Why Conservatives Must Surrender on 'Redistribution'
Liberals talk about booming incomes at the top while lower-income households barely see benefits from economic growth. Conservatives talk about a rising share of the population that depends on government benefits and a shrinking share that pays income tax.
Though the frames are different, these are descriptions of the same economic phenomenon: rising inequality of pre-tax incomes. But only liberals are advancing a semblance of an agenda to address it.
The main liberal reaction to this phenomenon is to call for more progressive fiscal policy: higher taxes on the rich people who have benefited most from the last 30 years' gains in gross domestic product to pay for programs that raise low- and middle-income people's after-tax incomes. Obamacare, which raised taxes on the rich to fund a new health-care entitlement for the poor and middle class, is a key example of this agenda.
Liberals also advocate policies that are aimed at reducing pre-tax inequality: more subsidies for education, trade protection, industrial policy to support medium-skill jobs in manufacturing, easier unionization, minimum-wage increases, rent control.
All of these policies have a trade-off: in exchange for reducing income inequality, they are likely to reduce GDP growth. But some are better than others. Minimum-wage increases in the range being discussed in today's political debates don't seem to have significant negative impacts on employment or output. There is room for a significant increase in tax progressivity without (much of) a negative impact on GDP growth, especially if the reform is well-designed.
But the key problem in this debate isn't that liberals' ideas are bad, though many of them (especially on trade) are. It's that conservatives have no serious proposals of their own on rising inequality.
One conservative message on inequality is to say that it doesn't matter, and we should accept rises in both pre-tax and post-tax inequality. This is the implication of studies periodically put out by the Heritage Foundation, arguing that poor people aren't really poor if they have microwave ovens.
This isn't an appealing argument. The problem with rising inequality is not that lower-income families can't afford ever-cheaper electronics; it's that they can't keep pace with the rising costs of health care, education and (in certain parts of the country) housing. There's also no reason to think that, whatever standard of living we start from, an economy where nearly all the improvements accrue to a small fraction of families is either politically sustainable or morally acceptable.
Then there is the argument that government benefits reduce the productivity of people at the bottom, who would go out and earn more money if we made their entitlements less generous. When Mitt Romney says this he ends up more or less calling the bottom half of the income distribution moochers; people such as Paul Ryan manage to say the same thing more artfully.
The main problem with this position is the lack of evidence to support it: Lower taxes and a smaller government might raise GDP growth, but there's no particular reason to assume that growth would accrue in a more equal manner than we have experienced recently. The main effect of Ryan-style fiscal policy, which makes taxes both lower and less progressive and while shrinking benefits, would be a rise in after-tax inequality.
This is an example of what I said two weeks ago: Conservatives do not have economic ideas that are good for the middle class. Since the 1970s, wage gains have decoupled from productivity gains and the median family has therefore reaped a disproportionately small share of the benefits of growth. Conservatives are left without anything to say about this problem.
What can they say about it? I have a few ideas, though I don't think conservatives are likely to like any of them too much.
One, as I discuss at greater length here, is that they can take up the cause of cost control in health care and higher education, the effect of which would be to raise real incomes for the middle class. The rising cost of health benefits has been a key driver of middle-class wage stagnation. Unfortunately, many of the policies actually likely to control costs in these sectors are interventionist in a way that makes conservatives recoil.
Another possibility is greater high-skill immigration. Globalization has been disproportionately beneficial to high-skill workers in developed nations: they have seen the prices of products fall as manufacturing shifts to low-wage countries, but their own jobs are insulated from foreign competition. Letting in more foreign doctors and engineers should drive down wages in skilled professions and the cost of the services those professionals provide, raising real incomes for lower-income workers who already face wage competition from other countries. Reducing occupational licensing requirements would similarly raise real incomes.
But the big problem for conservatives is that these policies cannot fully substitute for progressive fiscal policy. The dirty secret about the last 30 years' rise in pre-tax income inequality is that we probably can't reverse it. Instead, we will have to rely on policies that ameliorate it on an after-tax basis -- that is, the dreaded redistribution of income, or "spreading the wealth around."
Some redistributive policies are more economically damaging than others. If conservatives made peace with the need for more redistributive economic policy, they could fight to make sure it is pro-growth. For example, they could focus on minimizing poverty traps created by means-tested entitlements, and making sure the tax base is broad so progressivity can be achieved with relatively low tax rates.
Roughly, this is what right-of-center political parties in Europe do.
Obviously, it's not something conservatives in the U.S. are interested in doing. Instead of trying to make Obamacare less costly and less economically distorting, conservatives fought as hard as they could to stop it, rejecting the whole idea of a more progressive fiscal policy. (If you think conservatives' objection is to spending rather than spending specifically on poor people, note how protective Republicans are of Medicare, a relatively non-progressive entitlement program.)
And they lost, because the rise in pre-tax inequality (and the related rise in health care costs) is making the electorate's demand for progressive fiscal policy stronger and stronger.
Eventually, if conservatives want to keep putting their stamp on American economic policy, they will have to give in to that reality that government must become more redistributive. Otherwise, the Republican Party will be left with an economic appeal to an affluent minority of the population and an ethnic appeal to a shrinking older white-voter base -- and that will win them fewer and fewer elections.
Read more breaking commentary from Bloomberg View at the Ticker.