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Greater Growth

by Ramesh Ponnuru

Steps to reduce economic anxiety

James Monroe had the third eight-year presidency in a row, a period called “the era of good feelings” for its lack of partisan rancor. We are now finishing another string of three back-to-back eight-year presidencies, but Barack Obama’s America is experiencing something closer to an era of bad feelings.

Gallup in early March asked Americans whether they were “satisfied or dissatisfied with the way things are going in the United States at this time.” The nays had it, 73 to 25. An NBC News/Wall Street Journal poll taken at the same time asked whether “things in the nation are generally headed in the right direction” or “are off on the wrong track.” Results: 65 percent for tracking wrongward, 26 percent rightly headed. Pew put the question in terms that often bring out American optimism: “Do you think the country’s best years are ahead of us or behind us?” It was a closer call, but nostalgia beat hope 49–44.

Much of this pessimism seems to be related to economic insecurity. A McClatchy-Marist poll in February found that 68 percent of respondents believed that these days, “people who work hard” have “a hard time maintaining their standard of living.” Eighty percent thought that it took more effort “to get ahead” than it did in previous generations. The vast majority of Americans — 86 percent in that poll, comparable to the number in other surveys — define themselves as middle class. But polls also find widespread fear of falling out of the middle class. Confidence that “today’s youth will have a better life” has plummeted over the last 15 years.

Liberals have both an explanation and a remedy at hand. The economic optimism of post–World War II America, they say, rested on a compact between big business, big labor, and big government that broke down around 1980. Since then deregulation, tax cuts, declining public investment, and government hostility to unions have created an economy where the very richest take all the rewards. This model of economic development — and particularly the lax oversight of the financial industry it entailed — is what caused the crash of 2008.

It follows that we need to reverse course. Raise taxes, especially on the very rich; increase the minimum wage; expand public investment in industries that show the potential to create jobs, such as green energy; and reinvigorate public oversight, especially of the financial industry.

Each of these matters inspires argument without end. But there is good reason to reject both the liberal diagnosis and the prescription. A higher minimum wage will not do much one way or the other for most people, but will likely retard job growth, especially for those with less schooling. Subsidies for green energy will probably yield more boondoggles than breakthroughs. Unionization has declined more because unionized companies found it impossible to compete with non-union companies than because elected officials turned against them.

Maybe most important, the economic numbers look pretty good for the 1980s and 1990s. Median household income rose 19 percent after inflation from 1980 to 2000. The statistics were reflected in how people felt at the time. In the late 1990s, 71 percent of people told pollsters for the New York Times that they thought the next generation would have better lives.

More recently, though, economic progress has slowed — if not halted. Growth since 2000 has been weak. In the middle of the last decade, economic growth did not translate into higher take-home pay. Employee compensation went up, but the extra money went to health benefits rather than wages. Then came the crash. Median household income, again adjusted for inflation, fell 9 percent from 2000 to 2012.

Conservatives have generally lacked a coherent and persuasive response to the disappointing economic performance of the last decade and a half. They spent the middle part of the last decade talking about “the Bush boom.” When it ended in disaster, conservative politicians did not do much to counter the prevailing liberal narrative about deregulation as the cause. Instead they moved pretty rapidly to criticizing the Obama policy agenda. While that criticism was often justified, it sometimes had the effect of making it sound as though conservatives thought that the economy was basically doing fine before January 2009, and wanted only to reverse the Obama policies instituted afterward.

Sometimes conservatives have reinforced that impression of complacency even when they have taken a longer view. They have been so eager to defend the reforms of the 1980s that they have overlooked more recent trends. Their economic program has not adapted much to changed circumstances. It remains focused on reducing the top income-tax rate: Congressional Republicans have repeatedly voted for budgets that declare a goal of lowering it to 25 percent.

The traditional supply-side argument for lower rates — that improving incentives to work, save, and invest will increase the economy’s long-term growth rate — still has some force. That force has diminished, however, for several reasons. Reagan was successful at bringing the top rate down: Cutting it from 70 percent to 40 raised after-tax returns on effort a lot more than cutting it from 40 to 25 would.

We have changed too. Labor-force participation was increasing in the 1980s as women entered the work force. It has been falling in recent years. Educational attainment was rising rapidly too, where it has now slowed down. The median age was younger then. Cutting tax rates was more likely to yield growth for that population than for ours. Growth, in turn, was more likely to generate wage gains, since health-insurance premiums were a lower percentage of compensation.

Three sets of reforms could help turn things around for today’s middle-class households. We need measures to increase economic growth, to safeguard that growth against the risks of fiscal disaster, and to ensure that this growth translates into rising living standards for everyone.

To promote growth, we should reduce the tax code’s bias against saving and investment. In particular, we should make it attractive to invest in the United States by adopting expensing for all business investment — that is, letting companies write off the cost of investments immediately, rather than making them follow a complicated depreciation schedule.

A pro-growth agenda should not, however, stop with taxes. The misuse and overextension of the patent system seems to be undermining the innovation it is meant to encourage. In Room to Grow, a forthcoming collection of essays from the YG Network about needed conservative reforms, James Pethokoukis argues that federal support for the financial industry is discouraging business innovation as well. In both of these areas, the federal government is promoting the interests of some businesses rather than the economy as a whole, and it should stop.

Runaway debt is a potential threat to economic growth. The deficit is declining for now, but Medicare, Social Security, and other entitlements continue their remorseless growth. The federal government should continue to help senior citizens afford health care and secure retirements, but in a more responsible way than it does today. Social Security grows over time so that the retirees of 2040 get much bigger checks than the retirees of 2010. It should be adjusted so that benefits keep up with inflation, but grow no faster than that. Medicare should be changed along the lines that congressional Republicans have repeatedly voted for: Seniors should be able to pick a coverage plan, with the federal government defraying the cost of a set of basic benefits. That way seniors would have an incentive to choose plans that offer the best value for money, and companies to offer them.

Neither higher growth nor a reduced federal debt load, as important as they are, will make households feel richer unless the government also does something about the costs it has imposed on them. Federal policy makes the costs of raising kids, purchasing health care, and getting an education higher than they should be, which is an important reason Americans do not feel as though they are getting ahead even when GDP rises.

Raising children is an investment in the future that the federal government discourages by failing to recognize it adequately in the tax code. The government counts on parents to make the financial sacrifices needed to raise the next generation of taxpayers while also taxing them as though they had not made those sacrifices. Twenty years ago, Newt Gingrich and a Republican Congress created a tax credit for children, moving federal policy in the right direction. That credit is much too small, however, to offset the burden entitlements place on parents. The credit should be expanded.

Federal tax and regulatory policy has swollen health costs, too, reducing take-home pay. Obamacare seems unlikely to improve matters and may well make them worse. We should try a different approach, or rather the same one we use to get value for the dollar in the rest of the economy: competition and choice. Instead of being rewarded with bigger tax breaks for buying more expensive insurance policies, people should get a tax credit that helps them pay for coverage but encourages them to economize. People who do not have access to company plans should be able to use this credit to get coverage for themselves.

Every year higher education seems to become less of an engine of opportunity and more of a bottleneck in the economy. A degree is necessary for a lot of jobs; but it does less than it once did to guarantee a good job. And the costs keep rising. We need more paths to opportunity. We should let people sell shares of their future earnings to finance their educations, promote online learning, break the colleges’ accreditation cartel, develop certification tests that allow many career-minded kids to bypass college altogether in favor of other forms of training, and pursue other strategies to make traditional colleges both more affordable and less necessary.

None of these problems — slow growth, metastasizing entitlements, the rising cost of important parts of the American dream — was caused by President Obama. All of them pre-date his administration. He has not done much to address the problems, however, and has in some respects made them worse. In all of these areas, we ought to give conservative solutions a try.

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