In this debate series, GRI asked whether the Democrats or Republicans have a less politically risk vision in the 2016 presidential election. Jeff Moore presents why the Republicans’ vision of free markets, reduced regulation, and lowered taxes are best for the United States. Read the Democratic side here.
Political party nominations for 2016 U.S. presidential candidates have started in earnest with the conclusion of the Iowa caucuses. But more than just selecting a candidate, the nominating system allows each party to begin to make a case for why their party is the best choice for America.
In the upcoming U.S. presidential election, voters must decide: Which party has the better economic vision?
In the search for an answer, one’s sights fix upon competing corporate and personal tax plans; conflicting proposals for business and market regulations; marked strategies to increase employment and elevate wages; and contrasting blueprints for economic growth.
However, it soon becomes apparent that when it comes to economic policy, the whole is greater than the sum of its parts. Indeed, combining the separate elements of tax, regulatory, growth, and monetary policies put forth by each party results in two distinct economic visions.
For the Democrats, that vision entails government-driven investment and demand, government mandates on wages, expanded regulation of businesses, and a ‘fair’ tax system aimed at redistribution of income and wealth. Democrats offer an economic vision of government control, predicated on central planning and a disregard for private property rights.
For the Republicans, that vision calls for market-driven investment, reduced and simplified regulation on businesses, stable and predictable monetary policies, and lowered taxes on the earnings of individuals and corporations designed to encourage sustainable, market-driven economic growth. Republicans offer a vision of economic freedom, founded on free market principles and a respect for individual rights.
A considered focus on these points reveals that Republicans have the better economic vision for 2016.
Classical v.s. Keynesian Economics
While observable examples of pure economic theory put into practice are elusive, the economic visions of the United States’ two political parties can safely be described as striving towards the ideals of either of two categorical systems: Keynesian ideals for Democrats, and Classical ideals for Republicans.
Keynesian economics, spearheaded by John Maynard Keynes in the 1930s, holds that economic activity is driven primarily by aggregate demand and that the volatile booms and busts of the business cycle can be moderated by state intervention. These interventions should take the form of direct fiscal and monetary stimulus by the federal government, including public works projects, infrastructure investments, and even direct payments to individuals.
Such Keynesian spending measures made up a great many of FDR’s ‘New Deal’ programs during the Great Depression. More modern examples include President George W. Bush’s (R) stimulus checks in 2001 and President Barack Obama’s (D) stimulus package in 2009. All were aimed at stimulating demand to soften major economic contractions. However, contrary to theory, evidence suggests that the practice of such state intervention not only failed to stimulate growth, they actually hindered genuine economic recovery.
Classical economics, on the other hand, posits that economic resources are best allocated according to the inclinations of individuals and businesses that own them, thus requiring a free-market system with little to no government intervention. By extension, in the face of declining economic activity the most stimulating measures the federal government should take are to reduce government expenditures and lower the tax burden on individuals and businesses.
Perhaps one of the best examples of this classic approach was the government’s reaction to the Depression of 1920-1921. After World War I, the U.S. economy fell into a severe deflationary recession. In fact, deflation was worse during this period than even the Great Depression, and unemployment spiked to nearly 12% in 1921.
In a dramatic response to the crisis, government cut spending by an incredible 65% in one year. They mostly left the rest up to the free market itself. Had they been around, Keynesians would have surely cringed. So what happened? The unemployment rate was nearly halved in one year, and by the next year had dropped to an astounding 2.3%. What followed was one of the most prosperous periods in U.S. history.
In general, the ideals of free-market, classical economics envisioned by Republicans produce the most vibrant and resilient economies; not the interventionism and government spending of Keynes and modern Democrats. Still, a few specifics warrant further inspection.
Both winners of the recent Iowa caucuses, Democrat Hillary Clinton and Republican Ted Cruz, include regulatory initiatives as part of their economic platform. The Democrats favor heavier regulation of Wall Street and big corporations, while the Republicans largely support reduced regulation on businesses to allow entrepreneurs to do what they do best.
From the Environmental Protection Agency, to Obamacare, to Dodd-Frank, there is no shortage of red tape regulating our economic lives. Democrats seek to bind businesses with even more layers, including mandated increases to minimum wages and further restrictions on banks.
However noble the intentions, overregulation actually hurts economic activity. This is especially true for small businesses — those the Democrats purportedly aim to help. The reason is that the cost of compliance is much more difficult to absorb for small operations and can even put them out of business, eliminating jobs and increasing poverty.
Larger corporations, by comparison, absorb these costs relatively easily, employing teams of lawyers and accountants to comply with new rules. Complex regulations actually benefit big business in this way, as they eliminate fledgling competitors and protect corporations’ market share.
In order to create an environment where businesses and jobs are easily created and give them the best chance to contribute to economic growth, reductions in regulation are needed. Taking scissors to this red tape, as proposed by Republicans, is actually better at creating a ‘level playing field’ for small businesses.
Higher levels of economic freedom dramatically increase prosperity, economic growth, and quality of life. Here again, the Republican vision for lowered regulatory burdens carries the day.
There may be no starker contrast between the parties’ visions than in their approach to taxes. Democrats favor an increasingly steep progressive system that taxes the highest earners at exponentially higher rates than others. Their argument is that the highest earners can most afford to pay more — and the lowest earners, less — so such a system is most fair. Further, Democrats argue for higher taxes on capital gains from investments in order to reclaim Wall Street’s ‘unfair’ advantage.
Republicans have some variance of progressivity in their income tax plans, but recent trends place lower, flatter income taxes firmly within their field of economic vision. Iowa caucus winner Ted Cruz proposes a flat tax. Under this system, all earners pay the same rate, and by eliminating a score of deductions and loopholes, tax bills are proportional to income. A Republican vision lowers taxes on capital gains and corporations to encourage investment and business growth.
So whose tax plans represent the better economic vision? By the laws of economics, the higher the tax on an item or activity, the less you will get of it due to natural incentives associated with production and investment decisions.
Consistently, studies have found that taxes have a negative relationship with economic growth. Moreover, study after study shows that lowering rates of corporate and personal income tax, especially, yields increases in growth.
Considering the wealth of evidence, there is no need to belabor the point: Republicans’ proposals for lowered corporate, personal, and capital gains taxes elicit increased economic growth, while Democrats’ higher rates inhibit growth.
We hold these truths to be self-evident…
There is perhaps no greater testament to the virtues of Republicans’ vision of economic freedom than the United States of America herself. Within the context of human history, the United States represents the most audacious experiment in codified individual freedom the world has ever attempted, resulting in the most prosperous nation the world has ever seen.
It is no accident that the opening words of the Declaration of Independence are of the joining of political and economic freedom, as they are inherently one and the same. Thomas Jefferson’s words describing an individual’s unalienable rights to “life, liberty and the pursuit of happiness” were in fact a simplification of George Mason’s words in the Virginia Declaration of Rights: “life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.”
The Founding Fathers understood that economic freedom is integral to individual sovereignty. Even barring the myriad of incursions, that core freedom has yielded the greatest economic growth engine of all time. Two-hundred and forty years later, the economic vision of Republicans – a projection of free markets, reduced regulation, and lowered taxes – most honors this principle. The greatest risk to economic growth in 2016 is that voters choose not to see it.
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