Somebody find the GOP a carrot
As House Republicans gird themselves for battle over the debt limit, they are united by an adamantine conviction that something must be done about federal spending, and soon. The challenge Republicans face, however, is that they‚Äôve become the party of all sticks and no carrots.
Back in 1976, Jude Wanniski, the idiosyncratic supply-side guru, published a short essay arguing that while the Democrats are the spending Santa Claus, bearing promises of more government benefits, Republicans should become the tax Santa Claus, bearing promises of tax cuts. That is famously what happened during the Reagan era.
But as the tax burden on middle-income households dwindled, middle-income swing voters started to care less about taxes and more about the cost of medical insurance, higher education, and a whole host of quality-of-life issues. President Bill Clinton exploited this dynamic by politically championing middle-income tax cuts and tax increases on high earners at the same time, a tactic that has paid dividends for Democrats ever since. Republicans have found themselves defending tax cuts for high earners while offering little if anything to middle-income voters but calls for entitlement reform. Whether or not this stance is defensible on policy grounds, it‚Äôs certainly not what Santa would do.
And after the fiscal cliff deal, during which the Republican leadership acknowledged that it was powerless to stop tax increases on high earners, the GOP finds itself in a bind. Federal taxes are expected to rise to 19.4 percent of GDP, a level that is well above the 17.8 percent of GDP that had been the average federal tax take from 1946 to 2008. There are good reasons why tax levels might be higher now than they have been in the past, including the aging of the baby boom cohort. But the growth of federal spending over the coming decades threatens to outstrip the ability of taxpayers to bear it, particularly if Congress aims to shield middle-income households from punishing tax increases.
Democrats can still play the role of Santa Claus by claiming, however implausibly, that tax hikes on the rich are all we need to pay for future federal spending increases, with an assist from technocratic fixes like the Independent Payment Advisory Board. Republicans, in contrast, are in desperate need of a new Santa Claus narrative, as across-the-board tax cuts are just not as appealing or affordable as they have been in decades past.
The most promising course is for Republicans to rediscover the virtues of ‚Äúdemand-side conservatism,‚ÄĚ a term coined by Jonathan Rauch a decade ago to describe what he saw as the emerging domestic policy vision of President George W. Bush. ‚ÄúConservatives have been obsessed with reducing the supply of government when instead they should reduce the demand for it,‚ÄĚ wrote Rauch, channeling Bush and his allies. Slashing social programs won‚Äôt do much good if voters continue to have an appetite for them, as they‚Äôll just vote in pro-government politicians who will expand the programs all over again. Rather than focus narrowly on how much we spend at any given time, government should help families build wealth and reform public services in ways that will make them both better and cheaper. The Bush administration had little success in implementing demand-side conservatism, thanks mostly to its post-9/11 focus on foreign policy. But the basic idea remains compelling.
So what might a demand-side conservative agenda look like? Rather than focus exclusively on top-end marginal tax rates, conservatives might fight for expanding the child tax credit and raising taxes on high earners without children to pay for it. That way the investment parents make in the human capital of the next generation of American workers will be recognized and rewarded. This, as the Bush Treasury Department veteran Robert Stein and Ramesh Ponnuru of National Review have argued, will tend to reduce the bias against child-rearing, which might ease the burden of paying for old-age social insurance programs well into the future.
Republicans have embraced the Medicare reform championed by House Budget Committee Chairman Paul Ryan. Yet they might also consider embracing ‚Äúcash-for-care,‚ÄĚ a promising idea from Lorens Helmchen of George Mason University. Essentially, cash-for-care would give Medicare beneficiaries a choice when confronted with a medical diagnosis: If there are two treatments that are similarly effective but one is much cheaper than the other, you will be allowed to keep some of the savings from choosing the cheaper option in the form of cash. This would induce older Americans to choose more cost-effective treatments, and it would counter the incentive of medical providers to convince patients to choose the more expensive option. It goes without saying the idea would be controversial. It does, however, have the potential to make swallowing the pill of entitlement reform much easier: Yes, taxpayers will save money if Medicare beneficiaries choose cheaper treatments — but Medicare beneficiaries will benefit too, and in a palpable way.
This approach — encouraging cost-consciousness by allowing the beneficiaries of public services to share in savings — can apply in many other domains, including education. Colleges and universities, for example, are extremely resistant to accepting transfer credits from low-cost competitors. This tends to raise the price of higher education. Kevin Carey of the New America Foundation has suggested requiring that higher education institutions that accept federal student loans also accept credits from specialized instructional providers with proven track records. That is, a cheap but effective Web-based provider that focuses solely on teaching basic calculus could substitute for a college‚Äôs own expensive, in-person, intro-level class. Parents and students win because they can spend less out of pocket, and taxpayers win because they spend less on subsidies and because this new competition will force higher education incumbents to become more efficient.
Perhaps most importantly, conservatives need to think about retooling the safety net so it does a better job of helping low-income families achieve economic stability. One of the biggest challenges facing families at the bottom of the economic ladder is that they have an extremely difficult time accumulating savings, thus making it difficult to pay for unexpected expenses like car repairs or missing a day of work to care for a sick child. Recently, Diane Calmus of the Heritage Foundation identified a number of promising approaches to asset building that might appeal to congressional conservatives. In an ideal world, encouraging asset accumulation among less affluent households would make these families more resilient in the face of economic disruptions, and thus less likely to have to rely on safety-net programs.
There is much more to say about the potential of demand-side conservatism. But for now it is important for Republicans to remember the two Santas theory ‚Äď or they‚Äôll have to run against Santa as the Grinch.