ESSA

ESSA

The economic irrationality of new conservatives


Matthew Rao

By

April 3rd, 2014


Matthew Rao examines the flaws in new conservative economic thinking. Can new conservatives reconcile their defence of strong communities with their commitment to economic rationalism?


The current wave of new conservatives, that have become the prominent voice of the right-wing in America, carry with them a great ideological passion. These conservatives have been vocal supporters of many policies that are often congruent with the neo-liberal viewpoint. Such policies include a laissez-faire economic approach and small government; both of which are aligned with the economic rationalist approach. They have also ardently maintained their pro-family, pro-community rhetoric in a time when they say these values are being tossed aside by an increasingly liberalised America.

However, a strict adherence to economic rationalist principles is not compatible with family strength and social welfare in either theory or practice. This new batch of economic rationalists would be wise to support an economic ideology that is the antithesis of their current one if they want to do more than just pay lip service to the masses.

Economic rationalism is a doctrine that improves efficiency rather than equality. The main principle of economic rationalism is that the government should step aside to let the free market work its magic. Lower tax and deregulation are seen as two key pillars of this approach. Of course, lower tax, in a progressive tax system, serves the rich largely at the expense of the poor and deregulation, especially in the labour market, often grants employers unwarranted powers to fire their employees. Above all, economic rationalist policies are generally anti-worker and pro-business, and the lack of moral concern in favour of the ruthless pursuit of profit is perhaps the most important factor to acknowledge. This should radically alter the mind of any new conservative who is supporting policies that comply with this economic doctrine, as the welfare of the communities that they are apparently speaking for, is not the doctrines main concern.

It’s not just in theory that economic rationalism is mutually exclusive from social welfare, but also in practice. Prior to the 1970’s, the middle class in America was in the best shape it had been in for decades. Incomes were rising at a rapid rate and unemployment was at record low levels. This was primarily due to an economic system that was highly regulated and highly equitable. However, a fundamental shift occurred as a new wave of neo-liberals began to sweep into power in the major world governments – lead by Ronald Reagan in the US. What followed was an era of massive deregulation, privatisation and tax cuts implemented under the guise of widespread prosperity. The results were wage stagnation for the American middle class and a string of financial crises, which culminated in the Great Recession. Economic rationalist ideas have had their impact, and the results are there for all of us to see and for working families to resent.

Given all this, the new conservatives should be finding themselves in an intellectual and moral conundrum, as one of their principle moral concerns is so sharply incompatible with their economic motivations. However, the fact that so many neo-liberals are unwilling to even begin to doubt the validity of their economic arguments, despite the weight of evidence against them, suggests that they are by no means concerned with the plight of American communities. It seems clear that their primary political motivation is to instil an economic laissez-faire system whereby those who can exploit it are the only beneficiaries and that the pro-family rhetoric is adopted only to quell outrage and gather support. The only way this tide can turn is if the new conservatives shift their ideological line, because throughout history and up to the present moment, there has been no reconciling economic rationalism with middle-class welfare.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • lennardi

    “It’s not just in theory that economic rationalism is mutually exclusive from social welfare, but also in practice. Prior to the 1970’s, the middle class in America was in the best shape it had been in for decades. Incomes were rising at a rapid rate and unemployment was at record low levels. This was primarily due to an economic system that was highly regulated and highly equitable. However, a fundamental shift occurred as a new wave of neo-liberals began to sweep into power in the major world governments – lead by Ronald Reagan in the US. What followed was an era of massive deregulation, privatisation and tax cuts implemented under the guise of widespread prosperity. The results were wage stagnation for the American middle class and a string of financial crises, which culminated in the Great Recession. Economic rationalist ideas have had their impact, and the results are there for all of us to see and for working families to resent.”

    Has the author actually done any research? The US government increased under the Reagan administration (total spending as a % of GDP was about 29% when he entered office, 32% when he left; http://blogs-images.forbes.com/joshbarro/files/2012/04/spending-GDP-chart1.png). He did undergo some steps to deregulate, yes, but he never even came close to achieving the levels of regulation prior to Lyndon B. Johnson, who massively increased levels of regulation. Ironically enough, Bill Clinton did a much greater job of deregulating industries (especially financial) than Reagan could have dreamed. I find it somewhat ironic that you call others irrational, yet you have failed to provide any reasoning or research behind your claims.

    • Matthew Rao

      I’m happy to address those points. Firstly, you’re right that Reagan increased government spending during his time in office. But, if you look closely, what I said was that he deregulated, privatised and cut taxes. All of which are true. I also said that the prosperity prior to the 1970’s, was due to a system that was highly regulated and highly equitable, not just because governments spent money. Small government doesn’t just mean a reduction in government spending, but more importantly a reduction in regulation and taxes. The fact remains that over Reagan’s time in office, he reduced the top marginal tax rate from 70% to 28%, which is anything but equitable. Secondly, you’re right to point out that Clinton continued deregulation, the repeal of the Glass-Stegall act being the primary example. But once again, I never said or even implied that these economic policies ended when Clinton stepped into office. You seem to be completely avoiding the crux of the piece which was to point out how neo-liberal economic policies, when implemented, are not congruent with the plight of the middle-class. It therefore seems like a perfectly reasonable contention to state that conservatives today should have to pick one or the other as their primary concern.

      • lennardi

        You’re only citation for a decrease in equity was a decrease in the top tax rate. You do realise that due to a huge amount of exemptions, the effective top marginal tax rate was far lower than the actual number. Let’s look at some facts:

        1) The government has increased steadily as a % of GDP in the years since world war 2. (http://blogs-images.forbes.com/joshbarro/files/2012/04/spending-GDP-chart1.png ))

        2) The top 1% pay far more in taxation today, than they did under Reagan. In fact, although Reagan dropped the tax rates, he got rid of so many exemptions that the top 1% actually ended up paying more: ( http://www.rationalrevolution.net/images/shareoftax.gif ).

        3) There was a massive increase in government welfare programs that began in the late 70s under Lyndon Johnson, and were continued under Reagan. ( http://en.wikipedia.org/wiki/Great_Society )

        So what we’ve had was a shift in the tax burden to the top 1%, the introduction of massive welfare programs, and an increase in the government, yet you claim you claim that there was, somehow, a decrease in the equitability or regulation of the economy? I would LOVE to see your sources other than your (out of context) claim that the top marginal tax rate went down from 70% to 28%.)

        • Matthew Rao

          On the first point, once again I stress the fact that I didn’t mention anything about Reagan’s government spending. On the second point, Jimmy Carter was the president in the late 70’s so I’m not sure why you are referencing Lyndon Johnson. In fact, I’m not sure why you keep bringing him up in the first place. I wasn’t attacking Reagan’s welfare policy, although I would encourage you to read further down that wikipedia page, where it mentions that Reagan cut many of the ‘war on poverty’ programs implemented by Johnson in his first budget in 1981. And finally, in regards to tax and the effect this had on the median incomes, I would advise you to read this article by Paul Krugman and have a look at the stagnation in median incomes during Reagan’s presidency http://krugman.blogs.nytimes.com/2013/02/18/the-myth-of-reagans-miracle/

          • lennardi

            Reagan did not cut the war on poverty programs. Again, where are your sources? Welfare spending, as a percentage of GDP, INCREASED under Reagan.

            http://www.oecd.org/media/oecdorg/directorates/directorateforemploymentlabourandsocialaffairs/Chart_SOCXWeb2013_EN.jpg

            http://www.heritage.org/static/reportimages/12C8BF372772E8472BD86BF1DEA5EF8B.gif

            By what measure are you using when you claim that the economy was “less equitable”. Taxes paid by the wealthy went up (as in previous post). Government spending went up. Government welfare spending went up. Again, you need sources for these ridiculous claims.

            Note: The 70’s was a typo (meant to write late 60s). Also, about your Krugman article. I never claimed Reagan was a success, and I think his actions directly contributed to the destruction of the American middle class (but through his increase in government welfare, spending, regulation). The idea that he shrank government and welfare is a myth.

          • Matthew Rao

            I already told you that the source for that was the very same wikipedia page, entitled ‘Great Society’ that you used as evidence for Johnson’s welfare spending (why you brought this up, I still don’t know). If you want me to be even more specific, it was quite far down the page under the heading ‘the legacies of the war on poverty’. If you are going to cite articles, please read them first. But once again I stress that my article was not at all concerned with Reagan government spending, the fact that I didn’t mention it at any point should of been evidence of this. If you want any more proof for the idea that reducing tax rates for the wealthy may just be inequitable, I propose you give this article a quick read. http://www.theatlantic.com/business/archive/2012/12/a-giant-statistical-round-up-of-the-income-inequality-crisis-in-16-charts/266074/ It seems that you enjoy graphs, so I have 16 here for you that show the sharp increase in the wealth of the richest Americans over the past 30 or so years at the expense of the rest of America. Hopefully this settles matters, if not, I await the next reply coming my way.

          • lennardi

            The rich have got richer, I completely agree with you. However, this is due to a massive increase in government spending and regulation. How, you might ask?

            Let’s talk about this graph, which seems to be the crux of the issue:

            http://cdn.theatlantic.com/static/mt/assets/business/assets_c/2012/12/p9-thumb-615×398-107764.png

            Clearly productivity of workers have risen, but capital has maintained. How can this be possible? If capitalists and employers are taking so much, then why don’t these workers start up their own businesses? They simply can’t, due to the massive amounts of barriers to entry, which take the form of skewed tax rates, licences, and REGULATION.

            Don’t believe me, look at the data. Why have these massive inequalities not occurred in countries that rate highly in the economic freedom rankings ( http://en.wikipedia.org/wiki/Index_of_Economic_Freedom ), such as Australia, New Zealand, Canada, Switzerland, all of which have smaller governments and lower amounts of regulation as the US government?

          • Matthew Rao

            Mate, you have completely lost me. If you’re ‘proof’ of excessive American regulation is that millions of workers haven’t decided to start up their own business, then I can’t help you. Once again, you’ve avoided pretty much most of what I said in my article and have instead decided to spend most of your time debating me on points that I never brought up. And whenever you have decided to actually touch on a point I made, you’ve provided no evidence. Please point to the data and evidence that shows America is too regulated. Or preferably you can read this article and realise how grossly wrong you are. http://www.cepr.net/documents/publications/dereg-timeline-2009-07.pdf
            Hopefully this is enough to keep you from replying once more, but if you decide to, please at the very least address the points I brought up in my piece. If you decide to go off topic once more, if you bring up government spending or Lyndon Johnson or Reaganomics, don’t expect me to reply, as quite frankly, you’re arguments are bordering on ridiculous.

          • lennardi

            I haven’t avoided anything you’ve said. I shall spell this out for you, paragraph by paragraph, if it helps:

            “Economic rationalism is a doctrine that improves efficiency rather than equality. The main principle of economic rationalism is that the government should step aside to let the free market work its magic. Lower tax and deregulation are seen as two key pillars of this approach. Of course, lower tax, in a progressive tax system, serves the rich largely at the expense of the poor and deregulation, especially in the labour market, often grants employers unwarranted powers to fire their employees. Above all, economic rationalist policies are generally anti-worker and pro-business, and the lack of moral concern in favour of the ruthless pursuit of profit is perhaps the most important factor to acknowledge. This should radically alter the mind of any new conservative who is supporting policies that comply with this economic doctrine, as the welfare of the communities that they are apparently speaking for, is not the doctrines main concern.

            It’s not just in theory that economic rationalism is mutually exclusive from social welfare, but also in practice. Prior to the 1970’s, the middle class in America was in the best shape it had been in for decades. Incomes were rising at a rapid rate and unemployment was at record low levels. This was primarily due to an economic system that was highly regulated and highly equitable. However, a fundamental shift occurred as a new wave of neo-liberals began to sweep into power in the major world governments – lead by Ronald Reagan in the US. What followed was an era of massive deregulation, privatisation and tax cuts implemented under the guise of widespread prosperity. The results were wage stagnation for the American middle class and a string of financial crises, which culminated in the Great Recession. Economic rationalist ideas have had their impact, and the results are there for all of us to see and for working families to resent.”

            This is what I have a problem with. You claim a “an era of massive deregulation, privatisation and tax cuts”, but this simply did not happen. Again, real tax rates on the top 1% went up in Reagan’s time:

            http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/

            You’ve correctly pointed out that the rich have gotten richer, but you haven’t proved why this is the fault of free market economics. There was NOT an expansion of free market economics under Reagan, or at any point. The government grew larger (linked in previous post), taxes on the rich went up (proved in previous post), regulation went up ( http://www.economist.com/node/21547789 ). None of this is off-topic, it’s all related.

          • Matthew Rao

            I appreciate your persistence and thank you for your interest. All I can say is that I stand by my article and the evidence and reasoning I have provided. Thank you again, hopefully you will take interest in other articles I write in the future, and I look forward to hearing from you again.

        • Matthew Rao

          I hope you can understand by now that the piece wasn’t meant to be an attack on Reaganomics specifically.

  • Owen Wakely

    Hi Matthew, you have certainly provoked some vigorous debate. Lennardi, as Matthew says, the crux of his thesis is that “neo-liberal economic policies, when implemented, are not congruent with the plight of the middle-class”. It has been argued that the tea party movement is really a reaction to change: to the seismic changes occurring socially and politically in the US and reflect a deep desire by some elements of American society for more comfortable, predictable and less challenging times. I believe many tea party members and neo-liberals are challenged when it comes to aligning their economic policies and their sense of social justice. Rather than spatting about Reaganomics etc how about a discussion on whether one can be neo-liberal and have a strong social conscience. This is the real question Matthew is raising and its a very valid one. Cheers Owen

    • Matthew Rao

      Cheers for the back up Owen :)

    • lennardi

      And my argument is that neo-liberal economic policies have NOT been implemented in the past half century in any western country, let alone America. Australia has had some liberalisation in the late 90s and early 00s, which paid off well, but Labor did a good job in unwinding that.

  • Christine Li

    Well done on your ESSA debut Matt. Some charged analysis from both sides.

    The question of equity and income inequality is interesting. While the share of federal tax revenue borne by the top 1% has steadily increased since Reagan-era tax cuts, along with increased welfare spending, you could argue that the redistributive effects are equitable (but not progressive, as tax rates did not increase for the wealthy. Reagan’s later tax increases that came in response to the record budget deficit were not the result of a tax rate hike but rather significant tax policy reform eg broadening the tax base, ending previous tax concessions, etc as Lennardi mentioned.). However, we also see massively widening income inequality – a trend which cannot be attributable to Reagan alone – not a sign of equity!

    Moving onto the crux of Matt’s article though, I think it is meaningful to try to analyse political economies with a clear separation between economic and social conservatism. If we are to say that the agenda of Republicans’ is contradictory, are we assuming that the interests of families are always diametric to small government and laissez-faire markets? Is this assumption correct? What about family-owned SMEs that may benefit from reduced regulation? (I admit I am not familiar with measures of regulation between eras though.)

    Matt, I would be interested to hear your thoughts on whether there is truly a clash between economic and social conservatism, what form this takes, and how this could possibly be reconciled. Further, to what extent do all facets of a party’s economic and social policies have to be seamlessly cogent? Is this possible? Evidently one can agree with limited government intervention and still believe in preserving certain societal traditions.

    • Christine Li

      Tax policy under Reagan is pretty inconsistent (small wonder so many different Reagan narratives abound). This article from CNN gives a good summary, and I also found the Economist’s graph quite neat.

      http://money.cnn.com/2010/09/08/news/economy/reagan_years_taxes/

    • Matthew Rao

      Thanks Christine :)

      You bring up many good points, I’ll do my best to address them. I wouldn’t say that social conservatism is always in conflict with small government and laissez-faire markets. For instance, I know that for many social conservatives, topics such as abortion, gay marriage and religion in general are very important to them, and I wouldn’t try to mount a case for why these beliefs are incompatible with economic rationalism as I don’t believe they have much to do with each other.

      However, these conservatives often stress the need for a strong community in the face of government intrusion in the economy, that they seem to believe is inevitably going to cause them harm. This is why they are so opposed to ‘Obamacare’ despite the fact that families are the ones who will most benefit from healthcare. This specific belief within social conservatism was what I was addressing in the piece and the point I tried to make was that the government is in place to do important things that the market cant. I aimed to show that a lack of government intervention in the economy often leads to poor results for the same people who speak out against intervention.

      In terms of whether economic rationalism and social conservatism can be reconciled, I am not entirely sure how this could occur because I don’t see how free-market policies, which are so focused on efficiency and profit-maximisation, have any relevance to a social conservatives concerns. I hope I have addressed most of your points, there was a lot there to dissect and I did my best. If you think I haven’t touched on certain things you mentioned or touched on them but not adequately enough, please let me know if you feel so inclined.

      Thanks again :)

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