The Illogic of the Current Economic Debate

In early June of 1992, I sat in the living room of the Governor’s mansion in Little Rock with Bill and Hillary Clinton and a half dozen other advisors, hashing out the economic program he was preparing to take to the country. Clinton had just won the California primary and sealed the presidential nomination, but he was running third in the polls behind President Bush and Ross Perot. That afternoon was the only time I ever heard Bill Clinton doubt himself. Referring to Perot and his movement, he said quietly, “sometimes no matter what you do, a big wave just washes it all away.” President Obama and congressional Democrats face a comparable challenge today from the Republicans and their Tea Party allies, who together threaten to wash over the Democrats’ plans and hopes for themselves and the country. The critical question for Democrats is how they should respond. 

Bill Clinton offers the best example in modern times of how doing what’s right, especially on the economy, can produce very large political rewards. First, there’s the rule that political scientists have taken from decades of economic data and election results: Reality trumps marketing. So, that June day 18 years ago, I reminded the Clintons that average incomes were lower than when Bush had taken office in 1988, and no president in the 20th century won reelection under those conditions. The second rule was all Bill Clinton’s, and it presaged the economic successes of his presidency: He said he would stick with the economic plans developed for him, based on a serious reading of what was wrong with the economy and what modern economics could teach us to do about it.

Today, our real economic conditions have a political double edge. The economy is in much better shape than when President Obama took office, but these remain deeply frustrating and even desperate times for millions of Americans. The political reality is that the frustration has overwhelmed any sense of progress on the economy. The pundits can argue over how Republicans managed to pull off their political jujitsu, in somehow shifting the debate from their own culpability for the worst financial crisis and recession in our lifetimes to the legitimacy of the steps the administration has taken to bring back the economy. By this Orwellian illogic, people’s economic problems today are somehow tied to an orthodox stimulus program to bolster sinking demand and the TARP rescue of the financial system, approaches supported at the time by virtually every conservative as well as liberal economist. In the tradition of “Ignorance is Strength” and “Freedom is Slavery,” the Tea Party-purified opposition also now calls for permanent stimulus through tax cuts while ignoring the repayment of most TARP rescue funds. And their only concession to their own loudly-stated concerns about deficits are far-fetched proposals to cut deeply into the safety net created to protect people from the worst effects of a bad economy, including unemployment benefits, Social Security, Medicare, Medicaid, and the recently-enacted health insurance guarantees. 

For everyone not running for office this year or employed by those who are, the pressing question is how this sorry debate will affect how most Americans fare over the next two years. Political opposition in democracies is often irresponsible, but those who govern don’t have that luxury. Like Clinton in 1992 and throughout his presidency, they have to resist the temptation to respond with distortions of their own. Instead, the administration has to stick with policies that could successfully nudge the economy to a better place for most Americans – and then get credit for it in the next election. 

That’s a very hard strategy to pull off. Reigniting job creation, for example, is clearly a critical part of any serious effort to drive economic recovery. The opposition points to small businesses as the source of most new jobs, and claims that raising the top marginal tax rate would disproportionately harm those same businesses. It’s more Orwellian marketing. They define “small businesses” not by their size, but as any enterprise organized for tax purposes to pass its earnings through to its owners. That does take in nearly all small LLC’s, LLP’s and subchapter-S companies. But it also covers every partnership and private-equity- owned enterprise, from Bechtel and parts of the Koch brothers’ empire, to the accounting giant PriceWaterhouseCooper and many of the holdings of the Carlyle Group. What most Americans care about here is not whether a business is large or small, or how it’s organized for tax purposes, but whether it really creates jobs. Yet, the GOP rebranding of their high-end tax cuts as job creators has driven the Democrats to respond with  their own package of new tax breaks for so-called “small businesses,” alas triggered not by the new jobs they create but by investments they would undertake on their own anyway, as soon as the economy strengthens.  

There are serious ideas developed by real economists about how to stimulate new jobs. For example, we could suspend an employer’s payroll taxes on new hires for two years, and so directly reduce the cost to create new jobs. Or we could offer American multinationals a temporary tax break on the foreign earnings they now hold overseas, in exchange for increasing their domestic workforces by 5 or 10 percent. But serious ideas are always more complicated than political slogans. So, a payroll tax holiday for new hires would also require a real plan to make up the lost revenues, and a jobs policy geared to multinationals would force progressives to retire their outdated views about how the foreign operations of U.S. companies affect American jobs. 

The Tea Party wave being amplified now by most Republicans could well drown out genuine public consideration of new steps for the economy. But what would Democrats lose by trying? Even if they end up losing 35 to 45 seats in the House and seven to nine in the Senate, President Obama and the country still need a serious plan to restore people’s incomes. Without it, the President in 2012 could find himself in the same position as George Herbert Walker Bush in 1992.

Comments

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