Magazine | December 3, 2012, Issue

Beyond Tax Cuts

The GOP needs a broader economic agenda

Everything you think you know about the decline of the U.S. economy is wrong. The United States is today the world’s largest manufacturer, as it long has been. Depending on whom you ask, the United States is either the world’s largest exporter or the world’s second-largest exporter. For all that dumb talk about the menace of “foreign oil,” the United States is today a net exporter of petroleum products — we import a lot of cheap crude and export a lot of expensive fuel. The International Energy Agency projects that the United States will become the world’s largest oil producer by 2017, surpassing Saudi Arabia. U.S. technology firms such as Apple and Google are the envy of the world — a world that sends its best and brightest to U.S. universities for the purpose of bringing them into contact with the innovative, entrepreneurial culture of which Apple and Google are emblems.

That’s a lot of opportunity. And all Republicans can think to talk about is tax cuts?

The poverty of the Republican economic imagination is something to behold. Tax cuts are held up as the cure for everything from stagnant growth to high unemployment to lumbago. And, as it turns out, Mitt Romney was right in one way when he made that “47 percent” remark: People who are net beneficiaries of federal transfers are not very much excited by the possibility of tax cuts. Ronald Reagan boasted of all the people of modest means he had taken off of the tax rolls, and he had good reason for doing so, but once you’ve taken the income tax out of a voter’s life, an income-tax cut is not the way to bring him into your party.

The economics of tax rates is a below-the-surface issue: Even people who do not themselves have direct tax liabilities pay a share of dozens of taxes they’ve never heard of. That is because of the counterintuitive fact that individuals operating in free markets pay taxes collectively: If you rent an apartment, you don’t get a property-tax bill every year, but you can be sure that you pay most or all of your landlord’s property-tax bill, possibly at a higher commercial-property rate and without the income-tax deduction for mortgage interest. Which is to say, as a person who does not get a property-tax bill, you’re probably paying a higher real-property-tax rate than somebody who owns a home. Every time you order a Big Mac, McDonald’s is negotiating a portion of its tax expenses into the deal. Every business suffering increased costs from Obamacare — which is to say, practically every business — will try to offload a portion of those costs onto consumers. And consumers, in their role as employees, negotiate with their employers for higher compensation to offset living expenses, of which taxes are a large component for upper-middle to high-income workers — i.e., for those who have the most negotiating power in the marketplace. That’s why technology companies, for example, often have to pay a San Jose–based employee more than a comparable Austin-based one. The reality is that taxpayers are in an important sense all in this together. (And never mind the question of whether a tax cut is really a tax cut when you have permanent deficits: As I have argued in these pages, it is more accurate to regard such cuts as tax deferrals, because the real level of taxation is the level of spending. Borrowing just shifts the tax burden into the future.)

So the economics of tax rates is deep, but the politics of tax rates is right on the surface: Tax-cut proposals are politically inert among voters not directly exposed to the taxes to be cut. Reagan’s success is the modern Republican’s burden.

But conservatives have a great deal to offer the country other than tax cuts.

The first and most important thing they have to offer is fiscal rectitude. Note that I wrote conservatives, not Republicans. The unified Republican government under George W. Bush, whatever its other virtues, spent money like nobody’s business, and that generation of Republican leaders managed to singlehandedly destroy the party’s reputation for fiscal restraint. They took a piece of bad luck — the Clinton-Gingrich surpluses were always destined to be temporary as entitlement spending escalated and the millennial boom tapered off — and made it a great deal worse. All of those Democrats braying about how Republicans squandered the surplus would have sounded a lot less convincing if W. & Co. had not described the tax cuts as measures designed to eliminate the surplus. Mission accomplished, geniuses.

The major driver of deficits going forward is of course entitlement spending, and Republicans have some excellent ideas about entitlement reform. But it would be wrong to write off the rest of the budget as small ball: 20 percent of the greatest Leviathan the planet has ever seen is still a lot of green, and there are very good economic and political reasons for going after it. No, euthanizing Big Bird is not going to balance the budget, but there is a strong case to be made against having state-run media in a free society. Foreign aid is a minuscule fraction of federal outlays, but there is a strong case to be made against shunting funds to people who are, pardon us all for noticing, indistinguishable from our declared enemies. Eventually, that money adds up to something — and so does the messaging.

#page#The Right complains of “crony capitalism” and the Left of “corporate welfare,” but in the majority of cases we’re talking about the same thing: favoritism for politically connected businesses, often enacted through the tax code but also present in other federal activity. This stuff costs a great deal of money — and it is bad for the economy in that it keeps capital and energy locked up in enterprises that are viable only because they are in part sustained by politics. Corporate welfare makes markets less efficient, stifles competition, and undermines innovation — and makes the country pay for the privilege. There is no need to let the Left and the ideologues who want to abolish patents dominate the conversation about corporate welfare: An enterprising Republican looking to build a name for himself would not have very far to look for an issue that both bolsters the party’s reputation for fiscal responsibility and provides much-needed evidence with which to answer allegations of Republicans’ thrall to Big Business. Opposing the GM bailout would have looked a lot better coming from a party that had consistently opposed other examples of cronyism. Ripe targets include the Overseas Private Investment Corporation, the Small Business Administration, and about half of what the Commerce Department does.

And unless the Republican party is ready to go the full Rothbard and declare itself an anarcho-capitalist outfit (this I do not recommend), it should work to discover a few areas of government in which it finds value beyond those engaged in the sometimes necessary but never profitable business of bombing the tar out of dusty little countries harboring fanatical savages. As conservatives and free marketers, we have our skepticism about the ability of federal bureaucracies to do much of anything right, but there are a great many opportunities for marginal improvements through reallocation of resources. As the economist Tyler Cowen has argued, a dollar spent on medical research is almost always more productive than a dollar spent on health-care benefits. Most of the work done by organizations such as the Centers for Disease Control constitutes a legitimate public good. If Republicans ever get serious about cutting spending, they will be sorely tempted to repackage some of those savings as tax cuts. And while shrinking the federal footprint is a necessary thing — both a moral and an economic good — moving resources from the stuff that government has no business doing to the things that it does constitutes a real improvement, too. Encouraging research at institutions such as the CDC or DARPA, as well as supporting university-based science and technology research, is one of the best uses a federal dollar ever sees. Republicans who want to be in favor of something rather than against something might take a look at that.

We are in the early stages of an energy renaissance, which will produce many excellent opportunities for manufacturing, heavy industry, technology, and related fields. We also remain a world leader in the original mass-production business: farming. China is already using two-thirds of its annual water consumption for irrigation, and there are real constraints on its ability to continue to expand food production. The production of essential products such as energy and food provide a great many employment opportunities for the people who have suffered the most during the long stagnation in real-money wages that has afflicted the lowest-earning half of Americans for the past several decades. We have plenty of resources for the kids who are bound for Harvard and MIT, but for the up-and-coming generation of non-elite workers, from laborers to managers and professionals, things look grim — and they have for a while. Republicans have some very good and politically popular ideas about education reform: Romney was right to call that his “human capital” agenda. Republicans are uniquely well positioned to take a meat axe to the departments of diversity and the colleges of underwater basketweaving, redirecting scarce resources into programs that will help to prepare students for real-world jobs and connect them with real-world opportunities. Yes, it would be great if the guys working in the Pennsylvania gas fields read Cicero — and they’re a bunch of smart guys, so maybe they do — but they also need steady jobs at decent wages. And for those who are not college-bound, it would be an excellent thing if there were fruitful and productive career paths that began at 18 rather than at 28.

But somebody has to build those educational programs. Somebody has to design those economic reforms. Somebody has to make sure that CDC budget doesn’t end up going into the pockets of grievance lobbyists or do-nothing contractors. If Republicans can’t take a look at our economy, our society, and the situation of our young people at this critical moment in our history, then they are not paying attention and do not deserve to lead. If tax cuts are the best they’ve got, they’re done.

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