Saturday, November 15, 2014

Richard Epstein from the US: Republicans Won. Now What?

In the aftermath of the decisive Republican sweep of the midterm elections, the question on everyone’s mind is how the Republicans will govern now that they control the Senate and have a larger cushion to work with in the House. The overall objective seems clear enough: find ways to whittle down the size of government so as to reverse the current trends, perpetuated by the Democrats, of higher taxes and greater regulation. This objective will also help reverse the decline in household income in the midst of an era of slow economic growth.

The Republicans must consider both the ends and the means. The ends chosen should be determined by a consistent theory of the relationship of the individual to the state. To a classical liberal like myself, this means a limited government focused on social order, national defense, infrastructure improvement, and regulation of private monopoly, while limiting federal programs of wealth transfer and income redistribution. 

The guiding light in this venture is to reduce government subsidies that alter the balance of competitive forces, and to lighten the burden of regulation across the board by cutting back on the endless sets of permits that must be obtained before engaging in any economically productive activity.

The question of means is far more vexed, because in the world of practical politics, compromises are always required which make these transitions less intellectually coherent than they should be. It is a regrettable truth that people develop reliance interests that cannot be wiped away with the stroke of a pen. One may think, as I continue to, that massive programs like the minimum wage or the President’s Affordable Care Act should never have been passed in the first place, but that is water under the bridge, so that the question is how to minimize the damage in the effort to cut back their influence.

On this score, the first step for the Republicans is to make it explicit that further regulation and new taxes are off the table, period. More specifically, the Republicans should emphatically reject the advice of the forlorn New York Times that writes as if another stimulus program, a living wage, a revitalized labor movement, and further constraints on international trade will produce the needed jolt to grow an economy, which in truth needs more bed rest and less government intervention.

The simple argument here is that all of these misguided progressive interventions reduce the possibility of gains from trade. A stimulus program seeks to reduce interest rates to make it cheap for businesses to borrow. But at the same time, this program reduces the return to capital, which means that equity investors stay at home. The Keynesians only see half of the picture; they ignore two crucial factors. The first is the gratuitous uncertainties attributable to the duration, size, and character of the stimulus program. Its internal uncertainties all weigh down all sides of any market. The second is the high administrative burden of implementing these unwise programs. The stimulus approach may not fuel inflation, but it certainly dampens growth.

We should not double down on past failures by seeking macroeconomic solutions to labor market problems. A slow return to market rates of interest should bring more capital into the market, which in turn will give greater opportunities for increased wages, at least if the federal government backs off its chronic desire to meddle in labor markets. It is always tempting to say that government helps the poor when it shackles the rich, but not so when the two parties seek to trade with each other. Instead, the reduced options for prospective employers result in fewer options for prospective employees. Not surprisingly, labor market restrictions hit the bottom of the income distribution the hardest because the workers with the fewest skills also have the fewest substitutes.

Start with this simple truth. Capital is flexible in a way that labor cannot be. Greater investments in labor-saving equipment or moving operations off-shore are two standard responses to restrictive labor laws that no clever government program can forestall. Perhaps some existing businesses are trapped in their current locations, but foreign investment can remain off-shore and new domestic investment may never take place at all. A stimulus growth agenda will only aggravate the wage and income stagnation that progressives lament.

Just putting labor market regulations off the table should assure both workers and businesses that no fresh surprises lurk around the corner. Greater capital expenditures should then fuel wage increases, for as John Kyl and Stephen Moore remind us, capital and labor are complements as well as substitutes. Increase the total levels of investment, and the new businesses will bid up wages, so long as they are not hassled by a new set of restrictions.
What is true of new regulation is also true of new subsidies. The Obama administration has showered subsidies on solar and wind energy in the futile effort to create good green jobs. Big mistake. The federal government should not be in the business of picking its energy favorites. Its correct role is to adopt policies that minimize the real externalities—like pollution and dead animals—generated by alternative energy sources. The central task is to get an accurate measure of those outputs, and then to allow the individual firms within the various energy sectors to maximize their profits within that overall constraint. The rap therefore against wind and solar is that they are propped up by senseless programs like the Production Tax Credit that has unwisely been lavished on the wind industry, which should not be renewed during the lame duck session or anytime thereafter.

The same fate should await the ethanol subsidies that for too long have distorted relative prices between the agricultural and energy businesses. There has never been an interest group that failed to explain the benefits its members received from largesse. And there has never been an interest group that explicitly acknowledges the losses that these subsidies impose on both their competitors and the public at large. The Republicans can and should take a principled stand on these questions whether they come from Iowa or Maine, which could prove a lot harder than it sounds.

A harder transitional question is what to do about existing programs that have teetered on the brink of failure. The President’s prized Affordable Care Act is one such program. To be sure, it has its beneficiaries, which include millions of individuals who have gotten healthcare at below cost. But transfer programs of this magnitude also have enormous hidden costs, including the loss of insurance coverage by those individuals whose healthcare policies were not deemed rich enough to survive cancellation. The dislocations go even deeper than that. They include the distortions created by the unpopular medical device tax, which has gutted a once-thriving industry, and the serious labor market distortions that result from employers refusing to hire marginal workers for more than 30 hours per week lest they get socked by the $2,000 per employee tax.

Faced with these realities, it seems clear that this massive program should never have been enacted in the first place. But given that it was enacted, Republicans are now faced with the questions of what to do. Are House Speaker John Boehner and incoming Senate Majority Leader Mitch McConnell correct to insist “on renewing our commitment to repeal ObamaCare?” Let’s hope that they mean that as a long-term strategy and not a short-term initiative, which President Obama would veto with great fanfare. A far better approach is to delay the employer mandate by at least one more year, so that its first phase—covering firms with over 100 employees—does not have to go into effect in 2015, and its second stage—covering firms with 50 to 99 workers—can be pushed back beyond 2016.

This phase of the healthcare law carries the risk of economic disruption greater than that from the roll out of the individual mandate in October 2013. Slowing the employer mandate down gives everyone a chance to think hard about its execution. It also allows Congress to soften or remove its key substantive provisions before putting the program into place. That gives Boehner and McConnell a shot at exempting employees who work fewer than 40 hours per week, which would defang the program. But any immediate postponement puts a besieged President in the awkward position of having to veto a popular measure that could easily gain some democratic support. That extra time gives another year of experience with the individual mandate, which might strengthen the case for total repeal down the road.

Some Republicans will, without doubt, push hard for immediate repeal, but if there is one lesson to be learned by comparing the midterm election of 2010 with that of 2014, it is that moving too fast in the right direction is a sure recipe for losing political support. The President has a tin ear when he says his party got clobbered at the polls because he could not “sell” his program to the public. But he is congenitally unable to rethink those policies from the ground up, which might let him cut back on his failed progressive agenda.

The best way for the Republicans to counter animus is to go first after the low-hanging fruit, and then as its first round initiatives prove effective, to broaden the offense. But inviting popular presidential vetoes is the best way to give the Democrats a second lease on life, just in time for the 2016 presidential election, when the clash of governing philosophies will be front and center.

Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.

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