Needed: A Politics of Generosity

These days, Republicans and Democrats fight as if the U.S. economy will never bounce back. They're doing the country a disservice

By Christopher Farrell

Maybe I'm just getting older, but it seems as if American politics has become increasingly vicious and dispiriting. Witness the recall effort by conservatives against unpopular Governor Gray Davis in California. Or the recent redistricting shenanigans in Texas, where a Republican-controlled legislature sent Texas Rangers after Democratic lawmakers holed up in Oklahoma to avoid a vote. While conservatives fight fiercely for tax breaks that benefit the wealthy, liberals are on the defensive, depleted of new ideas or vision and reduced to carping about tough times and a skyrocketing federal budget deficit.

The animosities informing politics these days go beyond a classic power struggle, in my view. What's disturbing is that both parties appear to believe that the American economy is no longer an engine of growth. Politics is now a battle over what both sides perceive as a zero-sum economy. The stakes are especially high now that America is heading into the campaign season.

Sure, Republicans still genuflect to Ronald Reagan's legacy. But they don't share his sunny "Morning in America" optimism. Folks can argue all day about the merits of Reaganomics (and economists still do), but the core notion was to expand the pie for everyone. Yet, Republicans these days focus on preserving the capital gains of supporters against any pressures to redistribute income. In this light, President Bush's massive tax cuts look less like a bold gamble on growth and more of a defensive move to shore up wealthy supporters for the upcoming election.


  Similarly, Democrats still pay rhetorical tribute to Bill Clinton, but no one seems willing to emulate his optimistic embrace of the New Economy. Instead, the '90s is dismissed by liberals as a bubble of prosperity that benefited the few at the expense of the many. And the only way to improve the lot of the poor is to take money from the pockets of the well-off.

Why the lack of faith in the animal spirits of capitalism? Hard to say. It could be the lingering legacy of September 11. Perhaps it's a reflection of the gloomy long-term consensus among forecasters that both the economy and the stock market will languish for years to come.

Indeed, the only leading figure in Washington with faith still in the economy's vigorous potential is septuagenarian Alan Greenspan. But his belief that American enterprise is only at the beginning of tapping the productivity potential of the Information Age is increasingly dismissed as the tarnished perspective of a New Economy cheerleader.


  Let's look at three high-profile policy stances by conservatives that, taken altogether, add up to a zero-sum view of the economy: the drive to eliminate estate taxes, the vehement reaction against the Supreme Court's affirmation of affirmative action, and the resistance of House Republicans to extend a child tax credit to low-income families.

The estate tax is a flawed law. But an easy compromise was within reach -- all Congress had to do was sharply lower the estate tax rate, eliminate loopholes, and raise the wealth threshold significantly before the tax kicks in. Instead, conservatives in the 2001 tax cut law won a phase-out the estate tax over the next decade -- only to allow it to be revived in 2011 barring additional action from Congress. All in all, horrid tax policy.

It's almost as if the Republicans are trying to create an American aristocracy, traditionally an anathema to a society built on equal opportunity and entrepreneurial merit. But inherited wealth becomes vastly more important in a stagnant economy.


  Similarly, affirmative action threatens the elite. A number of credible cost-benefit economic studies conclude that affirmative action on net has been a gain for the economy. The experience of the military, police and fire departments, and most corporations with fostering equal opportunity is largely positive.

Problem is, a college education, especially at prestigious universities, is the increasingly recognized as the ticket to material success today. Affirmative action limits the number of slots available. At the same time, few have protested the so-called legacy policies that tilt toward the well-heeled at elite universities.

The recent attacks on the working poor are stunning. Conservatives have targeted the earned income tax credit, a negative income tax for those just getting by on a paycheck. It was devised by conservative economist Milton Friedman and liberal economist James Tobin, and signed into law by President Richard Nixon. Friedman and Tobin argued that a negative income tax was vastly preferable to welfare since it rewarded work and, at the same time, was cheaper to administer.


  Yet conservatives now call the EITC welfare and want to sharply scale it back, if not end it. Their political message: There just isn't enough federal largesse to go around in a slow-growth economy.

It's not just conservatives. While this column has long warned of the dangers of long-term budget deficits, much of the discussion about deficit reduction seems predicated on the assumption that the economy will remain weak for as far as the eye can see. Meanwhile, environmentalists oppose faster economic growth because of the negative ecological impact.

Even '90s-era growth under the Clinton/Gore Administration -- an environmental-friendly team by most measures -- is perceived now by greens as a "winner take all" economy where the promise of higher productivity growth lined the pockets of the rich. The poor and working class were squashed like bugs, in their view.


  Not true. Almost all the gains generated by the 2.2% average annual productivity growth rate of the '90s went to workers, as BusinessWeek Economics Editor Michael Mandel documented in a cover story last year (see BW, 4/1/02, "Restating the '90s"). A paper by University of Texas political economist Paul Jargowsky for the Brookings Institution calculated that the number of people living in high-poverty neighborhoods (with a poverty rate of 40% or higher) in the '90s plunged by 24%, or 2.5 million people. The share of poor black individuals living in high-poverty neighborhoods dropped from 30% in 1990 to 19% in 2000. This Fourth of July weekend, here's something to remember: Few things are more American than baseball, hot dogs, apple pie, and economic growth. The faster the economic growth, the better.

Over the past three years, the U.S. economy has been hit by the tragedy of September 11, a recession and anemic recovery, war in Afghanistan and Iraq, and a three-year bear market. Yet, productivity growth has remained strong. The unemployment rate is still low by historic yardsticks. Individual investors are sticking with their equity investments. The U.S. is only beginning to understand the efficiency-enhancing promise of the high-tech revolution.

The 1990s weren't an aberration. Washington should focus on policies, like education and free trade, that encourage rapid economic growth. The economy will take care of the rest. And then America could enjoy a politics of generosity.

Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over Minnesota Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online

Edited by Douglas Harbrecht

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