has been said to be decisive. Inflation and growth affect more voters than unemployment does — even in recession years — and they may therefore affect election outcomes more, too.

More important, none of us knows what the economy will look like next fall. The conventional wisdom has been that this recovery will conform to the pattern of slow job growth set by the early stages of the last two, which started in 1991 and 2001. But there is some reason to think that sharp recessions tend to be followed by strong recoveries (as happened soon after those 1982 elections). And in any case, the conventional wisdom expected the November jobs report to be much worse.

The dangers for Republicans should be obvious. Their message now is that Obama’s policies are failing because unemployment is high. If unemployment starts to fall rapidly, Obama will, as president, naturally reap some of the credit. But he will reap an extra share because the Republican message will be discredited. Worse, Republicans could start to give the impression that they are rooting for continued economic pain for the sake of political gain — an accusation that the president is already making.

In 1993, Republicans argued that President Clinton’s tax increases would ruin the economy. When the economy proceeded to boom, it seemed to validate Clinton’s entire economic philosophy. The Republicans would have done better to make the more defensible claim that the tax increases would reduce the long-term growth rate. The analogue today would be to say that Obama’s program will cause the recovery to be weaker than it would otherwise be, and that the current policy mix is likely to yield inflation.

Two of the sharpest and most energetic conservative Republicans, Reps. Jeb Hensarling and Paul Ryan, took this tack in a recent op-ed for the Wall Street Journal. “Many investors are reaching the conclusion that this administration and Congress favor policies that virtually guarantee the economy will not return to the climate of low interest rates, benign inflation and strong growth that we knew from 1982–2007,” they wrote. “When you repeal the Reagan economic program, you repeal its results.”

A broad focus on economic growth, rather than a narrow focus on jobs, has served Republicans well during the past generation. But returning to a Reaganite politics of growth, while an improvement on a platform of pessimism, is unlikely to be enough to bring about a Republican restoration. The public may look back fondly at life before the recession, but at the time, the “Bush boom” did not inspire enthusiasm from the voters.

That’s because for a lot of people it didn’t feel like much of a boom. The low interest rates, low inflation, and strong growth that Hensarling and Ryan rightly celebrate turned out to be compatible with wage stagnation. According to the Census Bureau, median household income fell every year from 1999 through 2004, rose a mere 3.2 percent over the next three years, and then fell again. The latest figure is for 2008, and it shows Americans with a lower median household income than they had in 1998.

A common left-wing analysis of this stagnation holds that wages are not keeping up with productivity growth, as they are supposed to. It follows that workers’ bargaining power needs to be bolstered, most importantly by strengthening unions. Economist Robert Gordon of Northwestern University has recently found, however, that correcting some statistical distortions eliminates almost all of the gap between productivity and wage growth. There is no reason, for example, that productivity growth in the private sector should match wage growth in the whole economy; lack of productivity growth in the public sector must also be factored in.

Other analysts argue that the problem is that productivity itself has been growing too slowly. Economists Claudia Goldin and Lawrence Katz have published an influential book arguing that an important reason for rising inequality is that in recent decades American educational attainment has not been rising as fast as it once did. They advocate policies to increase the percentage of Americans who receive college diplomas. Their work may shed light on the problem of wage stagnation, too. But in a review of their book, economists Arnold Kling and John Merrifield poked some holes in their thesis. In the first place, it is not clear that encouraging more schooling is an efficient way to increase skill levels; and the growth in graduation rates between 1950 and 1970 could not have kept going forever, as a matter of simple mathematics. (The graduation rate, that is, cannot exceed 100 percent.)

Conservatives who look at the statistics typically minimize the problem. They point out that the decline of marriage rates makes median household income lower than it would otherwise be. Replace one household making $70,000 with two making $35,000 apiece; nobody’s wage has to drop but the median will.

Conservatives also often argue that consumption is the best measure of economic welfare. Kevin Hassett and Aparna Mathur of the American Enterprise Institute have explained in these pages that middle-class consumption grew even during the Bush years. Updated figures they supplied to NR suggest that middle-income households increased their consumption by 11 percent between 2001 and 2007. Debt surely financed some of this increase.

But it’s also worth noting that health care represents a large and growing chunk of that consumption. Most people get their insurance through their job. Employers nominally pay a large share of insurance premiums, but in reality, that employer expense is a part of compensation that could have gone to wages. The evidence strongly suggests that over the last few years rising health-care costs have eaten up what would have been raises. In other words: Total compensation has been rising, but not take-home pay. It is no coincidence that some of the best years for wage growth in recent decades came in the late 1990s, when HMOs slowed the growth of health-care costs.

The growth of employee benefits at the expense of wages constitutes both an economic and a political problem. The economic problem is that much of the spending is inefficient. If people were free to dispose of their total compensation as they saw fit, with no tax breaks encouraging medical spending, they would be better off as they spent less on health care and more on everything else.

The political problem is that this increased compensation, because it has not taken the form of raises, has been invisible to most people. People do not feel better off because their employer is spending more on their health insurance. This could very well be a problem for Obama: If he fails to restrain health-care costs, even a strong and job-full recovery will not generate the wage growth people want. In the long run, though, the political problem for conservatives is deeper. It is hard to see how a political consensus for pro-growth policies such as free trade and a reduction in corporate income taxes can be built in the absence of rising take-home pay.

Conservatives should therefore pursue the right kind of health-care reform not merely as a way of staving off socialized medicine or even of improving the health-care system. Such reform is an indispensable piece of a conservative economic agenda, in a way that it wasn’t in 1980.

In his February address to Congress, President Obama said, “The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. . . . Now is the time to act boldly and wisely — to not only revive this economy, but to build a new foundation for lasting prosperity.” In this diagnosis, if not in his prescriptions, Obama seems closer to the mark than his conservative critics.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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