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(This item originally appeared in Forbes.com on September 30, 2012.)
http://www.forbes.com/sites/nathanlewis/2012/...y-little/
I used to be a macro analyst for institutional investors, covering countries
in Asia and elsewhere. I would look at the political dynamics, and get an
idea of whether a country was going to implement successful policies or
destructive ones.
These countries would typically have some sort of left-leaning party or
coalition and some sort of right-leaning party. Sometimes, these parties
would be on the right track, and sometimes they would go off the rails.
There’s a lot that’s right about the Republican Party today. I think the
message of tax reform, like the Steve Forbes-style Flat Tax, and budget
reform, for example the Ryan Plan, are going to be very important for the
United States going forward. The Democrats don’t really have anything new to
offer except flawed healthcare plans.
The Republican Party should be popular, but it is not. Why not? Here are some
things I suggest:
1) They turn a blind eye to criminal activity, especially by the banks. I
think we all know that, over the past decade or so, someone committed some
very large crimes, and so far they have gotten away with it. You can be a
business-friendly party without letting your banking cronies loot the public
Treasury and screw the middle class silly. New financial regulations, for
example a return of Glass-Steagall, will be necessary.
2) They say nice things during the election and then …. The last two
Republican presidents were Bush I and Bush II. The first got elected on his
“Read My Lips” promise to continue the Reagan low-tax policy. He raised taxes
instead, and got involved in a voluntary and easily-prevented war in Iraq.
The second promised (in 2000) that he would avoid foreign adventures, but
instead started two wars on false pretenses (“weapons of mass destruction” in
Iraq and “looking for Bin Laden” in Afghanistan), along with a lot of other
police-state stuff that we would rather forget about today. Remember the
Patriot Act? The same Bush cronies are still hanging around in the Republican
Party’s wings, apparently ready to continue their games with whatever
Republican president is elected.
3) Their low-tax message doesn’t seem to apply to most Americans. In the
1970s, the idea of lowering marginal income tax rates was important. The top
income tax rate was 70%, with state and local taxes piled on top of that. Tax
reform is still important, but I think it might be time to look at taxes on
incomes below $100,000. Taxes on the first $50,000 of income are, arguably,
way too high today: sales taxes, payroll taxes (direct and indirect), income
taxes, property taxes (direct and indirect), and all sorts of minor taxes and
fees, on gasoline, phone service, and dozens of other things.
Some Republicans argue today that income taxes should be applied to even
lower incomes, supposedly with the idea that, if Republicans raise income
taxes on lower incomes, people will be more appreciative of Republicans’ low
tax message. That makes a lot of sense. Rather, it might be time to raise the
lower brackets, so that income taxes do not apply until you reach about $80,000
for a family of four. Because income taxes on the lower income levels hardly
raise any revenue anyway, you aren’t giving up much there. However, it would
lower the marginal income tax rates for many families by 10%-15%, which is a
lot. And, it would build the broad-base political support for further tax
reform.
Also, I would consider reducing payroll taxes, and perhaps substituting some
other sort of tax. Note how Obama’s temporary payroll tax cut sailed right
through without much controversy whatsoever. The political environment is
apparently ripe for such a thing. I personally would consider replacing all
payroll taxes with a tax on fossil fuels equivalent to about $1 for a gallon
of gasoline, on a btu basis. You always get less of what you tax, and more of
what you don’t, so the result might reasonably be more employment, less
domestic environmental abuse, and less dependence on foreign oil.
4) They want to cut spending, but don’t have good alternatives to existing
entitlement programs. Social Security and Medicare, in their existing form,
will likely bankrupt the government. But simply cutting services is not the
answer. Rather, Republicans need to think about how to solve basic problems –
senior income security and healthcare – with programs that are much, much
less expensive. This shouldn’t be hard to do. I would suggest that Social
Security be replaced by a mandatory IRA-type solution, as is used in dozens
of other countries worldwide. However, this should be combined with an income
guarantee for seniors, basically a need-based welfare program. Nobody falls
through the cracks.
For healthcare, the U.S. government (all levels) is already spending more, as
a percent of GDP, than almost all other OECD countries – which all have
universal healthcare! In 2009, the U.S. government spent about 8.2% of
GDP on healthcare, while the average for the OECD was about 7.0%. Republicans
should think about a way to provide universal healthcare of some sort, while
cutting government healthcare spending from 8.2% to 7.0%. It would be a
Nixon-in-China sort of moment. Plus, a universal healthcare plan would
eliminate most corporate healthcare spending. That might be popular among
businesspeople.
5) The big-military message is passé. The Cold War is over. Remember the
Founding Fathers’ message about “standing armies”? When you build a big
hammer, pretty soon someone starts looking like a nail. The U.S. doesn’t need
to spend more on “defense” than all other countries combined. No strategy to
cut spending that doesn’t include big reductions in the military’s budget
will have any credibility.
One of the most successful conservative parties in history was Japan’s
Liberal Democratic Party during the 1950s and 1960s. They were cutting taxes
every year, and kept the yen pegged to gold via the Bretton Woods system.
Unlike their predecessors of the 1930s, they didn’t engage in any overseas
empire-building. The economy was roaring, the middle class was getting
wealthier, and unemployment was rock-bottom. Whenever left-leaning parties brought
up a new issue or social program, the LDP would co-opt it and integrate it
into their small-government framework. The LDP – the conservative party –
were the ones to introduce a public pension (Social Security), welfare
programs, a universal healthcare plan, new environmental regulations, and all
sorts of other supposedly “liberal” issues. The voters could get all they
wanted from one great conservative party, and never had to replace it with
another.
The Tea Party movement in part represents a fracture in the conservative
coalition in the U.S., between the peaceful small-government libertarians
characterized by Ron Paul and to some degree Ronald Reagan, and the
big-military, big-business types characterized by the two Bush presidents.
The Democratic party also has its cadre of status-quo protectors, and another
group that wants “hope and change.” One thing we may see over the next decade
is a realignment of U.S. politics, from Democrat and Republican parties which
many complain have become indistinguishable, to a new bifurcation between the
Status-Quo Protectors in both parties and the New System Promoters, a
coalition of Occupy Wall Street and Tea Party-type interests, again from both
parties.
I suppose some partisan spear-carriers will write to complain that I
shouldn’t criticize the Republican Party at all. But, a party that is not
aware of its weaknesses will not accomplish very much. The U.S. will have
some big challenges up ahead, and they are mostly conservative challenges:
getting the budget back in line, tax reform, getting the economy going,
monetary reform, entitlement and welfare reform, and shrinking government
overall from the bloated state it has been in since World War II. The
conservative team needs to start getting in shape for all the heavy lifting
it will soon have to do.
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