Friday, June 08, 2007

Reviving the Hamilton Agenda

Published: June 8, 2007

These days there seem to be four schools of political economic thought. First, there are the limited government conservatives, who think taxes should be low and the state should be as small as possible. Second, there are the Hamiltonians, who believe in free market capitalism but think government should help people get the tools they need to compete in it.

Third, there are the mainstream liberals, who think government should intervene in small ways throughout the economy to soften the effects of creative destruction. Fourth, there are the populists, who believe the benefits of the global economy are going to the rich and we need to fundamentally rewrite the rules.

If you are reading this column, you’re keeping company with somebody in group No. 2. We Hamiltonians disagree with the limited government conservatives because, on its own, the market is failing to supply enough human capital. Despite all the incentives, 30 percent of kids drop out of high school and the college graduation rate has been flat for a generation.

Just when it needs a more skilled work force, the U.S. is getting a less skilled one. This is already taking a bite out of productivity growth, and the problem will get worse.

We Hamiltonians disagree with the third group, the mainstream liberals, because their programs haven’t worked out. Retraining programs for displaced workers have flopped. Tax code changes to reduce outsourcing are symbolic. Federal jobs programs aren’t effective. Moreover, the high taxes you need to pay for these programs sap the economy. There’s now a pile of evidence showing that higher taxes mean reduced working hours. In the face of Chinese and Indian competition, we don’t need Americans working less.

We Hamiltonians disagree with the populists because we don’t find their storyline persuasive. The populists argue that global trade is creating a race to the bottom that is leading to stagnant wages and vast inequality. But when you look at the details, you find that most inequality is caused by a rising education premium, by changes in household and family structure, by the fact that the rich now work longer hours than the less rich and by new salary structures that are more tied to individual performance. None of this can be addressed by changing global trade rules.

The global economy radically decreased poverty and increased living standards. It’s crazy to upend this complex system to return to some nostalgic vision of a 1950s industrial wonderland.

When it comes to what Hamiltonians are actually for, two big themes stand out. First, the overall economy has to remain dynamic. The biggest threat is the looming wall of entitlement debt. We Hamiltonians would break the current campaign silence on the issue by raising the retirement age and tackling medical inflation to make Medicare affordable.

The second big theme is a human capital agenda. No one policy can increase the quality of human capital, but a lifelong portfolio of policies can make a difference.

Children do better when raised in stable two-parent families. Bigger child tax credits and increasing the earned income tax credit can reduce the economic strain on young families (and shift the tax burden to older, affluent ones). Extending government income support to young men in exchange for work would make them more marriageable.

Nurse practitioners who make home visits can stabilize disorganized, single-parent families. Quality preschool can help young children from those disorganized homes develop the self-motivation skills they’ll need to succeed.

The most important thing in a school is quality teachers. That means there should be merit pay for the best, and a change in the certification rules (we should allow more people into the profession and weed out the mediocre ones, regardless of their certification).

Senior citizen groups could mentor students to keep them emotionally engaged during college years. National service should be a rite of passage, forcing city kids to work with rural kids, and vice versa.

Middle-aged workers need portable pensions and health insurance so they can move and take risks. The immigration system should reward skills, like the college admissions system. The government should increase funding for basic research, especially in math, engineering and physics.

The list could go on. My goal here is merely to describe the different economic policy schools that are out there, and to emphasize my favorite, the one least represented by the current presidential candidates.

Government is really bad at rigging or softening competition. It can do some good when it helps people compete.