Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in Project Syndicate.
Democrats are gearing up for the November mid-term elections, in which they hope to take back the US House of Representatives. Candidates are finding that the voters are not necessarily paying close attention to foreign affairs or even Trump scandals, and are more concerned about “pocketbook issues.” The conventional wisdom still stands: underlying the shock election of Mr Trump was a perception by the median household that it has been left behind by globalization and technological change and that the gains have been going to the rich instead.
The Democrats are said to be in need of an economic platform to address these median-worker concerns. From an economist’s viewpoint, it isn’t hard to think of proposals in eight policy areas that would simultaneously continue to expand the national pie while sharing the slices more equally. It is even possible to think of a package that is revenue-neutral, quite unlike the Republican tax cut passed in December, which is blowing the budget deficit wide open at precisely the wrong time. But the list of policy proposals shouldn’t be primarily redistributional – in part because many median voters say they disapprove of income redistribution, even if they benefit personally.
- First, increase spending on infrastructure investment. It is needed for economic growth in the long run and creates blue-collar jobs in the short run. Pay for roads and bridges with an updated higher gasoline tax.
- Second, expand, don’t reduce, the health-insured population. Start by repairing the damage that the Republicans have done to the Affordable Care Act (Obamacare).
- Third, expand and improve education. In particular, pursue high-quality universal pre-school education, so that children can enter kindergarten on a more equal footing. Expand higher education too (especially community college). But don’t do it via government loans that go into the pockets of those for-profit universities where a majority of students leave with nothing to show for their experience but high debt. Only schools with adequate graduation rates and job placement records should be eligible.
- That leads to the fourth issue area, financial regulation. The Republicans are busy trying to weaken it at precisely the wrong time, at the peak of the financial and business cycles. Keep the Dodd-Frank financial reforms. To minimize the risk of another financial crisis, keep the supplementary leverage ratio placed on the largest banks, which newly appointed regulators are working to relax. Bank capital standards should, if anything, be further tightened.
Resume the good work that the Consumer Financial Protection Bureau has done until now, protecting households who take out high-interest pay-day loans, student loans, and car loans. And of course housing finance, where the 2007-08 crisis originated. Mortgage-originators, for example, should be required to “keep skin in the game” by risk-retention rules.
Reinstate Obama’s fiduciary rule, which would have required professional financial advisers, in return for their fees, to put their clients’ interests first when advising them on assets invested through retirement plans.
- Fifth, reform the personal income tax to “make work pay” by reducing marginal tax rates on low-income workers, not high income workers. For example, expand the Earned Income Tax Credit. Abolish the carried interest deduction (which benefits wealthy managers of private equity and hedge funds), as candidate Trump (and Clinton) promised to do in the 2016 presidential campaign.
Don’t eliminate the estate tax as the Republicans want to do. To the contrary, when a couple leaves more than $10 or $20 million to their heirs, some fraction of the excess should go to the Treasury.
- Sixth, cancel the Trump tariffs on steel and other imports. Tariffs are taxes too, with especially high impairment of consumer welfare, distortion of efficiency, and complexity of enforcement. Sure, trade creates losers along with the winners. But so do steel tariffs — except that they create more losers than winners. The losers include the auto industry and others who use steel, all of us consumers who have to pay more for the finished products, and the farmers and others who lose exports as a repercussion.
- Seventh, compensate the losers, not just those who lose their jobs due to trade, as under Trade Adjustment Assistance, but the more numerous workers who are adversely hit by technological changes and other forces. One way to do this would be “wage insurance” [which supports those who lose their jobs, but without the negative effects on their incentive to take a new job).
- Any increased spending or transfers (like that wage insurance proposal) should be paid for. One way to raise revenue would be a carbon tax. Another step that would go a long way would be to “repeal and replace” the $1.5 billion 10-year tax cuts passed in December, which go overwhelmingly to the rich. To lower the corporate tax rate, the reform should have offset the revenue loss by limiting interest deduction and other loopholes. Other deductions to curtail include the special treatment of option-based executive compensation. A third possibility that has not received enough attention would be to cancel plans – projected to cost at least $1.25 trillion over 30 years — to modernize the land-based component of the US nuclear missile force triad. It accomplishes little other than extending terrifying pressures on future Presidents to launch a nuclear war in “use them or lose them” response to possibly mistaken warning of incoming attack.
The items on this list may not be especially sexy or new. They have been heard before, usually proposed by Democrats and opposed by Republicans. But they would help bring about widely shared growth. There is no reason why voters shouldn’t respond to a good pitch for them.
This post written by Jeffrey Frankel.