Glenn Hubbard: Turn the populism of 2016 into an honest revolution in Washington

Policies that can fix Washington and appeal to opposite ends of populism.
Policies that can fix Washington and appeal to opposite ends of populism.
Image: Reuters/Lucas Jackson
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Most economic policy wonks (including me) have lamented the lack of serious policy ideas from candidates remaining in the 2016 presidential campaign. Indeed, what passes for policy ideas are vague thoughts bearing either negative consequences (punish the banks, on the one hand, or impose a 45% tariff on all Chinese goods, on the other hand) or fuzzy math (a massive tax cut, on the one hand, or a massive increase in social spending, on the other hand, with no regard for debt burdens). Political pundits point to measures of economic anxiety—stagnating incomes for many, rising out-of-pocket health care costs, student debt burdens, and so on—to explain the populist, policy-light campaign.

But I’m not so sure.

Exit polls for Donald Trump or Bernie Sanders don’t reveal a single-minded identification with economic anxiety. An alternative explanation is voter anger that Washington doesn’t work — solutions cannot be found, and stasis reigns. Voters do not believe policy ideas can be carried to fruition, leaving space for promises to “make America great again” or lead a “potential revolution.” If accurate, such an interpretation suggests one way to bring back important policy discussions is to craft solutions that work and ensure a process for their implementation.

To illustrate, consider three types of infrastructure mired in policy debates relating to human capital, physical capital, and law. In each area, Washington is broken. Out-of-date labor policy has fostered an emphasis on economically questionable ideas—a high minimum wage or restrictions on trade just because they might actually be implemented.  Private capital formation and associated benefits in higher productivity are held back by a complex and inefficient tax system, but the debate focuses on rejection of politically unrealistic options rather than crafting a feasible solution. And vestigial laws and regulations constrain growth and individual action, with layers of patches making true reform difficult.

In all three cases, there are solutions that work, but they require a different policy process, not just the search for a different policy.  There are tools to bolster incomes from work, but they require considerations beyond a ‘rising tide lifts all boats’ or ‘strengthening unemployment insurance.’  A workable tax reform to increase investment requires starting with business tax reform, for which a reasonable agreement is feasible.  The debate over our legal and regulatory architecture must move beyond ‘more versus less’ to a process of evaluating what works.

Declines in labor force participation and stagnating incomes for low-income workers have fueled calls for policy actions like a high minimum wage and tariffs, action that would depress opportunities or purchasing power for these very workers.

Human capital reform

A number of policies already raise marginal tax rates on work for low-income individuals by making non-work more economically attractive.  What is needed is a policy to support work, bolstering earnings for low-skilled individuals who work. When work does not pay, individuals are deprived not only of earnings today, but of opportunities to advance made possible by continuous work. The Earned Income Tax Credit (EITC) is thought of as such a policy, but its earnings subsidies are substantial only for households with children. Increasing EITC payments for childless workers and phasing out those benefits more slowly as earnings rise can bolster work and inclusion.

By strengthening opportunities for low-wage work and, over time, advancement, this policy that works should appeal to both Democrats (to address distributional concerns) and Republicans (to blunt calls for increased welfare spending or a higher minimum wage). 

Physical capital reform

Policies to promote private capital formation are also important. Advancing our living standards requires a focus on improving productivity growth, which has been weak since the financial crisis.  Many economists focus primarily on fundamental tax reform, by which they hope to raise productivity by increasing investment and efficiency in the allocation of capital. But frustratingly, the political debate has often centered on a contest between an incremental, no-reform agenda and textbook reforms (for example, scrapping the current tax system in favor of a broad-based consumption tax).

Neither of these plans are likely to be enacted.  An alternative approach could emphasize reform of the taxation of business income (corporate and non-corporate) that would reduce marginal tax rates and broaden the tax base. Such proposals could capture bipartisan interest, and they can capture much of the growth benefits of broader tax reform.

Legal reform

Finally, the approach to law and regulation as software for our economy, replete with the requisite patches and updates, not to mention the calls for more or less, feeds the idea that Washington doesn’t work. Complex and overlapping regulation in financial, product, and labor markets raise costs and reduce productivity.

Many economists also associate increases in regulatory complexity over the past decade with the fall in startup activity in business dynamism. A variety of process reforms from explicit sunsetting of regulations to a presidential commission to recommend streamlining of rules across levels of government would underpin better policy. This idea is not new, as a look back to the cleanup and reformulation of a Uniform Commercial Code in the postwar period reveals. Such efforts affect both the ability of policy to work effectively and the confidence by citizens that government intervention is more than just a red tape dispenser.

Interpreting today’s populism as a byproduct of public cynicism that Washington doesn’t work suggests a reframing of economic policy toward workable ideas and processes that support their successful implementation. The populism of 2016 provides an opening to new tools. Those tools, and the process that identifies, them can make Washington work again and lead to an honest revolution.