What Republicans Can Do to Adapt (But Probably Won’t)

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By Josh Barro

Mitt Romney lost the election because he failed to offer a convincing case that he would address middle-class economic concerns, like high unemployment, slow-rising wages, access to health insurance and the rising cost of college.

The Democrats’ approach to these issues is better than the de-facto Republican alternative of doing nothing, but it is still flawed. If they were willing, Republicans could offer constructive alternatives that focus more on bringing down the prices of things that middle-income Americans have trouble affording, and less on subsidizing them. In other words, Republicans could provide viable plans that focus on making government better without necessarily making it bigger.

The best examples are in health care and higher education. High inflation in these sectors is squeezing the middle class. The rising cost of health insurance is a key driver of stagnant middle-class wages. Rising tuition makes economic mobility harder; it also burdens young professionals with debts that stop them from buying houses and starting families.

The Democrats’ approach to these issues is multi-pronged, but at its core are larger subsidies, addressing rising costs by shifting more of those costs from individuals to the government. Subsidies are a necessary part of the solution in both sectors, but they are problematic. They interfere with price signals, encouraging overconsumption of expensive services. They reduce the incentive to find cost-saving innovations. And they increase fiscal burdens, requiring higher taxes and discouraging economic growth.

To reduce the need for subsidies, we need policies geared toward reducing pre-subsidy costs. Republicans have made some moves in this direction, particularly by pushing the expansion of high-deductible health plans that encourage consumers to pay closer attention to the cost of health care. But Republicans have not produced a health care cost control agenda that is sufficiently aggressive or that is linked to realistic plans to get health coverage to people who lack it today.

There are reasons for this failure. One is that controlling costs requires taking on powerful political interests. In the case of health care, that means Medicare beneficiaries, plus providers, pharmaceutical companies and health insurers. In higher education, that means schools, their employees, and some state and local officials.

Instead of fighting these forces, Republicans have chosen a cynical strategy of protecting the status quo and the incumbents who benefit from it. The party’s conduct on Medicare for the last four years has been particularly appalling. From bizarre opposition to the Medicare Independent Payment Advisory Board (conservatives don’t like big government, but if we’re going to have it, they apparently want it to cut checks indiscriminately) to a hugely irresponsible promise to hold those over 55 safe from any Medicare changes, the GOP has made its clear goal on health policy to protect the old at the expense of the young and uninsured, not to control costs or make the system work better.

Similarly, on education, the GOP’s main agenda has been to grumble about the expansion of federal subsidies for college tuition, and how they fuel rising tuition. Fair enough. But where is the agenda to get colleges and universities to control costs, slow the expansion of non-instructional staffing and stop offering degrees that are a bad value for the money?

Republicans could advance an agenda that ties college subsidies to cost effectiveness and penalizes institutions that sell students low-value products. This would ensure that reductions in student loan subsidies don’t just leave low-income students in the lurch. But they don't.

This brings us to another reason Republicans won’t say smart things about cost control: It requires admitting that we need a mix of market and non-market solutions. Health care and higher education are and will remain sectors of the economy that have a large government share of expenses, and so the market will necessarily be distorted. The key objective should be making sure that those distortions balance each other. For example, policies that guarantee universal access to health care will necessarily push the cost to the consumer below the actual cost of providing health-care services, encouraging overconsumption; other top-down policies to restrain consumption will tend to make the market less distorted on net.

Instead, conservatives are in an ideological bind. They are resigned to the existence of things like Medicare and federal student loan subsidies. But trying to make the programs work better, within their context as government programs, seems like too much of a capitulation to the statists. That’s how you end up with rhetoric on IPAB that’s not too far from “get the government out of my Medicare.”

An agenda of making government programs work better also doesn’t square with conservative tax-cutting dogma. Making government more efficient can make funds available for tax cuts. But sometimes when the government gets better it becomes a good idea to make it bigger.

If the U.S. could eliminate its huge cost disadvantage in transportation projects, we might respond by building more new infrastructure. If public employee benefit costs could be brought in line with the private sector's, it might make sense to hire more workers. Similarly, one of the key ideas behind Obamacare was that savings from cost control in existing health care entitlements could be redirected to provide coverage to people who lack it today.

All of that is fine with me. I’m an infrastructure skeptic because of the cost gap, but if we could get American infrastructure costs to match Spain’s, I’d want to go on a subway-building binge. I think the government should do more of the things it’s good at and less of the things it’s bad at, and I’d like the government to be good at more things. But being the party of better government will only sometimes mean being the party of smaller government, and I don't think that's a bridge most conservatives are yet ready to cross.

Carl DeMaio, a Republican who narrowly lost the San Diego mayoral race this month, has some good advice for his co-partisans: “Californians like government, and voters want government to work again. Too often, Republicans have taken an ‘end it, don't mend it’ stance. ‘New’ Republicans can offer a vision of making government work that is still consistent with our principles.”

Unfortunately, I don’t think DeMaio’s message is likely to be acceptable to conservatives in California or nationally. But as it becomes increasingly clear that the share of the electorate that reacts with Pavlovian consistency to “You Didn’t Build That” is not a majority, Republicans may be forced to offer such a message.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Nov/20/2012 19:01 GMT