Pethokoukis

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 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.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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