Anchor the Biden Plan to 4 principles of Country Success…

By Roger Scher

Source: images.search.yahoo.com drawn from www.catholiclane.com

Over the last three decades, Center-Right and Center-Left reformers around the world have identified the key elements of country success.

Four principles of economic policy emerge from a study of this reform record.

In an effort to derive lessons for the U.S. today, this article considers programs implemented since the 1990s by governments we could call centrist.

This article will assess the record of governments led by these Center Left leaders:

  • German Social Democrat Gerhard Schröder,

  • U.K. Labour leader Tony Blair,

  • and, U.S. Democrats Bill Clinton and Barack Obama;

And, by these Center Right leaders:

  • Spain’s former People’s Party leader Mariano Rajoy,

  • and, U.S. Republican George H.W. Bush;

And, by the Centrist French president, Emmanuel Macron.

The 4 principles, or best practices, are:

  1. Unleash the energy of markets;

  2. Invest in human capital, i.e. in education, R&D, health care, and retraining and retooling workers, focusing on the disadvantaged;

  3. Reduce government debt, rebuilding buffers against shocks; and,

  4. Deploy strategic planning, setting national goals for sustainable growth, supported by a consensus in society.

The Biden Plans

President Biden’s speech to Congress on April 28, outlining his 3 plans (the American Rescue, Jobs and Families plans), was impressive. It contained many important elements — notably, investing in human and physical capital, a low-carbon transformation, and bold efforts to reduce poverty and inequality.

However, Biden’s plans are too expensive and not laser-focused on where the U.S. needs improvement. And, while the Biden plans seek to upgrade American competitiveness, the effort falls short on strategic planning.

Political expediency has driven up the cost. In order to get broad-based buy-in for his sweeping initiatives, too many middle-class giveaways have been included, a common feature in American politics. These include cash rebates and the expansion of Pell Grants and college funding, as well as income eligibilities for social assistance that capture the middle class.

Given the heavy debt burden of the U.S. government — 127% of GDP in 2020, its highest level ever and nearly 60 percentage points higher than Germany’s — the country can ill afford expansion of middle class programs right now. Still, the Biden team should be commended for expanding programs that reduce poverty and inequality.

While stimulus and investment are called for right now, the country still lacks a medium-term plan to restore America’s fiscal health. The Biden team deserves credit for identifying tax revenues to fund its initiatives. However, the administration should look to the Congressional Budget Office’s (CBO’s) report, “Options for Reducing the Deficit: 2021–2030”, for additional measures to control deficits, including on the spending side. For example, means-testing entitlement programs is critical. U.S. debt needs to be put on a sustainable path, or future success could be forfeited.

The likelihood that all of Biden’s tax proposals will pass Congress is also not high. In a democracy, inherently, there is greater reluctance to raise taxes than to raise spending.

Finally, effective strategic planning requires a formal structure and a set of procedures. In a paper I co-authored, we proposed that the government convene a Future Economy Council, run out of the White House, to roll out a strategic plan for sustainable long-term growth. Strategic planning, led by government and partnering with the private sector, is international best practice.

A U.S. strategic plan should include action on the political front to encourage consensus and bipartisanship, through changes in the rules and practices of the legislative process and elections. Reforms that reward majorities in Congress and encourage “deliberative negotiation”, as deployed in the past with the Congressional “gang” approach, should be pursued.

The reform record of Center Right / Center Left governments around the world has been impressive. What follows is a summary of these successes, which could serve to inform the current U.S. policy debate.

The Center-Left Blueprint

A Center-Left blueprint for country success emerged in the 1990s. The blueprint is pro-growth — making markets more flexible and dynamic — while cushioning the impact of capitalism on the most vulnerable.

In reaction to the ideological rigidity of Thatcherism / Reaganism, British Prime Minister Blair and German Chancellor Schröder launched the “Third Way” in 1998, with a manifesto calling for a fiscally-sound, market-oriented alternative to the traditional policies of left and right. Meanwhile, President Bill Clinton had arrived on the scene as a “New Democrat” with a similar policy approach.

The approach did not neglect social programs that empower the labor force, unlike the initiatives of their right-wing predecessors.

Nevertheless, budgetary discipline was imperative, both to ensure country success and to prove that Center-Left governments could be entrusted with the nation’s car keys.

In Germany, where the social welfare state had gotten too large and policies had become counterproductive to economic growth and jobs, Schröder’s coalition cut long-term unemployment benefits, making them conditional on active job-seeking and training.

The so-called Hartz labor reforms contributed to a decline in the German unemployment rate from over 11% in 2005 to under 5% in recent years. One indication of the success of a government’s reforms is when its political opponents, upon taking office, adopt them as their own — as Angela Merkel’s conservatives did in 2005. When this happens, a durable consensus can be the outcome.

Over the years, Germany’s Economy Ministry has periodically rolled out strategic plans as well, establishing goals for industry over the medium term.

In the U.K., Prime Minister Blair introduced a minimum wage, and increased health care and education spending, easing pressure on the working poor. Blair also raised tuition fees for the middle class to ensure the financial viability of universities.

A cornerstone of Blair’s “New Labour” program was adherence to a stringent budget rule that even impressed his Conservative opponents (because it stipulated no new government borrowing except for public investment).

In the U.S., Bill Clinton raised taxes on the wealthy, lowered the tax burden on the working poor and small business, and cut spending. As a result, Clinton produced federal budget surpluses for the first time in the U.S. since the 1960s. His administration also negotiated numerous trade liberalization deals, including with China, underpinning global and U.S. prosperity. In his second term, Clinton signed welfare reform, conditioning access to benefits on efforts to find employment.

President Obama signed into law the Affordable Care Act over a decade later. Broad access to health care ensures a healthy and productive workforce. He was also a principal force behind TPP, the trade deal with 10 other trans-Pacific nations, excluding China. Obama’s most noteworthy economic policy achievement though was the adept rescue of the world economy from the worst ravages of a global financial crisis.

Economic growth in the wake of these Center-Left reforms was comparatively robust in these three countries.

Sometimes what is needed is a Center-Left government to address inequality and poverty head on. The Right often neglects this. It is not only the ethical thing to do. It also reverses the negative impacts on growth that poverty and inequality have, due to the skills deficits they create, and underpins a social consensus.

The Center-Right Blueprint

Before Ronald Reagan made taxes a bad word in American politics, the American Right had preached fiscal rectitude. George W. Bush and Donald Trump understood Reagan’s political genius, so they too sought the electoral benefits of tax-cutting.

From Reagan on, the G.O.P. became the party of fiscal recklessness, with the impressive exception of George H.W. Bush (W’s father). Republican tax-cutting has been the primary cause of an astronomical rise in U.S. government debt (pre-pandemic), as well as the related increase in the country’s external indebtedness (what we owe foreigners), as national savings declined under the weight of government deficits. 

U.S. government revenues total only 30% of GDP, considerably lower than in most other advanced countries, which have ratios ranging from 35–50%. The U.S. should not sacrifice its low-tax status, but it can keep it, while raising the tax intake several percentage points to ensure sound finances and fund growth-enhancing programs.

Sorry, Republican friends, it is that simple.

President George H.W. Bush ignored the rebellious Reaganites on his right flank, doing a deal with Democrats in Congress in 1990 to raise taxes on the wealthy in exchange for domestic spending cuts. Besides restoring sound public finances, this action ensured that H.W. was primaried by populist firebrand, Pat Buchanan, and also had to face the independent candidacy of H. Ross Perot. And, in the middle of a recession, H.W. went down to defeat against the charismatic Bill Clinton. Profile in courage meets ballot box reality.

Concerned that America’s widening fiscal deficits could undermine U.S. power, George H.W. Bush’s number one goal was to cut the federal deficit, once he had kicked Saddam Hussein out of Kuwait. And so, he made life easier for his successor, Bill Clinton, allowing him to take credit for the fiscal surpluses and booming economy of the late 1990s, which H.W. had helped create.

Lesson: when the Center Right sticks to its historical role as the guardian of fiscal policy, as H.W. did, the U.S. benefits.

Spain’s Mariano Rajoy, of the right-wing Partido Popular, likewise pursued deficit cuts and a lower debt-to-GDP ratio in 2012. In the middle of the Euro Area financial crisis, after taking over from the Spanish Socialists, Rajoy raised taxes and cut spending to meet EU requirements. Still, Rajoy maintained long-term unemployment benefits for low-income persons, as long as they were actively seeking jobs.

Spain has long suffered from a dualistic “insider-outsider” labor market with rigid rules and protections for insiders who hold permanent contracts. By contrast, a large number of workers, especially the young, are outsiders, hired under temporary contracts with few protections.

Spain’s rigid labor regulations have historically caused high unemployment. Unemployment has reached as high as 25% of the labor force and 50% for youth.

Rajoy introduced deep labor reforms, including enterprise-level collective bargaining, greater flexibility for firms to hire and fire, and reduced severance pay. As a result, Spain’s economy rebounded, becoming the fastest growing large economy in Europe between 2015–19.

Unemployment dropped to 14% in 2019 from 26% in 2013. When Rajoy left office in 2018, his opponents in the Socialist Party (PSOE) who had succeeded him kept his labor and fiscal reforms intact.

Emmanuel Macron became president of France in 2017 after creating a centrist party to implement reforms. He had been the French Socialist government’s market-oriented Economy Minister (and a former investment banker), but found the Left too constraining; so, he resigned and ran for president.

Like Rajoy in Spain, Macron reformed France’s dualistic labor market. He introduced hiring and firing flexibility, which led to an increase in the use of permanent, over temporary, contracts. He also reduced the “labor wedge”, the difference between what employers pay and what workers take home, driven by large taxes and social charges. This reform increased both the supply of and demand for labor, by increasing worker take-home pay and reducing employer payments.

The Center Right seems better-placed to implement labor market reforms. That said, in Germany it was the Center Left that introduced them, so you never know.

Lessons for the U.S.

To achieve country success, the U.S. government should:

  • Fix public finances — with a medium-term fiscal consolidation plan, announced soon.

  • Focus on anti-poverty programs and reducing inequality. Poverty and inequality hold back GDP growth, so fix this, while postponing and means-testing middle class programs.

  • Retrain and retool — through universal Pre-K and a K-12 educational focus, increasing Title I funding of disadvantaged schools and STEM programs, lifelong job training, and basic R&D. The emphasis of the federal government should be on primary and secondary education, significantly upgrading programs begun in the 1960s to provide educational opportunity to all (and advanced under George W. Bush and Barack Obama). Means-testing college programs and college loan relief would complement this focus on the neediest.

  • Focus infrastructure spending on a low-carbon transition, backloading other (non-green) projects when possible, implementing them when the nation can afford it.

  • Promote, don’t backtrack on, globalization. Approve the WTO adjudicators without delay. Work multilaterally with like-minded nations to penalize cheaters through the WTO Dispute Settlement Mechanism and other multilateral fora. Jumpstart multilateral trade deals, such as TPP and TTIP. Temper “Buy American” rhetoric, and exclude anti-China language from messaging.

  • And, don’t throw the baby out with the bath water by undermining America’s strengths. America is known for its flexible markets, particularly its nimble labor markets. The U.S. scores 4th in the world in the World Economic Forum’s Competitiveness index for competitive labor markets, and first for labor mobility. Likewise, U.S. product and financial markets are among the most flexible and competitive. The U.S. is ranked first in the world for the dynamism of its businesses, and 2nd for both innovation and entrepreneurship. So, we should guard these strengths by avoiding the introduction of too many regulations and by keeping the growth of government in check. Yes, distribute prosperity more broadly, but the best way to do this is by upgrading the skills of the labor force.

    As the IMF recently said: “…the U.S. has proved time and again that it has the flexibility to adapt to shifts in the economic environment as well as the talent and human capital to innovate in new and unexpected ways.” (Art. IV 2020, p. 22)

The genius of the Center Right is its focus on the market economy and low government debt.

The genius of the Center Left is its focus on empowering workers, inclusion, public investment, and a social safety net.

Friends, we have the Blueprint. Let’s use it!

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See Ten Point Plan: Strategic Planning for the U.S. here