Opinion

Reihan Salam

To create growth, unleash the invisible foot

Reihan Salam
Mar 1, 2013 16:58 UTC

Across the political spectrum, there is a growing recognition that while short-term battles over government spending are important, they would be far less ferocious and intense if our economy were growing at a faster clip. But while conservatives and liberals alike clamor for more growth, they disagree about how to produce it. The key is unleashing what the economist Joseph Berliner once called the “Invisible Foot,” the neglected counterpart to Adam Smith’s “Invisible Hand.”

Before we turn to the Invisible Foot, let’s think through the prescriptions for growth offered by Democrats and Republicans. President Barack Obama and his Democratic allies often argue that substantial increases in public investment will deliver robust growth. Republicans, in contrast, emphasize the notion that reductions in marginal tax rates will spur growth by increasing the incentives to work and invest. These approaches are obviously far apart, yet they face at least two common obstacles. First, the aging of the population and the high cost of health entitlements severely limit the government’s ability to increase spending or cut taxes. Second, advanced economies have by definition already taken advantage of the most obvious sources of productivity growth and so are forced to innovate to find new sources of productivity growth. And innovation is a trial-and-error process that is far more expensive and arduous than simply following the leader.

So the question of the day isn’t whether we want growth (yes, we want it badly) or whether we can dramatically increase public investment or dramatically cut taxes (neither strategy is in the cards). Rather, it is whether there is anything we can do to make the American economy friendlier to the kind of risk-taking and innovation that will eventually yield productivity gains without breaking the bank.

Enter the invisible foot. Despite sluggish growth, large U.S. business enterprises have fared reasonably well in the post-crisis years. Corporate profits after taxes have hovered around 10 percent of gross domestic product, almost twice as high as they were during the Reagan years. High corporate profits aren’t an intrinsically bad thing. Yet we’d normally expect that they would over time be reduced by competition from new entrants enticed by the prospect of making their own fortunes. This invisible foot of new competition is what drives incumbent firms to either step up their games ‑ a process that often involves burning through stockpiles of cash and shrinking profits ‑ or go out of business.

Unfortunately, this reallocation of resources ‑ from inefficient incumbents to innovative upstarts and the incumbents that manage to keep up with them ‑ stops when incumbent firms succeed in erecting regulatory and legal barriers to shield themselves against competitors, which is why regulatory reform and patent reform are so important. It is also why we ought to take care not to give large incumbents any undue advantages in our tax code.

After Boehner’s Plan B, crafting a new plan for Republicans

Reihan Salam
Dec 21, 2012 20:42 UTC

House Speaker John Boehner has struggled for weeks to unite his fellow Republicans around a deal to avert the fiscal cliff. Having failed to find a package of tax increases and spending cuts acceptable to the Obama administration and the House GOP, he pivoted to a politically shrewd “Plan B” that would have extended all of the Bush-era tax cuts except for the high-income rate reductions that applied to income above a $1 million threshold. But as Boehner and his lieutenants worked to rally support, they found that they didn’t have the votes to pass “Plan B.” And so Boehner has suffered what is widely regarded as a humiliating defeat, one that has left many observers wondering whether he can survive for long as speaker.

Whether or not Boehner manages to regain his standing with House Republicans, his defeat raises a number of more significant questions about where Republicans should go from here.

Until the next presidential election, Boehner and the House Republicans are the face of the GOP. There are, to be sure, a number of talented Republican governors, yet most of them are either deeply engaged with issues close to home or too obscure or low-wattage to have much of a national impact. All but a handful of House Republicans represent constituencies with substantial Republican majorities, thanks in no small part to the influence of Republican state legislators in drawing district boundaries. The GOP is thus likely to hold the House for years to come, even if Hillary Clinton wins the White House come 2016. Like it or not, conservatives need the House GOP to get its act together sooner rather than later. But how?

Tax hikes conservatives can love

Reihan Salam
Dec 14, 2012 21:22 UTC

Though it is hard to tell exactly how the fiscal cliff tug-of-war will end, what we can say is that Democrats and Republicans have been drearily unimaginative. President Obama wants to see the top two federal income tax rates increase above their current levels.

Obama has called for a top rate of 39.6 percent, though he has signaled a willingness to compromise on a somewhat lower rate. While he has said he is open to entitlement reform in some vague way, he has so far refused to be pinned down on the details. Essentially, he is asking congressional Republicans to make a big concession on taxes and to trust that he will honor his end of the deal by agreeing to embrace spending restraint in 2013.

Republicans are by and large opposed to a top tax rate above today’s 35 percent. Though they too have been light on details, many have instead embraced sharp limits on popular tax exemptions for high earners to raise revenue. Others have suggested they’d be willing to budge on tax rates. Representative Tom Cole (R-OK) has called on his fellow House Republicans to pass two bills, one that extends the Bush-era high-income rate reductions and another that extends everything else, with the understanding that the latter will become law while the former will fall into oblivion. This strategic retreat is designed to allow Republicans to use the forthcoming fight over the debt limit to secure, among other things, a hike in the Medicare eligibility age.

Actually, conservatives should favor even fewer people paying income tax

Reihan Salam
Sep 20, 2012 19:44 UTC

The outrage over Mitt Romney’s extended off-the-record riff to wealthy donors about the fact that “47 percent of Americans pay no income tax” has shown no sign of dying down. As of now, this looks like the defining moment of his presidential campaign. In lumping together those who have no federal income tax liability with those “who believe the government has a responsibility to care for them,” the former Massachusetts governor gave new life to every crude caricature of conservatives as class warriors for the ultrarich.

But did off-the-record Romney have a point? Is it a problem that we have narrowed the federal income tax base, or is there a case that conservatives seeking to contain the growth of government should strive to make the income tax base even narrower?

In a 2001 interview with Nicholas Lemann of the New Yorker, Republican Senator Jim DeMint of South Carolina called the narrowing of the tax base “a major crisis in democracy.” Just months before the first Bush tax cut removed millions of households from the federal income tax rolls, DeMint warned that “the tax code will destroy democracy, by putting us in a position where most voters don’t pay for government.” DeMint’s dark premonition wasn’t enough to get President Bush to revamp his tax cut, but the idea has grown more popular among conservatives in the intervening years, hence Romney’s riff.

Obama and the ghost of Walter Mondale

Reihan Salam
Sep 6, 2012 17:47 UTC

When Barack Obama accepts the Democratic presidential nomination in Charlotte, he will no doubt channel party heroes of the past like Bill Clinton and JFK and FDR, all of whom are celebrated still for their charisma and raw political skills. But he would do well to heed the wisdom of Walter Mondale.

Yes, that’s right. Most Democrats see Mondale as a faintly embarrassing relic from an era in which Democrats had lost their way, and of course there is something to that. He was also one of the last Democrats to make the case that government was worth paying for, not just by the rich but also by the middle-income households that rely on expensive social programs.

By the summer of 1984, Mondale, the former Minnesota senator who had served as vice-president under Jimmy Carter, knew that he was facing an uphill battle for the White House. The brutal Reagan recession had given way to a V-shaped Reagan recovery, and Reagan Democrats were thick on the ground. So Mondale decided to do something very strange at that year’s Democratic National Convention. Rather than make the most anodyne, ultra-cautious, poll-tested argument he and his team could conjure up, he told the truth as he understood it. “Mr. Reagan will raise your taxes,” he told the assembled delegates. “And so will I.”

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