What's Wrong With the Republican Party?


September 30, 2012


(This item originally appeared in Forbes.com on September 30, 2012.)

http://www.forbes.com/sites/nathanlewis/2012/09/30/a-gop-oblivious-to-its-weaknesses-will-accomplish-very-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.