The Foundational Tension That Drives Economic Divisions

by Sheri Rivlin and Allan Rivlin on June 17, 2015

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The inherent tension, buried deep in the foundational structure of our capitalist democracy, is the perpetual tension between one-person-one-vote democracy, and one-dollar-one-vote capitalism. The two parties each emphasize one side of this tension, driving differences on nearly every political issue currently being debated, as we are detailing in this series, which starts here.  This tension drives the parties in two very different directions, when it comes to economic policy.

Because nearly all Republicans would describe themselves as strong supporters of free-market capitalism and strong opponents of government intervention, their economic policy proposals amount to little more than repeated demands to cut taxes and regulations on business.  Republicans doubt whether government can do anything to increase economic activity, improve wages, or provide economic opportunity, they promise that with government off our backs the free market will deliver a stronger economy.  The recession that started during the administration of George H. W. Bush, followed by the global financial crisis that started in the final years of the George W. Bush Administration, have undercut the credibility of the assertion that low taxes, fewer regulations, and small government creates prosperity.  Still, this simple set of proposals, which opponents have derisively called “trickle-down economics,” is nonetheless still a fairly clear articulation of the current economic program of nearly every Republican politician running for office in 2016.

Democrats believe there are lots of things government can do to grow the economy, create jobs,  raise wages, and enhance economic security for the middle class.  For Democrats, the glory years for the U.S. economy were the 1940s, through the end of the 1960s, as extreme government intervention (and a World War) helped pull the economy out of the Great Depression, into an extended period of growth.  In this view, the guiding hands of market forces and government policy achieved a proper and effective balance.  Government hired huge numbers, built an interstate highway system, invested in other infrastructure, virtually ended poverty among the elderly through the Social Security and Medicare programs, provided college education to millions of returning soldiers through the GI bill, and protected the right of workers to form unions and bargain for higher wages.  All of this helped build the American middle class, strengthening the customer base for businesses to thrive.  

With Watergate, the Iran hostages, and two oil shocks in the next decade, the 1970s were not good for either party; but the 1980s, especially the first Reagan term, are the golden years for Republicans.  Regulations were cut and the business cycle turned upward, before slowing again toward the end of the decade.  Democrats are mystified that Republicans so celebrate the 1980s economy, except to understand that it may have been a good time to be wealthy in the USA.  Earnings for most workers were flat through the decade, and the Savings and Loan Crisis, which occurred during the Reagan and George H. W. Bush Administrations, cost customers and taxpayers billions, and were enough to convince Democrats that strong financial regulations are necessary — especially as the whole scenario played out again on a far grander scale, in the financial collapse at the conclusion of the George W. Bush Administration.

Is More (or Less) Government Policy Best to Strengthen the Middle-Class?

For years, Democrats have been talking about the income gap between rich and poor, and stagnant wages for the middle class, and for months now, many Republicans have been echoing the same themes.  The difference is Democrats, through allied progressive think tanks, have been developing a broad range of policy proposals, to address the economic conditions leading to wage stagnation; while Republicans and their allied think tanks oppose the Democratic proposals, offering no alternative other than tax cuts, and roll-backs of regulation.  The debates over whether the minimum wage should be increased; whether government should make major investments in modernization of roads, railways, and other critical infrastructure; whether government should help families lower student loan debt; whether government should help people with job skills training, afford a college education, or offer preschool programs for all children, are all specific aspects of the broader tension between those who believe government can help rebuild the middle class, and those who believe government should just get out of the way of businesses and market forces.  

Republicans believe the government does not create jobs,with one major exception:  If you try to cancel a military procurement program, Republicans will tell you how many states will lose jobs, and all of the economic activity that flows from them.  Democrats believe there are primary and secondary economic costs to cutting defense spending, but also from decreased government spending for education.  Laying off teachers costs jobs today, and also leaves students less prepared for the jobs of tomorrow,even if Republicans do not see this.  

Democrats believe new investment in infrastructure creates good jobs, and also improves economic capacity.  For example, modernizing highways, railways and ports puts people to work right now; but it also increases the capacity of businesses to get raw materials and ship products to customers and markets.  Modernizing power and data grids creates good jobs in construction today, and helps business thrive, creating good jobs in the years to come.  

Unintended Consequences of Government and Anti-Governmentalism

Conservatives correctly point out that government policies often produce unintended consequences.  If anything goes wrong with a non-defense government program, you can be certain they will be talking about it all day on Fox News.  Medicare is one of the most popular government programs ever passed, but some people have figured out how to defraud billions out of Medicare over the years.  Wherever there are sums of money, there will be people trying to get their hands on it, and this is as true in the private sector as in military projects.  If you offer help to some, others may have less incentive to work, so certainly there are some senior citizens who leave the workforce because they qualify for Social Security.  Democrats believe despite these unintended consequences Social Security and Medicare are, on balance, good programs.  

Recently, some Republicans may be realizing there are unintended consequences from rampant anti-governmentalism.  With the rise of the Tea Party, Republicans have come to fear a primary challenge, if they ever make a deal with a Democratic president, or raise even a penny in taxes.  There is now a growing list of major legislation the business community actually needs, but can’t see a path to passage in the current environment.  The major business groups support comprehensive immigration reform, as well as greater investment in math, science and engineering education.  And businesses really do need the repairs to the nation’s infrastructure to keep their inputs and products moving.  But all these things cost money, and require agreement with President Obama, so they appear to be off the table due to Republican opposition.  This has been fueling a split within the Republican Party between pro-business Republicans and anti-government Republicans, that is playing itself out on Capitol Hill, and is coming to the crowded GOP presidential debates.

The foundational tension inherent in democratic capitalism not only gives the two parties dramatically different approaches to the economy; it also fuels the battles on the campaign trail, on Capitol Hill and in the Supreme Court.  We will detail how this plays out in the next installment.  

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