Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
About ‘The Republican Case Against Republican Economics’
New York Times’ columnist Thomas Edsall uses my recent The Week column, “What Conservatives Don’t Understand About the Modern U.S. Economy,” as a prompt for analysis on how Republican “reformers” are, in his view, “questioning … free-market orthodoxy.”
The subject of my critique was a recent manifesto put forward by top conservative groups after a big meeting in Washington. To me, their agenda reflected little recognition of the major challenges facing today’s economy. As I wrote:
It bemoans the Not-So-Great Recovery. But there is no suggestion the economy faces longer-term problems that predate Obamanomics.There have been jobless recoveries after each of the past three downturns, with each leading to a depressed share of middle-class jobs. Globalization and automation are playing a role. Going forward, some economists fear a permanently bifurcated labor force with rising pay for a slice of tech-savvy workers, and stagnant wages for everyone else. It’s not all about Obama’s economy.
I expand on that diagnosis in the chapter I wrote for the new book (free and downloadable) Room to Grow: Conservative Reforms for a Limited Government and a Thriving Middle Class. But here’s the thing: I don’t see myself questioning “free-market orthodoxy” as much as I am questioning the relevancy of a moldy, narrow policy agenda that some folks continue to push. I didn’t see a whole lot in that manifesto dealing with the job polarization or other problems facing the American middle class. For instance: one of the group’s ideas is an across-the-board tax cut. Reagan redux. In Room to Grow, economist Bob Stein parses that idea from a traditional supply-side perspective:
Let’s say we cut the 15 percent federal income-tax rate faced by much of the middle class to 10 percent. Instead of keeping 85 cents for a dollar of extra effort, a worker would get 90 cents—an improvement of only 5.9 percent.
Meanwhile, the tax cut would make a real dent in revenues—and we could not count on its having any major effect on behavior to make up for it. Cutting the 15 percent rate to 10 percent would reduce government revenue by about $100 billion per year over the next decade.
Even worse, IRS data show that only about one-third of the tax relief would go to taxpayers who would see even a slight improvement in incentives. The other two-thirds of the tax cut would go to workers who earned some money in the 15 percent tax bracket on their way to higher tax brackets. For these workers, cutting the 15 percent rate to 10 percent would make absolutely no difference in work incentives.
A better idea, one Stein advocates, would be a big expansion of the child tax credit. Interestingly, Senator Mike Lee of Utah, who was at that conservative meeting, is also in favor of this. The group would have been better off cutting-and-pasting his tax plan.
Anyway, as I emailed Edsall, I think center-right policy folks “should let the data drive our diagnosis and analysis, with our policy recommendations informed by data and our values.” I think the data suggests, among other things, that (a) the US tax burden and government spending will need to be somewhat higher in the future than in the postwar era, (b) crony capitalism is dragging down US economic growth, and (c) automation may be severing the linkage between GDP growth and broadly shared prosperity. To me, this argues for, among other things, (a) raising the competitive intensity of the private sector through deregulation, (b) economically efficient tax reform, (c) strengthening the safety net.
Edsall’s piece was titled “The Republican Case Against Republican Economics.” Putting aside that I am not a registered anything, I think the headline misses the great and growing diversity of economic opinion on the right, both among wonks and politicians. Debate is healthy. Hope there’s more of it.
Published in General
The problem “boils down” to labor immobility. Strengthening the safety net doesn’t solve this problem. It probably makes it worse by keeping at least some % of the people who fall in, permanently attached to the safety net. If the problem is labor immobility, the solution would to be focused towards strengthening the educational opportunities for people and deregulating education and labor markets.
Expanding the safety net, and by extension government spending, will have the opposite effect.
Automation isn’t a new phenomenon. It was probably much greater in scope in the early part of the century than it is now. Imagine what the introduction of mechanization had on farm labor.
The main problem with “Republican” economics is the myopic focus on the “middle class”, for obvious political purposes. This is a moving target. What is the “middle class”? It is very sensitive to how one measures it. Looking at permanent income, the picture changes quite a bit. Lots of people who are considered “lower class” today would in fact be middle class by permanent income measures.
I wonder what you mean by ‘strengthening the safety net’?
I wonder what you mean by ‘strengthening the safety net’?
What the Insurance company said.
I am generally of the mind that we need to boost the return on savings bonds for the small investor. This will in a portfolio with an index fund boost their expected returns while minimizing risk.
I think most of the national angst is uncertainty and a total lack of confidence in the future. A stack of savings bonds making 5%, is an awfully warm security blanket, and could boost some risk taking ventures.
There is already a cap on savings bonds to 5K per year which seems about right.
If “the data suggests, among other things, that … the US tax burden and government spending will need to be somewhat higher in the future than in the postwar era” then I suggest the analytical framework being used is fundamentally flawed.
And if we’re pointing fingers about outdated policy thinking, then “a policy agenda including education reform, a national innovation policy encouraging more startups and federal research spending, and wage subsidies for low-income workers” seems about as dated as they come.
A truly bold data-driven approach would acknowledge that the lesson of the post-war macro-economic experience is that macro-economics is bunk, that a policy focus on magical-thinking statistics like GDP leads to a mindset that flatters the egos of politicians and technocrats but that has had increasingly deleterious consequences (citing your jobless recoveries), and that surfing the wave of the latest big-picture meme (‘technology changes everything – but for the worse!’) is great for generating columns, but a terrible basis on which to make laws.
I’m not saying Reform, Restore, Modernize – An Agenda to Restore the American Dream is a wonderful document (as one might expect, quite often the sweeping rhetoric of the introductions becomes pretty weak sauce in the specifics). But if, as you say, “[l]ight taxation and small government are principles worth preserving”, then a policy prescription for more taxation and more government doesn’t seem a terribly clever (or terribly modern) way of going about things.
What would be the economic effect of an energy policy that drastically increased energy supply? (i.e. building the XL Pipeline, opening up offshore drilling areas, building more refineries, fast tracking nuclear plants, building clean, modern coal-fired power plants)
Another frustrating post from Pethokoukis in that he doesn’t engage with the commenters.
For example, when he says “the data suggests … that (a) the US tax burden and government spending will need to be somewhat higher in the future than in the postwar era”, he’s almost certainly talking about entitlement spending promises made to current and “pending” seniors. Isn’t that what we’re talking about? If so, let’s talk plainly.
Also, Jim talks about “crony capitalism” as something than needs to be abolished. It is one of my primary objections to Obamacare: crony capitalism’s “highest stage”, to borrow from Lenin. Let’s be specific about which of the sleek, risk-averse leeches we will burn off the body politic…and how this de-leeching will spur growth.
Finally, I am very wary of targeted tax advantages of any kind, even ones I enjoy like the child tax credit. The tax code has become a nightmare of goodies yet again — speaking of crony capitalism — and needs a pruning. We should pick a few broad-based ones to preserve and kill the rest.
We need to look at something Newt Gingrich proposed a few years ago as a way to make the “safety net” temporary – make some kind of education / training a requirement for people who are physically able to work. Don’t just give people Unemployment benefits and other goodies with no end in sight. Newt’s idea was that if we were giving people 99 weeks of Unemployment, they could use that time to earn a 2-year degree at a Community College.
Yeah, this seems strange to me too. But then again, blaming technology is hardly the “latest” meme. The Luddites have us beat by about 200 years.
But logically, “automation” can’t possibly be the cause of “unemployment”. What new automation technology was introduced in the last 5 years, to cause the increased levels of unemployment we see today?
It’s not computers. They were around in 2005 when unemployment was low. It’s not automated production processes in factories. There hasn’t been any particular breakthrough in those technologies in a couple of decades at least.
It’s not outsourcing either. We were outsourcing to Asia and Mexico at a far higher pace in the 2000s, when unemployment was a lot lower than today.
A lot of the innovation has been in lowered price points and collaboration tech. Two examples:
Lowering tax rates and reducing deductions creates a economic dynamic. It mainly allows more money to be invested, which results in more jobs and tax revenues to the treasury. Simply playing with tax rates in a spreadsheet tells us nothing other than the math functions on our computer work. This is what Bob Stein misses and what Democrats and liberals miss–Dynamics.
You must be kidding. Loaning the government more money? Put your money in Corporate Bond fund or EFT. Investing in private business is what grows the economy–not ‘investing’ in government.
Sure, but all this stuff is not new. ERP is as old as me, and while large firms adopted these systems decades ago, most medium sized firms had such systems over a decade ago too.
It doesn’t explain why there is unemployment, now, and why there wasn’t unemployment 10 years ago when everyone started adopting these systems.
But more importantly, it assumes that it replaces someone who used to do that job before. These are transaction cost reducing technologies, which implies they allow you to carry out…more transactions. Human labor doesn’t impact transaction costs. It impacts production costs.
On the other hand, more jobs are created in the supply chain, as more transactions need to be handled, faster.
Same with outsourcing. The big outsourcing wave started well over a decade ago. Yet unemployment numbers were not affected for the better part of that decade, until 2008.
And an even clearer picture is to look at who the unemployed today are. They don’t seem to be former supply chain experts, assembly or warehouse workers.
We need to see a massive transfer of economic activity away from the government, and back to the private sector. I’m wondering if a negative interest rate, with conditions attached, would help increase bank lending to private individuals and corporations, or would it create another bubble, maybe even the bubble to end all bubbles.
The problem expressed in the piece is the relatively poor recent recoveries, with the most recent being the worst. I don’t see how your objection contradicts my comment. If anything, the increasing pervasiveness and mastery of such systems exacerbates the problem.
This is the first recovery we’ve had with pervasive adoption of modern ERP: post-Y2k, which explains why we don’t need to hire so many people back or can hire them at lower wages. While the big unemployment hits were in the bubble-inflated industries — or crony capitalist firms that missed the bailouts — other firms had to tighten as well. On the other hand, these technologies allowed competitive firms to realign and redeploy in ways they couldn’t before. Therefore, you had less slack for rent-seekers — e.g., housing — to recover and hire from.
This may be a terminology issue, but equating the ERP of twenty years ago with the ERP today is like saying we also computers twenty years ago. It has much lower price points for more powerful features, easier implementations, and real global ecosystems. More importantly, the firms that have implemented these systems have gone beyond mere transactional savings to transformation.
Sidebar: so much of this perspective is driven by one’s industry. More competitive industries — consumer products and manufacturing — look at ERP more than just what was the R/2 system twenty years ago. They see it as the heart of their extended enterprise and build out from there. Less competitive industries — big pharma, financials — look at ERP as just a transaction engine that does the regulatory dirty work. They pour lots of money into lots of other IT applications and try to tie them all together.
Yes, but that doesn’t translate to fewer “jobs”. ERP and IT of today is certainly better than it was 20 years ago, but there were higher “gains” 20 years ago from these systems than today. You would have expected job losses then too, not just today.
What you indicate here, i.e. the recovery, is the key issue. Technological change can’t account for a slow recovery given an external systemic shock. Technological change would have produced job losses throughout its implementation, not in a single shock.
What these IT systems do is make transaction costs lower, which as you pointed out, allows firms to “realign and redeploy”. But what that really means, is that they shift the boundaries of the firm, outsourcing activities which were previously carried out inside the firm. That doesn’t mean the activities aren’t being carried out elsewhere. In fact, it is likely to increase jobs because the volume of transactions would increase (and has increased).
You don’t carry as much inventory with a JIT system, but someone else down the line has to.
The explanation is probably a lot simpler: firms operating prior to the external systemic shock of 2008 carried a lot of “dead weight” with them. Financial pressures forced them to get rid of this “dead weight”.
The reason people aren’t “looking for jobs” and aren’t being “hired” has another possible explanation: labor immobility. People do not want to move physically for a new job, they do not want to move to a lower paying job, and they have rather large, comfortable and long-term safety nets to disincentivize them to do so.
Demographics plays a role here too. A much larger “older” population past their peek earning potential.
To expand a bit more. The nature of the more recent market crashes is different from previous ones. The 2000 crash was industry specific, and affected a particular type of labor. So was the last one, except that this was also tied to the financial industry and hence had side effects for the entire economy.
There is no particular reason to assume that labor would recover at the same rate if a particular industry is “decimated”. Labor immobility becomes a primary variable here.
He is simply acknowledging reality. A higher retiree population implies a greater tax burden. We can expect plenty of political conflict between younger workers and elderly people in the years ahead, I think.
I agree with Pethokoukis that Reagan-era policy is outdated. Reagan faced an inflation shock, and his policies were ingenious—for that shock.
To put it bluntly, Reagan killed inflation with fiscal deficits and interest rate hikes. The GOP’s current preferred policy is fiscal surpluses, and the party is divided on interest rates. Reaganomics just isn’t relevant to today’s Republican Party, or the economy.
(Reagan’s policies were ingenious, really. He avoided the productivity drag of spending increases by cutting taxes instead, and relied on the resulting overvaluation of the dollar to contain inflationary pressures. This lessened the amount of unemployment necessary to bring inflation down. By figuring out how to reduce inflation without large economic depressions, Reagan greatly enhanced the political sustainability of the free market).
But you are talking about investing in an instrument, government bonds (I assume federal), that which (1) is the cause of the problem and (2) can’t stop spending–You want to feed the tiger. On the other hand, if people invest on the private side, volatility decreases, equity grows and you achieved your goals. Besides, your idea involves more market interference by a bloated, ignorant federal government with too much power already.