'Room to Grow': Republican Pandering To the Sad
At one point during his presidential campaign in 1984, Democratic nominee Walter Mondale described himself as the candidate for "the sad." Mondale's 49-1 loss to Ronald Reagan in the electoral college after a campaign defined by his playing up to the non-exceptional side of Americans sprang to mind while reading the YG Network's, "Room to Grow: Conservative Reforms For a Limited Government and a Thriving Middle Class."
A collection of essays by a close-knit group of mostly conservative Republicans, what is very much a Washington document (New York Times columnist David Brooks unsurprisingly loved it) is most notably defined by Mondale-style pandering; albeit from the right wing. As explained early on, "Room to Grow" is written for middle class Americans "who do not consider themselves poor or rich, and who can imagine their fortunes turning either way" or, as contributor Peter Wehner puts it, middle class Americans "concerned about losing ground because they believe others around them are doing just that."
Up front, it should be said that middle class Americans have reason to be worried, anti-growth policies from Washington are the cause, but those policies are bad for Americans of all income classes, not just those in the middle. The problem for all Americans, including the middle class, is that "Room to Grow" has very little to do with growth precisely because it approaches Americans as a class, as opposed to individuals in need of greater economic freedoms that always deliver prosperity.
And then the politics are quite simply bad. They are because they amount to gauzy condescension to the middle as a sorry economic whole, rather than as individuals who would thrive if they were more economically free. Whatever the present economic state of Americans, they tend toward optimism and politicians who are optimistic. They at least think they have a chance to rise economically, as even George McGovern found out the hard way when calling for confiscatory estate tax rates in front of working class voters while campaigning for president in 1972.
Optimism about individual American economic potential isn't just correct, it also works on election day. That's why Reagan slaughtered Jimmy Carter before doing the same to Mondale, it's why Bill Clinton ("If we lead with class warfare, we lose") beat George H.W. Bush and Bob Dole, and it's why George W. Bush beat champion class warrior Al Gore in 2000; the latter having similarly preached to "the sad" despite the booming Clinton years.
After that, "Room to Grow" is plainly dishonest for frequently pointing out President Obama's admitted economic shortcomings, while almost completely glossing over the impressive economic ineptitude of his predecessor; George W. Bush's failed economic presidency a major reason for Obama's ascendance to the White House in the first place. Americans want growth, they're aspirational, but "Room to Grow" plays toward their average-ness. And precisely because the policies within the document point to weak outcomes, it's unlikely that they'll ever find their way into a winning candidate's playbook.
The YG Network's directors bill the e-book as "an opportunity to advance conservative reforms, firmly within our constitutional order." Wise minds might stop reading there, because as any glancing read of the Constitution reveals rather plainly, there's nothing in it about economic growth. The founders were far too wise for that.
Instead, they properly understood that free people unburdened by do-gooder politicians would likely be prosperous people. It's very simple. The problem today is that politicians think they need to deliver growth, and in trying to, they've cruelly gifted us with stagnation.
Peter Wehner is the first essayist, and he comically asserts that "There's no simple answer for what ails America's economy." This line alone speaks to the confusion underlying the book as a whole, and it does mainly because nothing could be easier than economic growth. It's as simple as getting the four basics to economic freedom correct for all Americans irrespective of class, and at least three of the four call for politicians to go against type and get out of the way; that, or to greatly reduce their growth-sapping burden on us.
Income taxes are a price, they are a penalty placed on work. So long as politicians are reducing the price of work, we're better off. There are no companies and no jobs without investment first, so capital gains taxes are a price or penalty placed on investment success. Reduce them, or better yet, zero them out. Government spending is by definition a tax because it empowers Harry Reid, Mitch McConnell, John Boehner, and Nancy Pelosi to allocate capital over profit-disciplined investors in the real economy. Reduce the size of government so that the private sector can increase in size.
Regulations quite simply don't work. If this is doubted, readers need only consider the banking sector. Despite it being the most regulated in the U.S., those charged with overseeing it were caught wholly unaware in 2008. To presume that regulations work is to believe that those who can't can successfully police those who can. Regulations are the equivalent of suggesting that Occidental College (where Obama attended for two years) can regularly beat the USC Trojans in football. The latter isn't going to happen, and just the same, regulators will never measure up to their betters in the private sector. So while regulations don't work, they are very costly for businesses that must expend enormous human and financial capital to comply with them instead of creating wealth for their shareholders.
Trade is why we work. We go to work each day, and we exchange the fruits of our labor for all that we don't have. Trade should be made completely free not just because we should be free as individuals to transact with whomever we want, but also because free trade speaks to the very economic specialization that fosters the greatest amount of individual productivity.
And then the Constitution requires Congress "To coin money, regulate the value thereof." Money is not wealth, rather it's what facilitates the exchange of wealth and investment. For centuries gold has been the definer of money not because it's pretty, but because it's so historically stable in value. When money floats in value, disharmony is brought into trade, and investment is distorted. More specifically, when money is declining in value, as it did in the ‘70s, and has since 2001, investment becomes cautious and flows into hard wealth least vulnerable to devaluation (think land, housing, art, rare stamps, gold, etc.) that already exists. Conversely, when money is strong, or better yet stable in value as it mostly was in the ‘80s and ‘90s, investment becomes intrepid and migrates into stock and bond income streams meant to create wealth that doesn't yet exist. Remarkably in a book allegedly about growth, money was never once discussed, let alone stable money. The book suffered mightily for this omission.
The more basic point is that when politicians are penalizing work as lightly as possible, regulating as little as possible, allowing for the free flow of goods back and forth across borders, and coining stable money, economic growth is easy. Neither presidency was perfect, but Presidents Clinton and Reagan got the basics to economic growth the most right during their presidencies, and the economy soared under both. Put more plainly, economic freedom was most prevalent under both. That Wehner could suggest that there's no easy solution to our weak economy was for him to ignore basic economic history.
Instead, Wehner pursues falsehoods. Channeling Hillary Clinton from not long ago, he asserts that "upward mobility is the central moral promise of American economic life." There he gets it completely backwards. Foreigners didn't and don't risk their lives to reach the United States for security, or the "promise" of anything. They took and take those risks because they want freedom, and believe that if they're free, that they'll be able to achieve economically too.
Of course that's what's so laughably absurd about Wehner's further contention that "the odds of moving up or down the income ladder in the United States are roughly the same as they have been for decades." Implicit in what is plainly false is that markets are stupid. Indeed, one of the most information-abundant market signals in existence is that of human migration. If it were really true what Wehner says about stagnant mobility in the U.S., would that same country have been such a powerful magnet for immigrants over the same decades he presumes to have been stagnant ones?
Wehner adds that "as a starting point, conservatives need to set aside their habit of speaking as if the very same solutions we offered a generation ago would work equally well today." Sorry, but that's just not true. As human beings we still want to eat, have shelter, and consume the world's plenty. In that case what worked in the past still works today. Prosperity can't be decreed or egineered, rather it's the result of matching the ambitious with economic freedom. Remove government barriers to growth for the individuals who comprise the economy, and prosperity is always and everywhere the result.
Worse in light of the above, "Room to Grow" is surely a monument to the "same solutions" that pundits and economists have been offering up in conservative media for decades. Strangely billed as innovative and serious, throughout readers are presented with tired policy proposals along the lines of child tax credits, earned income tax credits, and reducing the minimum wage. Even the ones that are appealing (yes, let's please zero out the minimum wage as it's a barrier to entry for those who most need work experience) amount to a manual that seeks to minister to Americans about how not to be a poor, as opposed to how to grow prosperous. Hong Kong was once a "barren rock" marked by immense poverty, but after decades of economic freedom it's a shimmering metropolis. "Room to Grow" plays to average outcomes meant to help us avoid the dole, as opposed to something that vivifies what is undeniably true: that immense prosperity is our reward if we think big, and do everything possible to reduce the economy-suffocating burden that is government.
He would be incorrect, but Wehner might argue that the electorate isn't interested right now in big solutions, its only focus is on not losing more ground. It's a fair point, Wehner cites numerous polls to back up the latter view, but then it's safe to say that Americans were similarly downcast in 1980 and 1992. Recessions have a way of depressing us, and lowering our expectations somewhat, but this doesn't change the historical truth that Americans think themselves exceptional, and because they do, they generally vote in politicians seeking policies that will free them up to maximize their ample individual abilities. In short, it wasn't just talk about tax cuts that got Reagan elected.
Yuval Levin follows Wehner, and gets more into the philosophy of government. There wasn't as much to disagree with there, but one line stood out. Levin wrote of "the catastrophe we face if our entitlement programs are not reformed."
Without defending entitlement programs that logically didn't work well for even a second, it says here that conservatives err impressively in focusing on deficits. Implicit there is that they're smart and the markets stupid. The reality is that long before the horrid imposition of quantitative easing, the investors who populate the Treasury markets lined up to buy U.S. government debt. What this tells us at least for now is that one of the deepest markets in the world presumes that future wealth creation in the U.S. will be so substantial as to make paying off the debt very simple. Time will tell, but to make deficits an issue today is for conservatives to proclaim debt markets dim. That's a flawed approach.
Worse, the deficit fixation ignores the true problem, which is the level of government spending itself. Whether through taxes or borrowing, when governments spend they rob the economy of the capital necessary for advancement. It seems the better economic and political solution is to call for gargantuan federal spending cuts not with a future Armageddon that never seems to come (deficits are "global warming" for conservatives, as are low birthrates) in mind, but because a soaring private sector unearthing amazing advances and jobs aplenty would reveal itself alongside a substantially shrunken federal government.
Moving to Robert Stein and taxes, the First Trust economic advisor posits that "cutting taxes is not, however, an effective tool for delivering tax relief to the middle class." He then laments that the Reagan marginal "tax cuts improved work incentives much more for higher income households than for the middle class." He's right in a small sense, as he further alludes the middle classes don't pay a lot in the way of taxes as is, but such a view misses the point about reductions in the top tax rate almost completely.
While marginal rate cuts don't much impact the impact the middle class each April, marginal rate cuts for top earners very much impact those in the middle class in a positive way every single day. The rich, by virtue of being rich, have lots of money. The earnings of the rich not taxed away don't sit idle, rather they reach entrepreneurs through bank loans, private equity, venture capital, and investment in the stock market itself. Amazon founder Jeff Bezos is worth tens of billions, Amazon itself employs tens of thousands (many of them middle class), but what can't be forgotten are the other investments Bezos has made with wealth not taxed away; Uber a rather notable Bezos investment that similarly employs a growing number of middle class individuals whom Stein et al presumably want to help.
And then we can't forget that Americans are an aspirational people. We're either first generation risk-taking immigrants; that or we descend from risk-taking immigrants. In that case it's hard to think of something more anti-middle class than a tax code that tells those on the way up that if they make it, their "reward" will be a higher tax bill.
Rather than focus on the good of tax cuts, Stein plays social engineering small ball, proclaiming that "tax cuts should reduce the cost of raising children, making it easier for parents (and potential parents) to pursue the family size they would desire in the absence of federal interference." But what's conservative about using the force of government to play favorites with certain classes, all the while promoting one lifestyle choice over another? Whatever the answer, such a tax cut will do little to increase incentives to produce. "Room to Grow" is very much misnamed.
Stein's proposal seeks enhanced tax credits for families per child, he fully acknowledges that this will mean even fewer Americans will suffer in a very direct sense the cost of government, but then he exposes the overall weakness of his argument (and Wehner's too about the alleged lack of income mobility in the U.S.) with his correct point that "most workers move across different income groups during their lifetimes." Exactly, and because what he says is true, it's worth asking again what's pro-middle class about rewarding those in it with a higher tax penalty assuming they eventually ascend to a higher income category.
Stein's conclusion is that "we need to offer something more than just updated versions [marginal tax cuts] of plans that have failed to gain traction for decades." But is the latter assertion even true? If we ignore Reagan's successful tax cutting presidency, we can't ignore liberal historian Richard Reeves' 1999 lament that "Reagan, in fact, is still running the country. President Clinton is governing in his shadow." No doubt Clinton signed an income tax increase in 1993, one that came nowhere close to bringing tax rates up to what prevailed before Reagan reached office, but as he sheepishly admitted in 1995 after his Democratic Party was wiped out in the 1994 elections, "Probably there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too." Notable there also is that in 1997 Clinton signed a capital gains tax cut from 28 to 20 percent.
Considering the 2000 elections, George W. Bush ran on tax cuts well aware of how his father's flip flop there rendered him a one-term president. So for Stein to say that tax cuts lack traction is for him to ignore very modern history. A better way to put it is to state what's true, that tax cuts don't work very well in isolation as Bush 43's failed presidency revealed in bright, 21st century color. If the dollar's value is in decline as it was under Bush, and for part of Obama's presidency, tax cuts (lest we forget, Obama maintained the 2003 Bush tax cuts through 2012) are wholly ineffective. When money is cheap, investment is once again cautious, thus blunting the good of tax cuts. Alas, the dollar was completely ignored in an e-book allegedly about economic growth.
And while conservatives are correctly disturbed by liberal political correctness, when it comes to education, they eagerly join them. Top-level classroom instruction will supposedly make us taller, better looking, wealthier, and just about everything else. Two chapters of "Room to Grow" covered education reform, and in them Frederick Hess wrote that "lousy schools rob their students of a full shot at the American dream," while Andrew Kelly asserted that "some form of post-secondary education - not just a bachelor's degree - is more important than ever."
Oh well, if we ignore how the most vibrant sector (technology) of the U.S. economy is famously populated with all manner of college dropouts, we can't ignore highly undereducated China's modern economic rise. Indeed, China's economy has soared in the last 30 years, and if Hess and Kelly are to be believed, a major factor in the country's ascendance would be a top-level education system that prepared the citizenry for a sharp-elbowed capitalist world through quality schooling? Not so fast.
As Fox Butterfield wrote about Chinese education in his 1982 book China: Alive In the Bitter Sea, "12 percent of those who finish primary school are unable to go on to junior high, and there is no room in high school for 50 percent of the students who complete junior high." Regarding access to college education, Butterfield reported that "only 3 percent of the college-age population in China, about a million students, can get into university." Not a country known for a media that was or could be honest about its presumed weaknesses, Butterfield wrote about how the Guanming Daily "groused that China ranked 113 out of a list of 141 countries in the world in percentage of its young people who get a post-secondary education."
Yet apparently the Chinese didn't get that memo about education and prosperity. Their economy began to take off in the early ‘80s; all this despite a population that was largely uneducated. Just as birthrates are made irrelevant by economic freedom, so is a lack of access to the irrelevancies taught in school trumped by economic freedom.
AEI economist Michael Strain was assigned unemployment in "Room to Grow", and he observed that "economists have carefully studied the long-term unemployed during the Great Recession, and have found that the chances of finding a job decrease significantly after a worker has been unemployed for six months." The argument here is that time away from the work force causes one to lose work skills and the knowledge necessary to re-enter the work force at a later date.
It seems the countless mothers who've re-entered the work force after raising children never read the research about long-term unemployment, not to mention that in an evolving economy, the nature of work is constantly changing as is. That the internet dominates so much of what we do today versus twenty years ago tells us that yesterday's knowledge isn't terribly relevant to future work in the first place.
Addressing Strain's argument further, we can once again return to China. For over 30 years the now economically ascendant country literally committed economic suicide. The Chinese were deprived of real work experience for decades under the brutal thumb of communism, but once their economy was to varying degrees freed of government meddling, its once "unskilled" workers quickly adapted to the work norms of capitalism. Since the Chinese rapidly evolved as economic freedom increased, so can Americans put out of work by hubristic politicians quickly adapt to modern work standards once our political class gets out of the way.
The problem, as always, is bad policy cruelly foisted on the people by the deep thinkers who populate both political parties. They don't need tax credits and other forms of industrial policy proposed by Strain, they simply need economic freedom.
On the energy front, Adam White writes that "It is difficult to overstate how dramatically the nation's energy fortunes have changed in the span of just a few years." This is hard to argue with at first glance, but a closer look makes it simple to correlate an energy renaissance with a weak economic outlook.
White cites positive stats about our booming energy economy from AEI economist Mark Perry, but what his chapter left out was another stat unearthed by Perry a few years ago which showed that the profit margins in the U.S. energy sector rank 112th. In short, the rush into energy by U.S. economic actors has signaled a migration of limited human and financial capital into that which isn't always terribly profitable. When it comes to energy, conservatives ingore the genius of David Ricardo almost completely.
Worse was an obvious omission from White. He lamented the sad fact that the bottom 20 percent of U.S. households by 2011 were spending 6.4% of their income on natural gas, electricity, and fuel oil, versus 3.2% in 2000. There's no quibble with his statistics there, but what he left out is that in the first seven and a half years of the Bush administration leading up to July of 2008 when crude hit a nominal all-time high, the price of oil in euros rose 198 percent, in Swiss francs 216 percent, but in dollars crude had spiked 459 percent. What this unquestionably tells us is that the expensive commodity story of modern times was and still is almost wholly a weak dollar story; the Bush administration having sought a limp greenback from day one.
But as mentioned before, the weak dollar's seminal role in our stagnation along with our rush into the prosaic never merited mention. This isn't so much to say that the world won't benefit from energy advances achieved in the U.S., but it is to say that at least with the gasoline that powers our cars, we never had a problem of expensive fuel during the Reagan and Clinton years precisely because both the Reagan and Clinton Treasuries were quite good about protecting the value of the dollar.
With AEI scholar Jim Pethokoukis, while it would be hard to prove, it seems he was assigned a chapter (Regulatory & Financial Reforms: To Combat Cronyism and Modernize Our Economy) that he would have preferred be left to others. This is assumed mainly because the chapter seemed rather scattered.
To Pethokoukis's credit, quite unlike the others he at least stressed the importance of entrepreneurialism. As he wrote, "There should be as few government hurdles as possible between a person with a good idea and the transformation of that idea into a small business with the potential to become a high-growth gazelle." Nothing wrong there.
Beyond that, Pethokoukis oddly tried to tie the rise of "crony capitalism" to the happy business concept that is "process innovation." The latter, according to Pethokoukis, entails "creating cheaper, more efficient ways to make existing goods and services," and then in an allegedly vicious circle, profits gained from increased efficiency lead to even more investment that makes "business even more efficient, often substituting machines for middle class workers." Apparently Pethokoukis missed Henry Hazlitt's essential point that "The progress of civilization has meant the reduction of employment, not its increase."
From the car, to the computer, to the internet itself, all three list among the biggest job destroyers in history. But as Pethokoukis surely once knew, all three economic advances fostered major profit increases that quickly led to abundant creation of much better jobs.
Looking at Apple alone, its commerical advances having surely authored all manner of job destruction thanks to increased automation, as of 2012 it had 12,000 employees at its Cupertino, CA headquarters, but those 12,000 jobs didn't nor do they come close to telling the job-creating result of Apple's success. As Cal-Berkeley economist Enrico Moretti calculated in his 2012 book The New Geography of Jobs, Apple's modern resurgence brought with it a rather substantial job-multiplier effect for both high and low-skilled workers.
Moretti explained that Apple "generates more than 60,000 additional service jobs in the entire metropolitan area, of which 36,000 are unskilled and 24,000 are skilled." Moretti noted that "high-tech jobs are the cause of local prosperity, and the doctors, lawyers, roofers, and yoga teachers are the effect." Other "job-destroying" companies like Amazon and Microsoft can similarly claim to have driven job creation up substantially.
To read Pethokoukis's chapter is to read someone who seemingly presumes that the U.S. economy can be walled off from progress in order to protect the middle class. But as Detroit and other dying manufacturing cities plainly reveal, the cruelest thing policymakers can do to the middle class is attempt to legislate the status quo. To do so is to foist on the middle the ultimate stagnation, and as evidenced by middle class flight from Detroit and its suburbs, middle class workers wisely migrate away from policies meant to protect them and their jobs. Detroit's destitution is living, breathing evidence of just how impoverishing are policies that seek to restrain profitable innovation, including replacing human labor inputs with machines and robots.
Pethokoukis quite surprisingly asserted that protection from competition wrought by crony capitalism has authored this search for profit-enhancing efficiency. More realistically, what Pethokoukis laments is in fact a signal that Washington hasn't completely suffocated entrepreneurial spirits in the U.S. Indeed, it's companies protected by politicians that would be least likely to search for profits anywhere and everywhere simply because they don't have to.
Pethokoukis asserts that "American workers deserve a safety net that protects them from the worst effects of the economy's inevitable ups and downs, but business deserves no such firewall." Wise minds can disagree with his first contention, and then considering his second point that he further expanded on about how government shouldn't "provide a backstop to prevent [business] failure," what he says is true. What's interesting there is that Pethokoukis very publicly defended the bank bailouts in 2008 that he apparently now decries. Nothing wrong with his positive evolution with regard to bailouts, consistency in thought is the hobgoblin of weak minds, or something like that, but for Pethokoukis to tie the brilliant, labor saving economic progress (very pro-middle class family progress for allowing mothers to be mothers, and kids to be kids) that has made the U.S. the richest nation in the world to "crony capitalism" is a policy non sequitur of the first order.
Pethokoukis is at least focused on growth as an end result, which makes him rather unique when we consider the proposals of his fellow authors. He would like more entrepreneurialism, laments the lack of startups, but as the others do, he too ignores how essential a healthy and stable dollar is to the investment that he desires.
Simply put, investors are buying future dollar income streams when they commit capital to new ideas. The latter rates stress mainly because in modern times Pethokoukis has attached himself to a newly revived form of Federal Reserve economic planning whereby our central bank is supposed to fiddle with monetary aggregates in order to plan pre-set national income goals, and in a more broad sense, monetary policy is supposed to be tied to the wholly worthless number that is GDP. "Market Monetarism" is what Pethokoukis and others call their form of central planning, yet lost on those who've fallen under its spell (it was last imposed from 1979-82, and nearly made Reagan a one-term president) is that not only can income not be planned, neither can money supply. Because it can't, any policy meant to plan it by definition ensures unstable money values that render investment rather cautious. To state the obvious, the floating, cheap money values sought by Pethokoukis are a start-up killer simply because investors are loath to commit capital that, if they're lucky enough to achieve returns, will come back in soggy dollars.
An analysis that began with commentary on Peter Wehner's musings will end with his. Wehner argues that conservatives need to stop talking "about what the government should not be doing." In truth, economic growth is weak today precisely because the government is doing too much. Economic growth is once again easy, and it's as simple as politicians getting out of the way. Freedom works as they say.
The good news is that perhaps nervous readers needn't worry about "Room to Grow" eventually finding its way into the White House. The policies within what is ultimately a political document speak to social engineering, favoritism from the Commanding Heights, and a lack of economic progress that has never played well to an electorate infused with the growth gene.
What's strange about a book that will quickly fall into the dustbin of forgotten policy manuals is that it was authored by many individuals who, if asked, would correctly say that Ronald Reagan was one of the greatest American presidents. How odd then that some of Reagan's most ardent fans would write a policy guide that is right out of Walter Mondale's failed, 1984 playbook.