Republican Reform Critiques Warmer, but Still Not There

Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary areas of interest include tax and fiscal policy, state and local government, and planning and land use.
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Most of the recent "how to fix the Republican Party" proposals fall into one of two groups. One set says the party's substantive agenda is basically fine, but it needs to come with a younger, more attractive, less white pitchman who is good at saying the words "middle class." Another set urges the party to moderate positions on issues where many professional Republicans are already moderates, such as immigration and gay rights.

What these ideas have in common is that they don't get to the heart of the party's problem, which is an economic agenda that most Americans view (accurately) as not advancing their interests. Two pieces from this past weekend do a lot better in realizing that Republicans must update their substantively unappealing economic policies.

In Commentary magazine, Bush administration veterans Michael Gerson and Peter Wehner call for remaking the Republican agenda around five principles, the first of which is the most important: "focusing on the economic concerns of working- and middle-class Americans." Bloomberg View columnist Ramesh Ponnuru writes for the New York Times that Republicans are still advancing the economic policies of the Reagan era, even though changing economic conditions mean that the underlying principles of his policies would call for new policies.

Unlike many on the right, Gerson, Wehner and Ponnuru have correctly diagnosed the economic challenges that Republicans aren't addressing. (Gerson and Wehner identify "stagnant wages, the loss of blue-collar jobs, exploding health-care and college costs.") And they have even advanced some ideas that would improve matters.

But the key word there is "some": All three writers leave unaddressed major Republican stumbling blocks with the middle class. Particularly, they are far from developing health-care and fiscal policies that can serve middle-class interests.

There are two big middle-class problems with health care. Costs have risen too fast, eating away at wages, and many people can't afford health insurance. Democrats have, in the form of the Patient Protection and Affordable Care Act, enacted policies that mostly fix the second problem and take some steps to deal with the first. Republicans have no plausible agenda on either, and neither of these pieces provides much useful guidance.

Gerson and Wehner attack Obama for "a poorly designed entitlement that further destabilizes the health sector." They talk about the importance of controlling spiraling health care-costs but don’t say how to do it -- nor do they acknowledge that the Republican "markets first" approach to health reform undermines this goal. They don’t at all address the problem of people without insurance.

Ponnuru calls for changing health-insurance subsidies so that they aren't more generous for more expensive plans -- a plausible cost-control reform but, as he acknowledges, only “a first step.”

This failure isn't surprising. Almost all conservatives treat "markets will make health care work better" as a first principle rather than an empirical claim. In fact, health-care markets are hugely dysfunctional for reasons only partly related to policy. Even when conservatives correctly identify health-care inflation as a key middle-class concern, they have an ideological block that prevents them from using the best solutions.

That's why conservative approaches to health reform tend to cover fewer people at greater expense than liberal ones and are therefore politically unworkable. Gerson, Wehner and Ponnuru are right to expose this problem, but fixing it would require rejecting a piece of conservative orthodoxy that they -- let alone the Republican Party -- are not prepared to let go.

Or take the issue of median wage growth having significantly lagged behind gross domestic product growth over the past few decades. Gerson and Wehner’s main plank for addressing this issue is education reform, which is an old red herring. Kindergarten-through-12th-grade reform is the standard Republican response to concerns about inequality and social mobility, seen most recently in Mitt Romney’s five-point economic plan.

This is a weak response to concerns about inequality and wage growth for four reasons. The federal government can only do so much about K-12 policy; K-12 outcomes have actually modestly improved over the period that wages have stagnated; it’s not yet clear which education reforms are effective; and any payoffs from education reform today will come far in the future. Middle-class Americans correctly identify shouts of "school choice" as unresponsive to their concerns about income growth.

Ponnuru does better on this point, calling for a monetary policy of nominal GDP targeting, which would have meant higher inflation during the recent recession, though not over the long term. Such a policy would reduce the severity of recessions and of spikes in unemployment, which should mean a tighter labor market and higher real wages. (Gerson and Wehner don't agree; they reaffirm the importance of "sound" monetary policy, which is code for tight-money policies that would make the middle class even worse off.)

But monetary policy can only go so far. The gap between GDP growth and median-wage growth opened up well before the recession, when the labor market was much tighter. If pretax inequality is rising and that's an important concern (as all these authors seem to think), the most obvious policy response is increased fiscal progressivity.

Ponnuru, Gerson and Wehner all get at this by endorsing a larger child tax credit, which would make the tax code more progressive, increase the standard of living of middle-class families and encourage people to have more kids. This is indeed a pro-middle-class policy that Republicans could get behind. But it also brings us to the biggest problem with these reform agendas: It would cost money, and we need to talk about how conservatives would pay for it.

Ponnuru allows that the rest of his agenda would require Republicans to abandon the goal of a 25 percent top tax rate. Gerson and Wehner say that Republicans should continue to promote "reasonable" tax rates; they don't define "reasonable." This is all too vague; a key driver of Republicans' unpalatable economic agenda is the need to make room in the budget for a low top tax rate. To figure out how much room there is for Republicans to stop proposing anti-middle-class policies, we need to know how far they will scale back their commitment to lower taxes on the rich.

I don't think that math can add up. If you're going to expand the child credit or use some other approach to fulfill Ponnuru's goal of providing payroll-tax relief to the middle class; and you're going to avoid gutting the entitlement programs that working- and middle-class Americans depend on to support their standards of living; and you're going to run only a sustainable budget deficit; then you're going to need tax rates on high incomes or capital gains that many conservatives will probably see as "unreasonable" -- for example, in the ballpark of a 40 percent top rate on ordinary income, where we are today.

I invite Ponnuru, Gerson and Wehner to get specific on the budget math and prove me wrong. If they have an idea palatable to both conservatives and the middle class that would make a more "reasonable" top rate workable, I would be very interested to hear it.

This is the most important point to address when fixing the Republican economic agenda. The need to make room for a low top rate is what drives Republicans to propose cutting Medicaid by a third over 10 years and call it a plan to "strengthen our safety net programs." If someone can come up with a way to achieve a low top rate without soaking the middle class, they will have done the country a great service. And if no one can, conservatives might realize they must redefine "reasonable" upward.

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

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.