The Weekly Standard
September 12, 2011
by Irwin Stelzer
With Paul Ryan out of the race, the last chance of a substantive program emerging from the debates of the Republican wannabes has gone a-glimmering. Or has it? Dare we hope that some one— better still, several— of the candidates eager to take on a president whose popularity is suffering from the failure of his economic program will come up with more than criticisms, but like Ryan will have some radical ideas built on conservative principles that will return the economy to growth?
Start with a few things on which all conservative candidates can surely agree.
With those principles in mind, and the urgent need to get a substantive debate started lest the campaign quickly descend into mindless repetition of talking points about who is less true to the memory of Ronald Reagan, here are some ideas that should be put to the economic policy types involved in the several campaigns, perhaps after reminding them, first, that it was only when conservatives made their peace with the New Deal that they became an effective political force, and second, that conservatives must make their peace with the idea that equity matters as well as efficiency if support for market capitalism is to be maintained.
I have no illusions that any of the candidates will adopt these ideas. That is not the point. Instead, my hope is that they will benefit from figuring out why they won't do the things listed below— and what they would do instead to confront the problems we face. I share the view that another Obama term would be bad news for the country— he is out of ideas, unable to lead, and the prisoner of constituency groups that elevate income redistribution over the need for growth. But he is no pushover, least of all to a candidate devoid of solutions and running purely as a critic.
So here goes.
(1) Spending: What the economy needs is just the opposite of what the GOP contenders are proposing. This is a bad time to cut spending, as Federal Reserve Board chairman Ben Bernanke hinted in a talk to his fellow central bankers, but the right time to put a plan in place that emphasizes longer-term cuts as bills come due for entitlements— to be phased in as the economy recovers. Experience in Greece suggests that cutting spending in the teeth of a weak economy can cause GDP to decline more rapidly than the deficit, raising rather than lowering the deficit-to-GDP ratio, in what is called a debt spiral. Paul Krugman might be always a tad hysterical, but he is not always wrong. The name of the game is to develop an effective plan to prevent future Congresses from reneging on promises to cut spending when the economy recovers. And a balanced-budget amendment "ain't it, kid, that ain't it," as one of the dancers in A Chorus Line said when asked if talent rather than looks would land a job. If you think it is, consider this: Italian prime minister Silvio Berlusconi favors just such an amendment for his country, and he is a man whose devotion to economic reform and deficit reduction has not heretofore been readily visible.
(2) Taxes: The "no new taxes" idea should be abandoned. End lots of loopholes in exchange for cuts in the general tax rate, as Jon Huntsman has proposed. Surely conservatives who favor having markets allocate capital rather than politicians— the latter proved their incompetence by over-allocating capital to housing markets— can have no objection to the elimination of tax breaks, aka subsidies, to wind, solar, ethanol, nuclear, and oil companies. And if we are serious about reining in Leviathan, surely we should be willing to trade $1 in tax increases for $10 in assured spending cuts.
Billionaires should be granted their wish for higher taxes. Anyone with assets in excess of $1 billion should have a 25 percent surcharge levied on all his/her income. That would make Gates, Buffett, et al., happy. Unless of course they prefer a wealth tax. It is difficult to imagine that any such tax would reduce incentives to risk-taking.
End mortgage relief on second homes, and dedicate the revenues to reducing top marginal tax rates. That way the incentive to work and take risks will be increased, and the artificial incentive to divert capital to housing will be reduced. A victory for both efficiency and fairness.
(3) Medicare: Require anyone with income in excess of a certain level to co-pay for various treatments. That would both generate revenues and reduce the demand for services. Conservatives have always recognized that failing to charge for a service will lead to excessive consumption, in this case with the cost borne by society. By linking co-payments to income, rationing-by-price is combined with a recognition that access to health care by everyone is something our rich and decent society can afford.
(4) Housing: Get over the desire to penalize those who bought houses they shouldn't have bought. If it makes you feel better, blame their plight on mistaken liberal policies. We are where we are, and returning thousands of people to the ghetto from which they graduated is hardly likely to do much for the possibility that their children will break the poverty cycle. That is why conservatives have always factored so-called externalities into policy making: turning a house over to a bank reduces the value of other houses in the area, including those owned by families up-to-date on their mortgage payments. So why not a two-year moratorium on foreclosures? This might give banks an incentive to accelerate their halting efforts to allow families to remain in their houses as renters for an interim period.
(5) Trade: Adam Smith advised that when some foreign nation discriminates against a country's goods, "revenge ... naturally dictates retaliation, and that we should impose the like duties and prohibitions" on their goods. So levy a 30 percent tariff on all imports from China, scaling it down as the regime allows the yuan to rise. It is ridiculous to try to compete with a country that undervalues its currency. Example: China's solar industry is undercutting our domestic manufacturers by an estimated 20 percent, the margin provided by their manipulation of their currency. The tariff would make it less likely that U.S. firms would build plants in China to serve U.S. markets, and, Smith again, "The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods." Yes, consumers would be hurt, but where is it written that consumers (many of whom are also workers who have lost their jobs because of competition from underpriced made-in-China goods) take precedence over producers, especially if those consumers are being lured into overconsumption by China's artificially low exchange rate? And if that overconsumption is threatening national security by putting us ever-deeper in debt to a hostile regime that is using its earnings to create a military with global reach, perhaps we should do more than send Vice President Biden to Beijing to complain.
(6) Equity: Many bankers would be pounding the pavements if the taxpayers hadn't bailed them out. So a cap on their bonuses seems a reasonable quid pro quo, as does a provision permitting the claw-back of bonuses paid out as a reward for profits that evaporated on examination, both arguably based on the conservative idea that performance should play a role in determining compensation, and that intervention can correct market failure. Also, the banks have so abused consumers— think only of retroactive increases in interest rates on credit card balances— that it is foolish to oppose all of the new regulations. Be discriminating. Market failure is a much abused excuse for government intervention, and government failure a problem to be reckoned with, but conservatives should be the last to deny that there are times when markets can be made to function more perfectly. In this case, the added benefit is an increase in the sense that market capitalism produces results that encourage support for it, rather than a lurch to less attractive models.
(7) Regulation: A five-year moratorium on all regulations, rather than the meaningless "reforms" proposed by the president, nudged along by Cass Sunstein, his regulatory czar. Call for Congress to enact legislation prohibiting all agencies from issuing new regulations or new rules for the implementation of existing regulations. There will obviously be leakage: Regulators will find ways to do mischief, but we can't let the perfect be the enemy of the good. If some practice or problem requires government intervention, Congress can always legislate.
(8) Benefits: Leave Social Security alone, or confine changes to those under 40, or even to those newly entering the system. Social Security is one, perhaps the only one, of the New Deal programs that works. Get over the idea that extending unemployment insurance will reduce incentives to find work. It will, in some cases. But it is absurd to think that 25 million American workers suddenly decided to take full or part-time vacations. Yes, malingerers exist. But worry less about that than how to encourage meaningful retraining, especially for those out of work for over six months. One useful step might be to call for a halt to the administration's assault on the private sector's training/education businesses because of high drop-out rates. Instead, give these for-profit institutions an incentive to improve performance— for every student that drops out, require them to take on another without payment. So what if 40 percent drop out of these programs, which seem to be the only ones that make a dent in the woeful army of the untrained young unemployed?
(9) Energy: End all subsidies to ethanol, wind, sun, and the oil industry. Open all save the most environmentally sensitive areas to drilling. Open Nevada's Yucca Mountain Nuclear Waste Repository, making sure that the fees paid for its use cover its costs. Leave regulation of shale gas to the states and potentially affected communities. If really brave, go for cap and trade, but with the permits auctioned off, rather than given away, and use the proceeds to lower or eliminate payroll taxes. The slogan: Tax pollution, not jobs. This is not only efficient and job-creating, but fair: It taxes those responsible for pollution and eliminates a regressive tax on workers.
Is there something wrong with each of these ideas? You bet. Will there be unintended consequences? You bet. Will those unintended consequences likely be worse than maintaining the status quo? I wonder. But one thing is certain: The exercise of punching holes in these proposals, and of suggesting alternatives to the policies of a failed president, will elevate the battle for the nomination and better prepare the eventual nominee to take on an incumbent whose main hope for reelection has to be the avoidance of discussion of policies that just might end talk of American decline.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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