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A Guide to Conservative Economics

By: Rob Weiss

Posted: 10/16/07

The Republican party has long claimed to be the standard-bearer of economic growth, limited government, and fiscal conservatism in American politics, but year after year of broken promises from a Republican-dominated government has exposed just how feebly grounded that ideological core is in real economics. For those willing to probe a little more deeply, the time is right to examine more the inherent inconsistencies underlying a theory of governance that holds that government action is doomed to fail-and to provide a more just and more hopeful Democratic alternative.

Let us start with economic growth, central to the broadprosperity that has made our nation the most powerful and among the most comfortable in the world. Are Republican beliefs and priorities consistent with a "pro-growth" mantra? Basic economic theory-and the empirical data that verify it-tells us a few things about what shapes the macroeconomic path of a nation. One is that national income growth pretty much converges over time to a point determined by the savings rate of a nation. The savings rate is 1 minus the consumption rate-what is not consumed is invested, either directly as in the stock market, or put into a bank account which then lends it out to firms in the market, the engines of macroeconomic growth. So, the savings rate determines how much financial capital is around to be put to use in the long-term development of the economy.

There are two components to the national savings rate: the public and private savings rates, where the public is how much the government saves or spends, and the private how much individual households. If we aimed to increase the national savings rate in the interests of long-term growth, we would implement policies designed to create a surplus at the federal level, and to incentivize households to save rather than spend. Yet despite claiming to be "pro-growth," Republicans have, with the largest spending increase in history, turned Clinton's substantial budget surplus into a deficit of record proportions. High budget deficits are not pro-growth, because not only are they equivalent to tax increases in the future, but they mean we have a low public savings rate. Furthermore, this deficit was created in large part by to a policy of income tax cuts with the explicit aim of increasing private consumption rather than savings. Tax cuts and high budget deficits do successfully accomplish one political goal of Republicans-saddled with enormous interest payments, government's ability to act is crippled. However, these policies, and the spirit in which they were implemented, are fundamentally at odds with the campaign season "pro-growth" rhetoric.

But we know another thing from macroeconomics: the rate at which a nation converges to that previously-mentioned growth point is primarily determined by two things, growth in worker productivity and in technology. And indeed, these are functionally equivalent in that technology is important because it increases per-worker efficiency (for those familiar with the term, this is a simplification of the Solow growth model, the dominant paradigm in growth economics). Thus, a truly "pro-growth" policy maker would want to make the following three investments in areas that firms-due to their nature as short-term individual actors in a competitive market-would invest in at sub-optimal levels. First, in the health of our workforce, so that productivity is greater and absenteeism due to health reasons is diminished. Second, in education-we know that average number of years of education and the quality of that education are two of the most crucial variables explaining empirical differences in growth patterns across nations. Third, in basic research and development (R&D), a classic example of an economic "externality" correctable by government intervention. Basic R&D is the essential foundation of technological advancement, yet private firms have no incentive to invest in creating those "building blocks" because profits come from new, patentable formulas and products.

Indeed, economic theory (which is considered to be a conservative field), argues that in the long run, gains in worker efficiency is the ONLY determinant of long-term growth. And yet again, both Republican policy and ideology are inconsistent with their "pro growth" rhetoric. Republican congresses and administrations have uniformly done all they can to cut R&D funding, denigrate science, underfund education, and denounce federal investments in health care solutions as "socialized medicine."

There is an oft-repeated slogan that summarizes these conservative claims about limited government and market efficiency: "The government that governs best is the one that governs least." Yet, even on conservative terms, there are important roles for government to play in a number of spheres. It can and does promote long-term prosperity and a rising quality-of-life in ways the capitalist economy alone cannot by fixing market failures and inefficiencies, providing regulation, and solving the problem of "public goods." Market failures such as monopoly capitalism, which can mean higher prices and lower quality goods for consumers are tackled through anti-trust laws created early this century; regulatory bodies like the FDA allow consumers to purchase goods that we can trust (generally) to adhere to reasonable safety standards. Bridges and tunnels that work, public transportation, stewardship of natural resources and protection of air and water quality; these are but a few examples of "public goods" or "externalities" that private firms, the base unit of the market capitalist system, do not account for on their own.

Conservatives may argue that these and other government services can be better provided by the private sector, but the record on that is mixed at best. Privatization presents a prime opportunity for corruption and inefficiency-think of no-bid contracts for Halliburton. And there are various structural reasons the private sector is not always more efficient on its own. Let's take health insurance, a national example: Americans spend far more on health for far fewer returns than pretty much every developed nation with a universal coverage plan ("socialized medicine" as the Right would dub it-one wonders if they can sleep at night with all the "socialized education" run rampant in our nation). There are several good reasons why the private sector is less efficient at providing health insurance, one of which is that the smaller the pool of risk, the higher prices providers must charge. In theory, a national "single payer" plan would allowing much lower rates than could be offered by a high number of private insurance providers. A lack of government regulation also contributes to high prices and misinformation in the health insurance market place, where companies are forced to compete for their profit margins by "cherry-picking" only healthy customers and charging outrageous premiums or denying coverage to those with pre-existing conditions.

The conservative ideology cannot reasonably claim to cut funding to the vital organs that make our nation work every day and create the highest standard of living in the world. Though it denigrates government and seeks to destroy its ability to act, it cannot help but admit that the areas to which the vast majority of financial resources are allocated are entirely legitimate. And in these areas, Democrats have even proven far more willing to be "fiscally responsible" and make the tough decisions necessary to the allocation of scarce resources-such as Congress instituting tough new Pay-As-You-Go (PAYGO) rules. If conservatism is not a philosophy of smaller government or greater efficiency, then what is it? If you probe an average conservative hard enough about what he or she means, you'll find that there is a potentially legitimate theme that emerges, one that gives a very specific, albeit incredibly limited, meaning to the philosophy of small government. This is a dislike for income redistribution or welfare, associated with liberals, and which they believe is unfair, promotes laziness, and doesn't work to eliminate poverty-why take from those who have made it and give to those who won't help themselves?

In the last couple of decades, Liberals have recognized these problems and moved to deal with them. Clinton ended the "welfare state as we know it" during the 90's, but though we have tried to shed our association with welfare, since then no single, simple economic mantra has come to be associated with liberalism. Instead, we try to beat conservatives at their own game, with a modicum of success. Now, however, it's time to set forth our core principles, a set of beliefs and values upon which we Democrats-all the way from the "fiscally conservative" Blue Dogs to the most heavily bleeding hearts-can agree.

The Left can present a coherent alternative to conservatism, one that promotes growth and competitiveness while simultaneously fulfilling our responsibilities to our community. These are the benchmarks that good governance-whether from the right or left- must measured against. The core of this philosophy, the Democratic alternative, is the recognition that, just as a business must invest in new physical capital to grow, for a society to prosper it must invest in human capital. Long-term growth in income, as noted, hinges primarily on improvements in the productivity of the labor force and technology, which both increase a core variable of efficiency. Thus, investments in education, health care, and basic R&D-investments that are made soberly and with regard to where money must be allocated away from-are crucial to keeping America strong and prosperous in a competitive global market.

While a rising tide lifts all boats, the Left also crucially recognizes that GDP growth is not the "be all and end all." Our political economy is characterized by many inequalities, some but not all of which it is our duty as a national community to rectify. We must stand by the principle that every person is of equal value at birth and deserves the opportunity to make his or her way up the ladder, while recognizing that differences in talent and effort will create inequalities based on merit. We recognize, however, that this does not describe our system as it is but rather as it should be.

In reality, advantages and disadvantages that are a function of sociopolitical and economic conditions create a system of inequality that not only holds back bright and talented individuals from realizing their potential, but also perpetuates institutionalized racism, sexism and classism. A child born into a less well-off family may not only face low quality schooling that will not prepare him adequately for the job market, but other non-obvious disadvantages like a disruptive home environment that impedes studying. He might acquire poor nutritional habits from harried parents who, between working two jobs apiece only have the time, money and energy left in them to stop at McDonalds for dinner. And if he is dark-skinned, he faces a debilitating set of low expectations derived from his birth and race. Put the same child in a white body born to a well-off family that can afford extra study lessons, an SAT tutor, college tuition, and most simply the leisure time to make sure that family life functions smoothly. He is faced with his own, much higher set of expectations about how far he will go in the world, and the people around him will see to it that he realizes that potential.

We neither have the power nor the responsibility to end all inequalities. Nonetheless, the left has a more realistic assessment of the political economy, and offers a just, equitable, and hopeful vision to overcoming its vicissitudes: take the long view by investing in Americans, and in opportunity; don't be held back by an outmoded, self-fulfilling prophecy that says government is doomed to failure and waste. Funding quality primary education, making college affordable, and making health care accessible to everyone are all central to growth and long-run competitiveness. More importantly, they also are ways to narrow the cycles of advantage and disadvantage that are eroding the middle class and creating a culture of fear, mistrust and isolation. The Democratic philosophy will put us on the path to better achieving what the Republicans claim as their goals: sustaining the broad prosperity that has made our nation the strongest in the world. But even beyond that, the Democratic way can restore the broad sense of compassion and community-"I am my brother's keeper, I am my sister's keeper"-that will once again make our nation greatest in the world.
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