There is something very strange about the 2012 presidential race so far. The election comes at a time of extraordinary public unease, which clearly demands some response from the political system, and especially from the men running for the highest office in the land. But the two presidential candidates are both running campaigns oddly detached from what is rightly worrying voters.
If you were to judge the state of the country by listening only to the Obama campaign, you would conclude that we are on the verge of the long-awaited triumph of the liberal welfare state, and that all that stands in the way is a gang of retrograde Social Darwinists who somehow manage to be simultaneously nihilistic and theocratic. That band of reactionaries ran the economy into the ground for the sake of their wealthy patrons, and now they’re coming for our social programs and for women’s freedoms. Only if they are held off can the forward march of history proceed.
If you were to judge the state of the country by listening only to the Romney campaign, you would conclude that all was well in America until we took a wrong turn four years ago and elected a president hostile to freedom and prosperity. If we just correct that error and undo what he has done, our economy will be ready to bloom again.
But neither of these stories speaks to what actually seems to have voters uneasy. The persistently weak economy is at the core of that uneasiness: Thirty-five months after the recession technically ended, economic growth remains anemic, and unemployment remains very high. But Americans are nervous not only because the economy has yet to bounce back, but also because we have a sense that the economic order we knew in the second half of the 20th century may not be coming back at all—that we have entered a new era for which we have not been well prepared.
To say that we are not, in fact, on the verge of the triumph of welfare-state liberalism is of course a gross understatement. We are, rather, on the cusp of the fiscal and institutional collapse of our welfare state, which threatens not only the future of government finances but also the future of American capitalism. But at the same time, American capitalism is not exactly ready to bloom once the shadow of Obama is lifted at last. While our welfare state has grown bloated and bankrupt, our economy has grown increasingly sclerotic—weighed down by a grossly inefficient public sector, the rise of crony capitalism, demographic changes transforming the workforce, and a general loss of focus on productivity and innovation. The American economy still has great stores of strength, but it is not well prepared to make the most of those strengths or to address its deficiencies as a global competitor.
This is not the fault of conservative plutocrats or of Barack Obama. It is not the fault of income inequality or of the Federal Reserve. It is the fault of our country’s failure to adequately modernize its governing institutions and its economy—its public sector and its private sector. This failure exposes us to a grave risk of stagnation, and, therefore, decline. And it is that risk, which we all have been sensing in our bones in recent years, that has Americans exceptionally anxious.
It is easy to see why President Obama would avoid taking up this challenge: As the incumbent, he bears responsibility for the fiscal disaster and poor economic performance of the past few years. Worse yet, the vision of the liberal welfare state is the very core of his own governing philosophy, and to acknowledge the failure of that vision and the end of the economic order in which it was dominant is to acknowledge that Obama has nothing constructive to offer. It is to confront directly the disastrous failure of his economic policies, and the dismal unpopularity of his signal domestic achievements. The president can only win reelection by changing the subject—by getting the public to ask questions to which his brand of liberalism might be an answer. And so he desperately seeks to tell a story in which income inequality is at the heart of our economic woes and our existing entitlement system is the key to prosperity and security—a story both internally incoherent and utterly detached from reality, and which could only be sustained by misdirection and distraction.
It is more difficult, however, to see why Mitt Romney would not be laying out the nature of America’s predicament before the public. He has begun to offer an agenda that speaks to some key elements of the predicament, but he has not made a coherent case for that agenda as a whole, and so ends up presenting voters with laundry lists of policy ideas wrapped in general criticisms of Obama. He has yet to state clearly the problem to which he offers up his economic policies as a solution.
The problem is that America is unprepared for the future, and Barack Obama is not so much the cause of that problem as the embodiment of it. He stands for what has gone wrong, and his ideological views, his party’s most powerful constituencies, and his policy commitments stand in the way of America’s future prosperity.
A proper understanding of the nature of that problem would not only help to show voters why Obama must be sent packing, but would also reinforce the case for Romney’s particular strengths in this unusual moment. The Romney campaign has yet to make an overarching case for the candidate. They would be wise to notice that a careful assessment of what America lacks as a new global economic order takes shape could add up to just such a case.
The Great Slowdown
The American public knows that the nation’s economic prospects are in exceptional peril. Huge majorities of voters say that this recovery feels like a recession, that the country is on the wrong track, and that their children’s economic prospects seem dimmer than their own. There is more going on than a cyclical downturn.
There are many ways to describe what appears to be worrying these voters, but if we were to sum up the danger in one word it would be stagnation. After decades of galloping growth, America now faces the prospect of a harsh and sustained deceleration, and therefore of falling behind in the world economy.
In the 60 years following World War II, the American economy grew at an average rate of 3.4 percent per year—a truly astounding persistent pace of expansion. This growth brought with it sustained improvements in income and standards of living—improvements that we have come to regard not as miraculous advances but as the normal course of American life. Our sense of the nation’s overall standard of living takes such growth for granted, so that a period of significantly slower growth feels like a real step down.
We have been living through such a period lately. Annual economic growth averaged 3.5 percent between 1960 and 1999, but only 1.7 percent between 2000 and 2009. In the Obama years, we have averaged 0.6 percent growth.
It will not be easy to regain our old trajectory. Economic growth is in essence a function of two factors—workforce expansion and productivity improvement—and the growth of the past half-century has involved both in roughly equal measure. As the population grew in the wake of the baby boom and women entered the workforce en masse, the American labor force grew by leaps and bounds, accounting for just under half the total economic growth in this period. Meanwhile, as new technologies and business-model innovations emerged in fierce succession, productivity gains accounted for the rest.
It is already perfectly clear that this balance of factors cannot be sustained. As the baby boomers retire and the proportion of women in the workforce plateaus, the growth of the labor force contributes less and less to the growth of the economy. In the past decade, productivity gains accounted for 80 percent of total economic growth, up from 53 percent in the 1990s and 47 percent in the 1980s, according to a recent study by McKinsey and Associates. The role of the labor force is diminishing quickly as the growth of that labor force slows. This suggests that economic growth in the coming decades will depend decisively on productivity growth. If we are to experience anything like the prosperity of the postwar era, our economy will need to be more productive than ever. Efficiency must be the watchword of our economic policy.
But we are not well positioned for the kind of explosion of efficiency we will need. Our government finances are in shambles, our public sector is woefully inefficient, and our private economy is very poorly served by a set of policies and institutions that seem intent on denying us a productive future workforce and on subjecting more and more of the economy to a regulatory mindset that prefers consolidation to growth.
The story of our public finances is the story of the collapse of the liberal welfare state. The edifice of the Great Society entitlement system, poorly constructed in a time of plenty and shielded from reform ever since by a bipartisan conspiracy of political convenience, is crumbling all around us. At its core are the health care entitlements—Medicare and Medicaid—which between them are responsible for essentially all of the growth of government as a share of the economy over the last four decades, and all of its projected unsustainable growth in the next four. At its periphery is an approach to discretionary spending that has left us with a broken budget process and an array of bloated and ineffective public programs. It all adds up to an explosion of the national debt—which has nearly doubled in just the past four years—and to a course of spending and borrowing that we could not hope to chase with tax increases even if we wanted to, and that our creditors know we cannot sustain. This is not the government of a lean, efficient, 21st-century economic power.
And it is not just government spending but government work that is holding us back. The two sectors of our economy that have seen the most job growth in the past decade have been the two most government-dominated sectors: health care, and government employment itself (especially in education). In both cases, that growth has decidedly not been matched by improvements in productivity. Our health care system—largely as a result of Medicare and Medicaid and of the poor design of the tax treatment of employer-purchased health insurance—is horrendously inefficient, inflating costs without any relationship to outcomes and playing a central role in an economy-wide wage stagnation. In education at all levels, meanwhile, we have been paying more and more for less and less—the very opposite of productivity improvement—while much-needed reforms have been prevented by powerful unions and their allied politicians.
The private economy is not exactly getting geared for efficiency either. The failure of education reform makes it difficult for too many younger Americans to gain the skills they will need to compete with foreign workers in tomorrow’s economy, and our immigration policy imports low-skilled foreigners to compete with low-skilled American workers while denying employers the high-skilled workers they lack. It is the worst of all worlds for building American human capital and driving productivity and innovation.
The tax code, meanwhile, undermines the competitive position of American producers and imposes immense efficiency costs on the entire economy. And from the financial sector to the auto industry, energy, health insurance, pharmaceuticals, and beyond, federal regulators are busily constructing rules and incentives to bring more and more of the economy into line with the objectives of government managers, rather than consumers and producers.
Economic policy is increasingly dominated by an ideal of state capitalism, in which regulators prefer to work with a few large players in each industry—functioning essentially as public utilities—while making the lives of smaller competitors and innovators next to impossible. This is where the health and insurance sectors are being driven under Obamacare. It is where Dodd-Frank wants to take American banking and finance. It is a vision suited to managing stagnation—with big government, big business, and big labor dividing responsibilities and benefits and keeping outsiders out—rather than to enabling growth.
All of this makes it very difficult to see how America can take the necessary steps to return to a trajectory of growth in the 21st century. The way is blocked by the partisans of the status quo, who are sternly opposed to any reforms that would enable innovation and efficiency at the cost of undermining the spoils system built up over half a century.
Barack Obama personifies this opposition to the reforms essential for growth. His express objectives are to protect our existing entitlement system from structural reforms, to increase the tax burden on investment and employment, to further empower and liberate regulators, and to bring more of our economy into the public sector. His economic policy is unimaginative in the extreme—combining early-20th-century social democratic theory with mid-20th-century pork barrel politics. His answer to the government’s fiscal woes is to squeeze the military and the taxpayer to buy a few more years of denial. In every respect, he stands for stagnation and stasis, for defensive consolidation rather than aggressive growth. He thinks the best we can do is to manage decline.
Simply put, President Obama has no interest in a new way of thinking about America’s prospects, and therefore essentially nothing to offer to assuage the public’s growing anxiety. All he can do is try to direct that anxiety away from himself. He is at best irrelevant, at worst a great impediment, to the effort to keep America growing in the new economic order we are entering.
To help voters see that fact, Republicans this year will have to show that they are not similarly disconnected from what worries Americans. Rather than beginning from Obama’s failures, or from vague if well-meaning allusions to the importance of liberty, Mitt Romney should begin his appeal by explaining the sources of public concern. He should be frank about the danger of stagnation, clear about identifying President Obama with precisely the difficulty we face, and then explicit in offering his own alternative and his own qualifications.
That alternative should aim not simply to remove obstacles to prosperity, but to cultivate the sources of strength and growth in the American economy—to help enable the kind of productivity boom necessary to get us back on a trajectory of growth.
Ironically, one plausible source of the next productivity boom is American health care. Today’s health sector is horrendously inefficient—thanks largely to poorly conceived federal policy—and yet demand for care is great and growing in our aging society, which makes health care primed for an efficiency revolution.
This would require above all the transformation of Medicare, which is principally responsible for the distorted fee-for-service business model of American medicine. By using the government’s immense leverage to drive innovation and contain costs through competition (rather than to drive volume and inflate costs through price controls), a gradual reform of Medicare into a premium support system could not only offer seniors more options but help unleash a wave of innovation throughout American health care. And at least as important, it could save Medicare from fiscal collapse, and so allow it to continue providing guaranteed, comprehensive health coverage to the elderly.
A reform of the broader health sector could advance the same cause. Like Medicare’s fee-for-service structure, the design of today’s tax exclusion for employer-provided care and the design of the Medicaid system both aggressively inflate costs rather than encouraging productivity and value in health care. Obamacare doubles down on the worst elements of them all: further tightening price controls in Medicare, vastly enlarging an unreformed Medicaid system, and building a new open-ended federal entitlement alongside today’s tax exclusion for employer coverage. Repealing that law must obviously be part of any agenda for American prosperity. But so must a real health care reform that moves in the opposite direction from Obamacare, toward a more competitive insurance market that drives health care providers to offer better quality at lower cost.
This should involve transforming today’s tax exclusion for employer-provided coverage into a fixed tax credit available to anyone (or at least to people not currently covered by a large employer) for the purchase of coverage. The credit would replace the value of the tax exclusion while giving people far greater control over their own insurance. By putting the credit on the table, moreover, such a reform would create an enormous incentive for insurers to offer attractive products to today’s uninsured at roughly the cost of the credit—by adjusting the balance between premiums, co-pays, and deductibles and offering some catastrophic-coverage options rather than only fully comprehensive ones. This would put at least some meaningful insurance within reach for essentially all of the uninsured at a fraction of the cost of Obamacare.
Meanwhile, the open-ended federal contribution to the Medicaid program (which helps propel that program’s rapid cost growth today) should be converted into a block grant that states could choose to employ in the form of an additional means-based credit—allowing the poor to enter the general insurance system, rather than segregating them in today’s inferior Medicaid ghetto. Such a transformation of health care policy would not only help cover the uninsured and save the federal budget, it could enable a productivity explosion in one of our economy’s fastest growing yet least efficient parts.
A second and perhaps no less surprising potential source of strength is the energy sector. While the president has indulged in embarrassing fantasies about solar and wind power and electric cars, America’s domestic energy supply has undergone an utter revolution in the past few years. Advances in technologies for recovering oil and gas from previously inaccessible sources now look increasingly likely to make available astonishing quantities of domestic fossil fuels.
Producers and investors are clearly adjusting to this new reality, but it has barely begun to be noticed in our political system. In a May 10 hearing of the House Science Committee’s energy subcommittee, for instance, Anu Mittal of the Government Accountability Office told a stunned panel of members that oil-shale deposits in the Green River Formation in Colorado, Utah, and Wyoming alone “are estimated to contain up to 3 trillion barrels of oil, half of which may be recoverable, which is about equal to the entire world’s proven oil reserves.” Newly accessible natural-gas reserves around the country could be equally staggering in volume. The United States may be on the verge of becoming the world’s fossil-fuel colossus.
But the Obama administration’s response to these developments has been largely to ignore them, as they are at odds with the green energy agenda. The age of nonfossil fuels will surely come someday—though it will likely require a serious adjustment in the left’s attitude toward nuclear power. But that day remains far off, and for the moment fossil fuels are not only essential to powering our economy but may be the source of the next great wave of productivity and wealth creation in America. The administration’s choice of lifestyle liberalism over this new opportunity for growth is nothing short of governing malpractice. Mitt Romney should make the public aware of the good news regarding American energy, and should propose to put the federal government fully behind the domestic fossil-fuel revolution: making public land available, helping develop new exploration technologies, and encouraging innovation toward cleaner ways to burn oil and gas.
While promoting reforms to encourage these two potential boom sectors in particular, Romney should also seek to modernize the federal government’s approach to the economy more generally, to make it supportive of the productivity improvements we need. One obvious target for reform is the tax code, which, as nearly everyone by now agrees, needs to be made broader and flatter to raise more revenue more efficiently. The daunting maze of credits and deductions should be pared back to serve just a few essential ends (like charitable giving, health insurance, and child rearing), rates should be lowered where they can be, and the corporate income tax rate in particular must be brought into line with those of our competitors abroad.
President Obama seems to prefer to make the code even less conducive to investment and employment in an effort to score some cheap political points. Here as elsewhere, Romney must show how fundamentally unserious the president has become, and how disconnected from our real needs and circumstances.
Governor Romney should also shine a light on the disturbing expansion of regulatory power that has accompanied the growth of the liberal welfare state (under Republican and Democratic presidents alike). Regulation obviously has a crucial role to play in governing free markets, but as bureaucratic discretion has increasingly replaced clear and predictable rules approved by elected officials, our regulatory system has become an obstacle to innovation. Romney should call for rebalancing our constitutional separation of powers by requiring all major regulations (judged to carry costs of $100 million or more) to be approved by Congress, along the lines of legislation passed by the House last year, and for pulling back the unprecedented regulatory discretion granted by Dodd-Frank.
Finally, he should pursue a human capital agenda to help supply the labor force our economy will need if we are to pull off a productivity revolution. This is no simple matter. One key element must involve turning our immigration policy on its head: Rather than importing low-skilled workers to compete with the Americans most hard-pressed in our evolving economy while preventing the world’s best and brightest from coming here, we must control the southern border and rein in our family reunification policies (allowing spouses and children but not other relatives of naturalized immigrants to come here) while significantly increasing the volume of high-skilled immigrants we permit.
But the real heart of a human capital agenda must be education reform, which for the most part is not the federal government’s purview. Romney should propose to put Washington on the side of serious reformers in the states working to modernize K-12 education by breaking the stranglehold of the teachers’ unions, permitting more choice and variety, and beginning to think beyond our 19th-century system of school districts and local boards of education. He should also not be afraid to put the weight of the federal government behind efforts to reduce the costs of college—using the leverage of federal dollars (not only the billions in subsidized loans, but even the billions in academic research grants) to deflate the higher education bubble, rather than vigorously pumping it up as federal dollars now do, and encouraging alternatives to the traditional four-year degree.
And as he pursues pro-growth reforms like these, Romney should also lay out a new vision of the American safety net, understood as a way to make the benefits of a thriving economy available to all—of making the poor less dependent, not making everyone else more so. Productivity and efficiency need not come at the expense of financial security and social cohesion; indeed, they have often gone hand in hand throughout our history. Only in a stagnant economy, in which redistribution is the only means of bettering the condition of the needy, is the good of employers and producers fundamentally at odds with that of workers and consumers, or with that of the poor.
Economic growth driven by competition and innovation has been easily the most effective means of lifting people out of poverty, particularly when coupled not with an empty promise of material equality but with a fervent commitment to upward mobility. And for those unable to rise, the safety net should work in line with the broader economy, using market mechanisms to offer options and encourage choice, and never coming at the expense of the family, religion, or civil society—as our welfare state too often has. The welfare reforms of the mid-1990s offer a model for such a broader transformation of our often counterproductive antipoverty programs. They should be adapted for the various related aims of our safety net.
None of these reforms would dramatically disrupt the lives of most Americans. They could all take the form of modest, gradual reorientations of our governing institutions and policies directed to better preparing America for the new economic order we confront. And none of them would require a dramatic rethinking of Romney’s agenda, either. He has already proposed a number of these ideas, and could easily find his way to others. What he has lacked is a unifying thread—an understanding of America’s particular predicament that could begin where anxious voters are and end with a platform for renewal.
What ties these various elements together is the need to modernize our economy to compete and grow. That is the essence of a conservative reform agenda to get us out from under the rubble of the liberal welfare state and help America come to terms with both its considerable strengths and its very real weaknesses in the emerging world economy.
A Romney Agenda
It is hard to imagine a figure more poorly suited to this essential task than Barack Obama—so committed is he to the dying order, and so sternly opposed to nearly every reform this moment requires. And it is also hard to think of a figure better suited to this particular way of approaching our economic challenge than Mitt Romney. This is not only because his more market-oriented views are closer to the attitude we need, but also because Romney in particular has spent much of his career helping various enterprises discover their hidden strengths and modernize to compete.
The conventional wisdom of this campaign has been that Romney’s background in private equity would be a liability for him—exposing him as a wealthy bloodsucker and professional firer of blue-collar workers. But this assumes that Americans accept Obama’s version of the problem we confront: that all is well with our welfare state and the only thing standing in the way of America’s success is the greed of the wealthy. This has never been a common view in America, and there is no reason to think it is now.
If, however, American voters can come to see that our economic challenges—and their own anxieties about the future—are grounded in our being genuinely unprepared for the 21st century, then Romney’s biography might offer some powerful reasons to elect him this fall. The fact is that private equity is a productivity engine. Firms like the one Romney started, Bain Capital, invest in companies that have potential but are underperforming and—using market incentives and an intense focus on efficiency—seek to dramatically improve their productivity and help them grow and prosper.
They do not always succeed, of course, and the productivity improvements they impose do sometimes involve job losses as well as job gains. But their goal is growth, and their effect has been to create more jobs and to create more wealth. Romney’s background does not mean he would govern as a private equity manager but rather that he understands what it takes to be effective and productive in the private sector and to create jobs and wealth—that he has seen what the modern economy requires, and what the American economy lacks. His experience can allow him to speak to the nation’s concerns in practical rather than strictly ideological terms, and to make the case that, while our problems are real, our great strengths are too, and the era of American growth and opportunity is by no means behind us.
To be sure, this way of seeing things is helpful largely in the economic arena, and Romney’s approach to foreign policy, social issues, and many other questions is informed by other ways of thinking. But the insights gained through decades of experience in fueling productivity would be of great use in the effort to fix our ailing entitlement system, to implement broader government reform, and to put the economy right.
America needs more than economic growth. But without growth, we cannot hope to take up our other priorities. With the crumbling of the liberal welfare state and the passing of the postwar economic order, we are badly in need of a new vision for growth. Barack Obama stands for the old order. If Mitt Romney chooses to stand for the new one—for American principles, drive, and ingenuity applied to our novel circumstances—America’s anxious electorate might just stand with him.
Yuval Levin is a contributing editor to The Weekly Standard, Hertog fellow at the Ethics and Public Policy Center, and editor of National Affairs.