Economic policy

Economic policy in times of volatility

The United States appears to be in the midst of a major political realignment. Really, this subject is the domain of historians and political scientists, so I will largely limit myself to writing about what this means for economic policy. To be honest, it’s hard to make a considered assessment of where we’re headed. Perhaps the best way to think about it is to consider the coalition debates surrounding abortion and how it challenges internal alliances within political parties.

According to polls, about 15% of Americans think abortion is always wrong, even though most would allow it to save the life of the mother. If one believes that life begins at conception, this is an entirely moral point of view. These people are primarily driven by faith and find themselves overwhelmingly in favor of the GOP candidates, at least on this issue.

There is another share of Americans, of similar size, who do not believe that abortion decisions fall within the proper sphere of government control. They believe that the government should not be allowed to interfere in these matters, as it is not within their jurisdiction. That’s a decidedly libertarian view, but for most of the past few decades libertarians have tended to lean toward the GOP. Yet this is not a typical GOP position on abortion legislation.

Any of us could have both views at the same time. The problem is that these two points of view have very different political choices. A party forced to make these choices faces considerable tensions and will surely lose some members to the other side. This is normal in the give-and-take of politics. What makes this period different is how many of these tensions are playing out in an increasingly polarized political environment.

Both parties tend to have elected representatives who are politically further removed from the median voter than at any time in recent decades. There are still moderates, but leading a political party whose elected representatives are largely made up of those who are on the extreme margins of public opinion is a challenge. The main obstacle lies in developing policies that prevent the coalition from fragmenting.

Several economic issues at the federal, state and local levels threaten to fracture the two-party coalition. In recent years, the two parties have developed large parts of their coalition on both sides on major issues such as trade, tax and industrial policy. A general observation is that the fringe of both parties tend to agree more with their political opponents than with members of their own centrist parties.

The progressive left has long opposed free trade and supported industrial policy that offered incentives to favored industries. For decades, moderate Democrats and the GOP have disagreed. Today, there is a growing share of Republicans aligning themselves more closely with progressives on these issues. Donald Trump was able to rally these voters and reverse decades of success in commerce while shoveling cash from favored industries.

These “economic nationalists” or Republican socialists may be a tenuous part of the GOP coalition. Or, they may be the new power of the party. Most voters will not change the party alignment because of trade or tax giveaways. But, in combination with cultural and foreign policy issues, we could see very volatile political coalitions in the years to come.

I think it’s pretty obvious that the broad economic policies promoted by progressives and “economic nationalists” will fail. Yet it will be difficult to see clearly the failure of policies because these policies affect us all. I should also add that hardcore Sanders and Trump supporters have not proven to be particularly responsive to evidence-based policy analysis.

However, at the state and local level, there are big political differences that drive people to vote with their feet. This means that policy successes and failures are much more likely to show up in states, cities and counties than in the nation as a whole. It is a feature, not a bug, of our national system of government, but its value lies in learning from the facts and experience of others.

In recent decades, local economic policy has become polarized. The results are increasingly evident. It’s counterintuitive to many, but almost all the growth is happening in places with higher state and local taxes. This is partly because wealthy people are increasingly grouping together, but partly because families place a higher value on public services. Remember that taxes are the price of public services. Families and businesses choose their location based on value, not price.

Half a century ago, the American Housing Survey didn’t even ask families who moved if it was because of school quality. Today, this is the number one reason why families move. Higher taxes provide more money to schools, which affects quality. Although school quality is not all about money, research data shows quite clearly that money matters. More importantly, families think it matters, as migration data for three decades clearly shows. Businesses follow these families to tap into the workforce and consumer base, so the places that create jobs are increasingly those that educate students well and provide other services.

The good news is that state and local economic policy is not a party monolith. Kansas and San Francisco have both recently demonstrated the economic futility of extremist tax and spending policies that are unrelated to the quality of schools, roads, and public safety. Here, GOP and Democratic candidates have been punished for their extremist policies.

However, places that emphasized the low-tax, low-spending model performed poorly in key measures of job growth, population growth, and income growth. . Conversely, places that do not pay enough attention to fundamental governance issues, such as public safety, or pay too much for services, also do poorly on the economic fundamentals of growth.

Taken together, these developments will put strong pressure on political coalitions built around economic issues. In both parties, we now have growing shares of voters who align more closely with a growing share of the other party’s voters than with their own. This misalignment is more pronounced when local and national economic objectives regarding spending and taxation are inconsistent. The economic policies of tax incentives, student loan forgiveness, trade, tax rates and more have never been more disconnected from mainstream Republican and Democratic arguments of the 2000s than they are. today.

So, on economic policy alone, we live in a fractured era around party alignment. I have no good predictions about where this will end, only that we are in a particularly volatile period of economic policy alliances in our political parties.

Michael J. Hicks is director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics at Ball State University’s Miller College of Business. Send feedback to [email protected]