Curious Capitalist

Republicans Seem to Be Out of Economic Ideas — Here Are Two Suggestions

If you think about thrift as a moral quality, it's easy to understand why Republicans have gotten things so wrong in terms of macroeconomic policy over the past few years

  • Share
  • Read Later

If you think about thrift as a moral quality, it’s easy to understand why Republicans have gotten things so wrong in terms of macroeconomic policy over the past few years. Austerity, after all, has a folksy and intuitive appeal, the idea being that you can’t cure debt with more debt. No household could — and why shouldn’t the government be run like a stable household, never borrowing what it can’t repay quickly and easily?

Of course, we know why not: Keynes explained the reason in his General Theory, and pretty much every modern leader who has tried to fight rising debt with austerity since then, from Herbert Hoover to the modern technocrats of Greece and Italy, has failed.

The Germans, like many American conservatives, are still enamored of austerity. It appeals to their sense of thrift and fairness; but having spent time recently in Germany, I can see that, as in the U.S., this approach has also become a moral issue. The fact that so many European nations are trying to cut public spending all at once is clearly the reason that Europe is now officially in the longest recession since the creation of the euro zone. But belief in austerity persists because there’s a certain grim moral justice in the idea that debtor nations should pay for their crimes with deep, painful forced cuts.

(MORE: The Mystery of the Incredible Shrinking Budget Deficit)

Justice aside, austerity is a failed economic concept, a realization that is having major short-term ramifications in Europe (as I’ll be exploring in more detail in an upcoming TIME magazine story). But it may also have a longer-term impact on the 2014 congressional and 2016 presidential elections in the U.S. For some time now, conservative economic policy has revolved around two ideas: the supposed need to slash government budgets in order to cut the deficit, and the notion that tax cuts will spur growth (a.k.a. trickle-down economics). But as we’ve seen in headlines over the past week, the deficit is coming down fast, not because of cuts, but because of a private-sector recovery that has put more tax dollars in federal coffers. If the current trends continue, the deficit will be about 2% of GDP by 2015, making it a nonissue for any presidential candidate.

Meanwhile, trickle-down economics isn’t working either. Globalization and technology have fundamentally shifted the dynamics of the labor market and increased the number of places that investors benefiting from any tax savings can put their money. Inequality is rising, the fastest-growing jobs in the U.S. are low wage (meaning they don’t generate much new income or consumption), and median wages are flat across the board. This is true no matter who is charge: tax cuts didn’t spur economic growth under Obama, nor did they in 2000 and 2001 under George W. Bush.

One thing that is interesting to me is that I don’t hear more conservatives talking about new economic policy ideas. With both austerity and trickle-down failing, Republicans need some new ideas in their arsenal. And I can think of two areas that could benefit from some smarter thinking from both sides of the aisle.

Tax reform. Liberals have been vocal about wanting higher taxes on the rich, but conservatives should lead the charge for lower overall corporate taxes. It’s true that the U.S. has higher-than-average corporate tax rates compared with other countries. The trick is lowering them in such a way that you actually generate more revenue overall. That means closing loopholes of the sort that I described in this recent column.

(MORE: Austerity Strikes Back: Budget Hawks Regroup After the Reinhart-Rogoff Affair)

But it also might mean thinking about ways to lower the tax burden on equity, as opposed to debt. The recent Apple bond issuance was a great example of how the U.S. tax code perversely rewards debt. The company saved $100 million in taxes by doing the largest ever corporate bond issuance rather than bringing home some of its $137 billion in cash abroad. While Apple can afford to do either, lower taxes on debt actually encourage risk taking in many corporations — as evidence, just witness the recent run-up in corporate junk bonds. With some creative thinking on corporate tax reform, conservatives could make a case for both lowering tax rates and making the financial system safer.

Education. Cutting state- and federal-school funding isn’t popular. But bringing private money into the system could be. Given beleaguered public budget, as well as the need to create tighter ties between employers and educators so as to churn out workers with marketable skills, public-private educational partnerships have tremendous potential. Many liberals are nervous about more corporate involvement in education; yet there are many examples of how it can work well — check out this column I did last year on IBM’s P-tech schools in New York, for example.

It’s a model that has been lauded by the President and copied by a number of mayors. Republicans should work with the business community to come up with other smart ways to funnel corporate money, mentors and brainpower into schools. Figuring out a way to overhaul education and put some of the country’s $2 trillion corporate cash horde to smart use would surely be a better political sell than austerity — and it would certainly be smarter economics.