Magazine | November 27, 2017, Issue

A Limited, Energetic Government

It is an alternative to both Trump and Sanders

Eleven months later, Washington is still reeling from the election of President Donald Trump. Politicians, operatives and interest groups, the media, intellectuals and writers — everyone is trying to find his footing in this new and unexpected political environment. This is having a major impact on the economic-policy debate.

Democrats are moving to the left, with many, for example, supporting a $15-per-hour federal minimum wage — a harmful policy that only one year ago would have been laughed out of the conference room at the Democratic National Committee. Senator Bernie Sanders of Vermont, a self-described democratic socialist, recently released a bill that would transform U.S. health care into a single-payer system. Remarkably, likely Democratic presidential candidates are co-sponsoring the bill, including Senator Cory Booker of New Jersey and Senator Elizabeth Warren of Massachusetts. This radical proposal found no home among mainstream Democrats in previous years.

Republicans, under the leadership of President Trump, are veering off well-trod ground as well. For example, it is remarkable that a Republican president is opposed to reducing projected spending on old-age entitlement programs. And it is stunning to see a Republican White House retreat from free trade, even if mainly rhetorically.

How should conservatives and economic policy respond to the Trump Right and the Sanders Left?

Before answering, consider how we got here in the first place. I agree with the consensus view that economics and culture collided to create our current populist moment.

For decades, technological advances have been reshaping the U.S. labor market, pushing employment away from middle-class, middle-wage occupations. This change has been wrenching, and neither political party adequately acknowledged it, much less championed policies to address it. Globalization has contributed to this change as well, particularly in local labor markets heavily exposed to import competition. These longer-term, slow-burning trends were exacerbated by the intense shock of and long recovery from the Great Recession. Periods of intense economic downturn are often followed by rising support for populism, driven by anxiety, a sense of loss and displacement, and the hostility towards immigrants and minorities that for too many go along with fear and concern about their own situation.

At the same time, many conservatives — including me — would argue that our culture is headed in the wrong direction. The institution of marriage is in danger of becoming a class marker, enjoyed only by higher-earning Americans. The white working class is seeing its rates of mortality and drug use increase. Suicide rates are up. Children are less often raised by their fathers. Our criminal-justice system needs reform. Men have been abandoning the work force for decades, but over the last 15 years women have been leaving, too. Trust in public institutions is in decline, as is religious attachment. It seems that social isolation and loneliness are becoming the norm for many Americans.

The public discussion has rightly focused on these two factors. But there are others, too. For example, many perceive both political parties as holding the masses — their voters — in disdain. I disagree with this perception, but one shouldn’t defend Mitt Romney’s comments about the “47 percent” or Hillary Clinton’s characterization of the “deplorables.” The populist segment of each party’s base was energized and likely expanded by this sense, and they reached out to candidates outside the mainstream of their parties. (Indeed, Mr. Sanders was entirely outside the party whose nomination he sought. Many would say the same of Mr. Trump.)

In addition, behind both Trump and Sanders there is energy and relief among the populist bases that “finally someone will say it.” “Finally someone will say the truth about Mexican immigrants.” “Finally someone will give the rich what’s coming to them.” This tendency has been fueled by the irresponsible — indeed, deplorable — political-entertainment establishment of each party, and the misguided hope that if “someone finally says it,” then a past-that-never-quite-was might become the present.

Of course, both Trump and Sanders are in part flukes, historical accidents. If the Democratic party hadn’t locked up the primary for Mrs. Clinton, a fringe candidate such as Senator Sanders wouldn’t have been able to attract so much of the vote, build momentum, and become an enduring force in the party. If over a dozen mainstream Republicans hadn’t run in their party’s primary, or if some of those candidates had dropped out of the race earlier, then mainstream Republican voters would have more easily coalesced behind one or two of those candidates and Mr. Trump wouldn’t have been able to seize the GOP nomination. But for a handful of decisions by presidential candidates and party leaders, we’d have Hillary Clinton, Jeb Bush, or Marco Rubio as president right now.

So following a campaign cycle in which long-term economic change collided with the consequences of the Great Recession and a declining culture, and with disdain for political elites and an element of chance mixed in, here we are — in a populist moment, with a populist president, our politics thrown out of balance. The first thing conservatives need to do is acknowledge it. The public debate over economic policy is different now. Fighting progressivism will require appealing to, and making the case for, the conservative first principles of limited government and free enterprise more than was necessary in the past, and will also require arguing against policies more radical than those that Democrats have formerly supported.

In addition, conservatives must have an alternative to the Sanders Left that convinces the American people that the Right isn’t blind to the challenges of daily life and to the longer-term economic issues facing the country. Conservatives must offer both specific policies and an understanding of policy that provide a baseline level of economic security to all Americans and demonstrate that the Right is interested in more than the rich and entrepreneurs.

Conservatives face an even harder challenge vis-à-vis the Republican party. It was never safe to assume that if the GOP was for something, then that thing was conservative. But the assumption is less safe today than it has been for quite some time. Conservatives will have to become comfortable scrutinizing GOP policies more than they are used to doing. And if the GOP is to continue to be the primary political vehicle for conservative thought and priorities in the age of Trump, then the conservative movement needs to provide the party with a compelling policy agenda that is true to conservative principles and can win support both within and outside the party. In other words, conservatives need to convince the Republican party that they are correct on not only the substance of policy but the politics of policy.

How to do this? By championing anew their basic values, principles, and priorities, and the economic policies that flow from them.

These commitments advance a particular vision of society. It’s a society in which free markets reward individual initiative, public policy advances opportunity and empowers people to earn their own success, and dynamism and energy characterize our economic lives. It’s a society that demands personal responsibility, self-reliance, and self-discipline, but also recognizes human imperfection and uncertainty and therefore allows no one to fall too far. And it’s a society in which the “mediating institutions” between citizen and government, most especially the family, are strong and vibrant, and in which social trust is high and bonds of solidarity are strong.

This vision of society acknowledges head-on that members of the working class have been subject to wrenching economic change. But it also acknowledges that they have agency, and that they bear some responsibility for the frustration and anger they feel. They have duties as well as rights. These include the duty to work if they are able, even if the only job they can get pays them two-thirds as much as the manufacturing job they lost years ago, or even if the only job available to them requires them to move a few states away; the duty to provide for and properly parent their children; and the duty to contribute their skills and talents to society.

Public policy should create on-ramps of opportunity for them — more on that later — in the hope that once they are thriving in the labor market they will find it easier to meet their obligations to their families and communities, creating a virtuous cycle in which self-mastery and proper choices in one area of life reinforce them in others and strengthen our common political life.

This is a tall order for public policy, and more than policy is required to meet this moment. Still, conservatives must explain how limited, energetic government, properly deployed, can help people navigate the challenges of the 21st century.

Specifically, conservatives should not retreat from their long-held policy views.

In the trade-off between economic growth and equality of outcome, the Sanders Left will much more forcefully advocate equality, to the point that — unlike Clinton Democrats — they may argue against the importance of robust, sustained growth altogether.

It’s always good to point out that socialism didn’t work out so well under Stalin and Mao — and isn’t working out so well in Venezuela, either — and that the only way to avoid social conflict over the distribution of resources is for resources to be growing. Why? Because if the economy isn’t growing, the only way for me to do better is for you to do worse. Economic growth promotes social harmony.

Even in a developed economy such as ours, growth is critical. If the U.S. economy grows at 1 percent per year, it will take 70 years for income per capita to double. At 3 percent per year, income will double in 24 years. It’s hard to imagine a government program that is anywhere near as effective as growth at getting income into the hands of American households throughout the income distribution. Growth also gives young people the opportunity to strive and to dream of a future that they haven’t experienced. We all want to use our skills and talents to contribute. Economic growth helps us do that.

Conservatives and liberals have spent many years arguing about whether the top marginal income-tax rate should be 35 percent or 39.6 percent. But the Sanders Left won’t be content to stop at 40 percent. They’ll want it above 50 percent, and likely much higher. Conservatives must be ready to rebut proposals to take it significantly higher — not just proposals to increase it by a few percentage points.

The usual argument against increasing the top tax rate by a few percentage points is that it would discourage work and investment. This is true and important. But a much larger increase of the Sanders kind would not only discourage work and investment — it would have the more damaging effect of discouraging human-capital accumulation, such as the acquisition of education and job skills. Why go to law school, for example, if the government is going to take half or three-quarters of the financial rewards for doing so? A very high top rate would also distort occupational choice. Why be a surgeon if you are paying so much of your high income in taxes? Why not just be a nurse? Similarly, why take the risk to start or expand a business if your extra profits will be taxed at such high rates?

A top rate so high that it distorts decisions about education, occupation, and business formation is bad because it results in a lower-skilled work force working in less productive occupations and fewer new businesses. But it’s also bad because of its impact on individuals. Public policy should encourage individuals to reach their full potential. Marginal tax rates as high as the Sanders Left might support would muffle ambition, not encourage it.

Conservatives have long recognized the need to reform the nation’s old-age entitlement programs, keeping them from bankruptcy for future generations. In years past, conservatives could count on support from Republican politicians. But the president is opposed to entitlement reform, and the Sanders Left wants to expand entitlement programs, not reform them.

Entitlement reform is necessary as a matter of plain arithmetic. Under current law, the federal debt as a share of GDP is projected to grow by 14 percentage points over the next ten years, despite the fact that spending on everything — infrastructure, research, the FBI, defense, and all the rest — except entitlement programs and interest payments on the debt is projected to decrease as a share of GDP. Spending on Social Security, Medicare, and Medicaid crowds out basic investments and basic services and puts the nation’s finances in disrepair, and the accumulated debt associated with this spending is a growing threat. Conservatives are used to making this argument to the Left and should continue to do so. But now they have to make the argument to the Trump Right as well.

In another instance of the strange bedfellows created by today’s political realities, both the Sanders Left and the Trump administration argue for mandatory paid family and medical leave. This impulse is understandable, but the policy is misguided. A large share of women already have access to some form of paid time off following the arrival of a new child. The government shouldn’t micromanage the compensation packages of firms that choose not to offer this benefit, which would likely lower the cash compensation of workers. Certainly it shouldn’t be required for all workers, as the administration and the Left want — why not focus resources on those low-income Americans who need paid leave the most? — and mandating that it be offered to men as well as women is a bit much. Yes, if it isn’t offered to men, firms might discriminate in the hiring and promotion of women out of concern that they will make use of mandated paid leave. But that might happen either way: Just because the benefit is offered to men doesn’t mean they will use it to the same extent as women do.

There is no way to expand paid leave without expanding the burden on businesses. This disruption will be felt most acutely by small businesses. And firms will most likely respond to it by hiring fewer low-income women of childbearing age. Conservatives ought to focus their concern on these invisible victims, defending them from the unintended consequences of a well-intentioned policy.

Free trade also needs to be defended from the Trump administration. The basic economics of trade have not changed: If we close ourselves off from the rest of the world, we will be made poorer, we will lose the ability to produce goods efficiently, and the prices of many goods and services will increase, eroding the purchasing power of wages.

But that’s not all we lose. An embrace of protectionism would mean a partial retreat from the liberal order that has advanced peace and prosperity for the last seven decades. Retreating from free trade is a retreat from the foundational proposition that two parties to a transaction should be left to their own judgment as to whether a voluntary exchange makes both better off. It means walking a distance away from liberty.

But holding on to traditional conservative economic policies is not all that is needed in today’s political environment. The conservative agenda needs to be updated to reflect the realities of the 21st century. Because of the Trump administration’s priorities, the two policy areas most in need of immediate attention are health care and taxes.

Both the Sanders Left and the Trump Right are deeply confused about health-care policy. Single-payer health care — rapidly becoming a mainstream goal on the left — would stifle innovation and productivity in the medical sector while reducing the quality of health care and limiting access to it. Single-payer would be incredibly expensive, requiring tax increases that the American people would not tolerate. And it would involve upending the health-care status quo for millions and millions who are happy with their employer-based health insurance. No reasonable plan to manage this transition has been presented, and it’s difficult to conceive of one.

As evidenced by the debacle of its attempt to enact health-care legislation this spring, the GOP is in the wilderness on health-care policy, lacking even a clear goal other than the political one of being able to say that they repealed Obamacare.

The conservative alternative to silliness such as the “skinny repeal” (eliminating Obamacare’s mandates and medical-device tax, and leaving the rest of it largely in place) and socialized medicine should be organized around the goal of universal coverage. President Obama’s lasting legacy is to have won the fight over whether that is the appropriate objective of health-care policy. And regardless of Mr. Obama’s view, in a nation as wealthy as ours, no one should go broke because he got sick or injured. Further, in a nation that values personal responsibility, no one should hoist his bills onto others because he chose to go without insurance. Universal coverage is the right goal.

The best way to pursue it is to fund subsidies generous enough to allow low-income Americans to purchase coverage against catastrophic medical events. The subsidies should be financed by limiting the tax exclusion for employer-provided plans, which would in itself help drive down health-care costs. The right policy would also deregulate the insurance market, allowing insurance companies to compete over price and quality for customers, all of whom can now afford basic insurance thanks to the subsidies. It should also include provisions such as high-risk pools for those who are priced out of the insurance market due to a serious preexisting condition. Conservatives should push for market discipline throughout the system, including a greater focus on the supply side. A smarter and expanded use of health savings accounts is one example of this approach. Allowing for the purchase of direct care from physician groups, allowing a greater role for nurses in the treatment of routine conditions, and an expansion of treatment options for routine and diagnostic services are others.

Done right, such a plan would expand consumer choice, reduce health-care costs, and encourage productivity and innovation in the medical sector — all while moving towards universal coverage.

Congress has moved on from health-care reform, but that doesn’t mean conservatives should. Obamacare is in bad shape, and health-care costs are a concern for middle-class families regardless of where they get their insurance. Especially given the president’s recent Obamacare-related executive orders, this issue isn’t going away anytime soon.

Taxes are an easier lift, if only because the Trump GOP and conservatives are in closer alignment. There is widespread agreement, for example, that lowering business tax rates is important. Lower taxes on businesses would encourage investment in the United States, increasing productivity and wages. It should be a principal goal of tax reform, more so than lowering the top marginal income-tax rate for households.

But about that top individual rate, conservatives must be careful. Steve Bannon, the influential former Trump adviser and executive chairman of Breitbart News, reportedly wanted to raise it several points above its current level. Press coverage suggested that Republicans in Congress might be open to this. For reasons discussed above, this is a bad idea, and it is a stark example of the divide between the conservative movement and the Trump Right.

Also important in any tax reform is the goal that it not add to our long-term debt. Ten years ago, the federal debt was equal to 35 percent of annual GDP. Today, at 77 percent of GDP, it has more than doubled. It is projected under current law to rise to above 90 percent ten years from now, and to keep climbing thereafter. My point? Large budget deficits are increasingly imprudent. Debt rising to projected levels will hurt the economy — reducing productivity and wages, forcing the government to spend a large share of its revenue on interest payments, and increasing the likelihood of a fiscal crisis.

The GOP wants a win on tax reform badly enough that it might be willing to accept a large debt increase in order to get it. Conservatives, who have long championed fiscal responsibility, should oppose adding a large sum to the long-term national debt. Reductions in statutory tax rates should be paid for by broadening the tax base, not by government borrowing.

What might this look like? An example: Revenue from the corporate income tax equals about 1.6 percent of GDP. Cutting the corporate rate in half (to about 18 percent) would therefore result in a (direct) revenue loss of about 0.8 percent of GDP. Eliminating the tax deductions for mortgage interest and state and local taxes would (roughly) cover this revenue loss. By eliminating those deductions — which are essentially government spending on upper-income Americans — we could pay for cutting the corporate rate in half without adding to the debt.

Taxes and health care are the two policy areas getting the most attention so far in the Trump presidency, but they are not the only areas of importance on which conservatives can advance their priorities.

Low rates of work-force participation and sluggish wage growth are also important challenges to confront. Guided by their belief that public policy ought to build ladders of opportunity, conservatives should push to expand earnings subsidies to help pull people into the work force. Relocation assistance targeted on individuals who want to work, have been out of work for some time, and lack the resources to move to a city with a better labor market would also offer them neither a handout nor a cold shoulder, but a hand up. Expanding apprenticeship programs would build skills and raise wages, but would allow the market to determine what skills are taught rather than rely on the judgment of bureaucrats.

State and local governments should take steps to reduce commute times, which have become a barrier to employment in many sprawling cities. Zoning regulation in many cities often makes it harder for workers to afford to live near good jobs. And increasingly over the past few decades, occupational licenses have been issued not to protect the health and safety of consumers but rather to protect established businesses. This is a prime target for deregulation.

Conservatives ought to argue for reductions in barriers at the federal level, too. Reforming our nation’s disability-insurance programs is necessary to ensure that our social safety net does not trap people in unnecessary nonemployment. Studying and testing ways to ease reentry for the incarcerated is a way to provide them with greater opportunity. More broadly, conservatives ought to tackle criminal-justice reform.

Further, conservatives should resist the anti-immigrant hostility the Trump Right is fomenting. Our immigration system should emphasize skills more than it does, and reasonable people of good will can disagree over the appropriate number of lesser-skilled immigrants the U.S. should admit. But the Trump Right goes much too far — unfortunately, taking its lead from the president himself — in demonizing immigrants. They are our neighbors. The party of Lincoln should never stoke racial or ethnic bigotry and anxiety. The longer it takes the Trump Right to learn this, the harder it is for conservatives to stand with them on other issues.

I have not attempted to provide a comprehensive overview of the economic-policy landscape, but have instead provided illustrations of how the rise of Trump and Sanders is changing it and how conservatives should respond.

Underlying the policies I have described are basic principles that in this populist moment conservatives should champion anew. Strong commitments to individual liberty, to the free-enterprise system, to economic opportunity, and to personal responsibility are key. The dignity of the human person should be a central concern of economic policy. It should be animated by a spirit of community and concern itself with strengthening the mediating institutions that exist in the space between the individual and the state, especially the family. Conservatives should never forget that we all share a special obligation to the poor and vulnerable — to the least among us.

Statism and democratic socialism are serious threats to human flourishing. But this does not mean that limited government is only a necessary evil. Limited, energetic government has a positive role to play in a society properly ordered, empowering individuals to earn their own success, realize their potential, and lead lives of dignity.

– Mr. Strain is the John G. Searle Scholar at the American Enterprise Institute.

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