As President Obama made abundantly clear at the Democratic National Convention, the Republican policies of less taxes for the wealthy, fewer regulations and lower trade barriers have outlived their usefulness, rarely bearing the “fruit” promised while continuing to undermine our manufacturing base and decimate the viability of our middle class. Even the repetitive accusation that Democrats do nothing but “tax and spend” no longer sways the hearts and minds of independent voters.
As a result, the Republican message has become more muddled in a mixture of the past and present day sound bites designed to incite the base and appeal to our more baser instincts. Various descriptive phrases have appeared in the press ranging from “out-of-date” to “behind-the-times," to even “shrill” in some circles. In the past four decades, our economy has definitely morphed into a more complex reflection of domestic capabilities and international market influences. Accepted remedies from prior years no longer have the same curative powers as before. New adaptations are required to survive.
Republican officials, generally known as the party of business and fiscal responsibility, have been slow to react. New innovative ideas that would gather broad-based support from the public and Democrats at large have taken a backseat to more radical notions that sound extreme to most moderately minded citizens. The present “malaise” has taken years to evolve, and basic evolutionary principles may be the only source of prudent guidance to escape from what can best be described as “Reagan-itis.”
If “survival of the fittest” is the rallying call, then why are present day policies unfit? The “Era of Globalization” is the term most economists use to portray the way global commerce has transformed over the past half century. Outsourcing activities in the West have led to the off shoring of jobs and manufacturing capacity to lower labor-cost environments, creating the greatest redistribution of wealth across the globe that the world has ever witnessed. As Tom Friedman so succinctly put it in the title of his latest book, “That Used to be Us.”
Back in the Sixties, the “standard-of-living” gap between the developed and developing countries of the world was unabashedly wider than it should have been by any measure. The reason given for the huge “gap” was that Western workers were much more productive. Technology and ingenuity added to the argument, suggesting that education was the only solution necessary for emerging markets to compete with the West.
As the old homily warns, “Pride goeth before a fall.” The Seventies watched the off shoring of labor-intensive industries, particularly in the textile and furniture manufacturing sectors. Capital-intensive industries like steel foundries were next, followed by technology companies in the Nineties. Lastly, service related activities had already begun a slide while other labor-laden components of the corporate business model found cheaper alternatives in foreign markets. Jobs left the American heartland in droves, never to return.
Corporate leaders complained that American products were no longer competitive. Off-shoring was deemed an acceptable solution to lower internal costs and respond to overly demanding market forces. Republican policies during the Reagan era responded by lowering taxes, regulations, and trade barriers, ostensibly to encourage an infusion of investment capital from overseas. Our infrastructure was already in decline, but outdated business facilities were in serious need of new investments for modernization.
Capital, however, has a mind of its own. It always flows to wherever it perceives the greatest potential for profit. Under the man-made constructs of the time, the “hot” arena was not within our shores, but within the fast-growing economies resident in Asia. Not only did foreign capital move to Asian shores, domestic hedge funds and investors loaded up on Asian-based Exchange-Trade Funds and commodities like Gold. Investments such as these returned multiples of “5X” to “6X," compared to a flat S&P 500 index from the millennium crossover until today.
Were productivity gains our savior on this rapidly changing global stage? Economists were buoyed by increasing domestic trends in this statistical measure, a seeming confirmation that Republican tax cuts and open trade were on the right track, and not deteriorative. During President George W. Bush’s tenure in office, however, it came to light that measuring techniques were actually sending the wrong message.
There had never been a good way to calculate what impact outsourcing was producing within the milieu of our monthly economic data releases. Lower import prices led to lower-priced goods, but also misrepresented the sources of productivity improvements. What had appeared as supportive gains were, in reality, signs of destructive pressures from abroad. The revelation that figures were in error arose when the furniture assembly sector displayed the highest productivity gain for a period, when the last factory devoted to this purpose had been closed several years before.
Republican policymakers, however, saw no reason to modify their stance. Reagan had stood for tax cuts, open trade borders, and fewer government regulations, mixed in with a little union-bashing on the side. The “Great Recession” was the “tipping point” for many years of intransigence. Tax cuts did not produce more domestic investment or jobs. Banks were more comfortable with highly leveraged “gambling” on OTC markets than with making commercial loans. Per-capita disposable income growth, the “engine” that creates demand in our service-driven economy, was flat to negative over the past dozen years.
Malcolm Gladwell, who has made a study of tipping point scenarios, proclaims that they occur in much the same way as epidemics. They do not happen overnight. Years of build up precede the sudden spread of an idea or trend. Little things can make a big difference, but refusing to change policies is akin to pouring gasoline on an ever-expanding fire.
Republicans have always been known for pragmatic ideas and a willingness to get the job done, but, if “Reagan-itis” is to be cured, new moderate approaches must be tried. Pushing an extreme agenda may energize the conservative base, but it does nothing to solve the financial issues at the core of our current structural economic problems.
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