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Special Report

Economic Growth and the Working Class


For decades, conservative Republicans could not consistently climb out of their political minority status based on their limited government philosophy alone. That changed fundamentally for the long run in 1980, when Ronald Reagan embraced supply-side economics and the Kemp-Roth tax cuts, and campaigned on a vision for robust economic growth. The focus on economic growth and tax cuts transformed national politics into at least a 50-50 battle between liberals and conservatives, and even majorities for Republicans and conservatives by the mid-1990s.

Some neoconservatives are now arguing that Reagan's success was based on his support for maintaining the New Deal rather than a devotion to small government ideology. But Reagan clearly communicated to every voter over and over throughout the 1980 campaign that his "national economic recovery plan" was based on four components -- tax cuts, spending cuts, removing unnecessary regulatory burdens, and sound monetary policy to stop inflation. That was all explicit, up front, and central. Reagan bowed only to pledge never to cut Social Security.

The economic growth component enabled Republicans to appeal consistently to a substantial majority of voters, because economic growth is the most progressive program possible. Growth is the most effective anti-poverty program in world history, shattering the whole notion of poverty over time. The Heritage Foundation publishes reports every year showing the standard of living of the poor in America today is comparable to the standard of living of the American middle class a few decades ago, and of the European middle class today.

Growth creates new jobs and rising wages that pull more and more of the poor out of poverty altogether, and more and more of the working class into the middle class. The poor in America today are almost all either recent low skill immigrants or those who dropped out of high school, bore out of wedlock children as teenagers, or suffer from alcohol or drug abuse. Over time, economic growth will pull these folks out of poverty as well.

Economic growth spreads broader and broader benefits across society. More rapid growth means more rapid development and wider use of breakthrough technologies such as the Internet. It means better health care and medical technology. It means more government revenue to help the poor enjoy these medical breakthroughs as well. It means more resources can be devoted to improving and maintaining the environment.

THIS PROCESS WAS was recently recognized by Barron's editorial page editor Thomas G. Donlan in his book, A World of Wealth: How Capitalism Turns Profit Into Progress. Donlan writes,

Two centuries ago, even a wealthy man such as George Washington did not have central heating. A hundred years ago, the indoor toilet, the electric light, and the telephone were found in only a few homes that could afford to install them. These inconveniences became middle class necessities and now are commonplace items in virtually every American home, even the poorest.

Donlan's no-nonsense book explains basic economics in terms the average person can understand. He starts by explaining,
There are two kinds of economists. Those who think the free market always works, except when the results don't suit them; and those who think the free market never works, except when the results do suit them. In my view, the free market always works. Whether the results suit me or you is a matter of taste....The best thing about economics is the free market, and the best thing about the free market is freedom.
This is why social goals can always be better achieved by peeling away big government burdens rather than adding new ones.

Donlan explains the process of economic growth starting with taxes, saying:

Oddly, if you really want to raise taxes on the rich, you should cut their tax rates the way Congress and President Bush did in 2001, 2002, and 2003. It sounds like a joke but it's the most sensible way to read the results of the Bush years in U.S. tax policy. After the Bush Administration and Congress reduced the top marginal `rates, the people with the highest incomes shouldered a larger share of the tax burden because they made so much more money....Of more importance, the expanding economy generated more revenue from income taxes, sales taxes, corporate income taxes, and social insurance taxes....By fiscal 2007, higher economic growth and lower tax avoidance covered the loss of revenue from lower rates.

But the Left argues that economic growth doesn't work anymore for low and moderate income workers, defined as the working class, and the poor. That is because in recent years wages seem to have stagnated among these workers. Historically, wages have grown when productivity has grown, but since 2000 continued productivity growth does not seem to have been reflected in rising wages for working people.

The Left has seized on this as an excuse for more government power, arguing that the market is obviously failing working people. But the Left offers this same response on every issue and development, including the weather (or more precisely its theories about the weather).

Unfortunately, some putative conservative intellectuals are now effectively taking this same position as well. They are arguing that conservatives and Republicans are losing their appeal to working class voters because of this wage stagnation. As a result, conservatives should drop their focus on limited government, free-market Reaganism, which, they say, is failing these voters. They should embrace instead a modern, big government conservatism with Republicans offering the working class government redistribution that will recognize their economic difficulties and their pain, and so win their votes.

How these intellectuals can fail to understand that this is socialism not conservatism is unfathomable. What they are saying is no more than that the free market has failed their politically favored interest group, but look at them in their central planning genius, they know the perfect government intervention to fix it.

THERE IS A REASON why wages for unskilled and lesser skilled labor have fallen behind in recent years. That is because the market for this labor is increasingly global, as modern technology allows the work forces of the emerging economies of China and India, and the liberated economies of the former Soviet bloc, to compete in the world market. This is a radical increase in the supply of basic labor, which naturally holds its price in terms of wages down. What should be surprising is that it hasn't had an even bigger effect.

But this is not a reason to abandon the free market. Quite to the contrary, this increased global competition means that there is even less margin for error, or big government fat and waste. We must adhere even more closely to free market policies, and seek even more ardently to maximize economic growth. This is the way, the only way, for American workers to keep earning the highest wages in the world.

In particular, for American workers to succeed in this global marketplace, we must equip them even more with the latest, the best, and the most in advanced, high-tech capital. Such capital investment, enabling workers to produce more, is the key to higher wages and incomes. Taking into account the huge increase in the global supply of basic labor, we need even more of this to get wages for the working class moving up again.

This means that we need even more urgently to rid our tax system of outdated, neo-Marxist, multiple tax burdens on capital investment. Every educated person needs to know by now that the biggest problem in our tax system is the multiple taxation of capital. The returns to a typical capital investment today are taxed once by the corporate income tax. If any of that return is paid to the stockholders, it is taxed again by the individual income tax. When the stock is sold, the returns to investment are taxed again by the capital gains tax. When the investor dies, the capital returns saved over a lifetime are taxed a fourth time by the death tax.

Then investment expenses are not treated fairly either. Every other business expense is deducted in the year it is incurred. But capital investment expenses must be deducted over many years according to arbitrary IRS depreciation schedules.

Page: 1 2  

Letter to the Editor

topics:
Taxes, Health Care, Economics, Business, Social Security, Environment, Books, European Union, Socialism, Conservatism, Energy, Oil

Peter Ferrara is director of entitlement and budget policy at the Institute for Policy Innovation, and general counsel of the American Civil Rights Union. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is a graduate of Harvard College and Harvard Law School.

Comments

Pingback| 4.1.09 @ 2:44AM

Interesting Inflation News Links (March 31, 2009) « Inflation Issues Blog links to this page. Here’s an excerpt:

Sachs Addresses Economic Crisis, Iraq War (Shane Ferro, Columbia Daily Spectator) March 31, 2009...4:26 pm Interesting Inflation News Links (March 31, 2009) Jump to Comments Economic Growth and the Working Class (Peter Ferrara, American Spectator) For decades, conservative Republicans could not consistently climb out of their political minority status based on their limited government philosophy…

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