April 12, 2015
Abraham Lincoln would be embarrassed about the polarization of U.S. politics today, 150 years after his assassination. Make no mistake, Lincoln was a polarizing president. His election was the pretext for secession by southern states. He refused to compromise even as the magnitude and duration of the Civil War grew. But Lincoln was polarizing because of his fidelity to the proposition that all men are created equal. That kind of polarization, based on unifying principles, is upside down today.
Gallup tells us that the most divisive president in modern history is Barack Obama. The second most divisive? George W. Bush. What are we fighting over that can possibly compare to Abraham Lincoln’s war?
Progressives have declared that the great war of our time is between the richest 1percent and everyone else. President Obama calls income inequality the “defining challenge of our time.” Last March, economist Thomas Piketty published what has become the progressive manifesto in this war, “Capital in the 21st Century,” in which he warns that wealth inequality is becoming so severe that “a revolution will likely occur.”
These sentiments are echoed by such economists as Robert Reich, Paul Krugman, and Joseph Stiglitz. In a recent speech, U.S. Senator Elizabeth Warren, a Massachusetts Democrat, reiterated the liberals’ core message: “Since 1980, guess how much of the growth in income the 90 percent got? Nothing. None. Zero.”Scholars often talk of the war of ideas, and in an important sense the distribution of income is the war of our times. The left has made class warfare the context for every political debate, whether it’s about the tax code, the federal budget, or regulation of labor and financial markets. Many observers might think this is all well and good. As economists, we tend to agree that money issues are central to just about everything. What’s upside down is that progressives have turned the idea of economic justice into a dishonest quagmire, one that is polarizing solely for political gain. They want to fight over the problem of inequality, not solve the problem of poverty.
Lincoln would shake his head at this squabble about inequality in the richest nation in history. “He never attacked wealth,” explains Rich Lowry in “Lincoln Unbound,” his biography of the 16th president. “He objected to the very notion of class conflict.” Lincoln disliked Democrats’ populism and mocked their message of rich versus poor. In a pivotal anti-slavery speech in New Haven, Conn., delivered a year before he was inaugurated, Lincoln advised, “Leave each man free to acquire property as fast as he can. Some will get wealthy.”
So how do Republicans get out of this quagmire and elevate the debate? First, they need a strategy based on growth, work and opportunity. Before that, they need to completely reframe the debate over inequality, redistribution and protectionism. But before that, Republicans need to get back to the economics of the first Republican president. A century and a half after his death, the legacy of Abraham Lincoln has been taken prisoner by the other side.
Lincoln’s economic legacy is obscured by the larger historical issues of slavery and the Civil War, but his feelings on these topics were strong and steeped in decades of self-study. Indeed, his animosity toward slavery is rooted in an economic understanding of a person’s right to control his or her own property and labor. Free labor is what Lincoln called it.
Nevertheless, Democratic presidents have routinely invoked Lincoln’s name when rolling out their great initiatives. In a 2011 book, professor Jason Jividen of Saint Vincent College documents progressives’ century-long effort to claim Lincoln. President Obama is just the latest in this long line. When FDR wanted to shore up support for his expansion of federal spending, he mentioned Abraham Lincoln at every turn. Former President Herbert Hoover pushed back in a keynote speech in 1939: “Whatever this New Deal system is, it is certain that it did not come from Abraham Lincoln.”
President Lyndon Johnson made the boldest claim on Lincoln. In February 1964, Johnson gave a reverent speech on the steps of the Lincoln Memorial that paved the way for his policy address one month later in which he declared a war on poverty. At a speech that fall in Dayton, Ohio, Johnson said: “A great American president led this Union in a war against slavery 100 years ago. Lincoln abolished slavery in the United States. Today we are starting another war to abolish poverty in the United States among our people.” So far, so good. But by 1965 LBJ was saying “freedom is not enough.” Contrary to the core Lincoln principle, President Johnson declared, “equal opportunity is essential but not enough, not enough.”
The historical record of Lincoln’s rise from poverty (which forged his view that more capital enhances work), his exhaustive campaigns against the anti-capitalist Democrats of the 1830s and 1840s, and his commitment to the idea of free labor need to be remembered.
Lincoln often said that his “ideal of a great man” was Henry Clay (U.S. senator from Kentucky, secretary of state, three times the speaker of the House and frequent candidate for president as the nominee of the Whig Party). Lincoln even gave the eulogy at Clay’s funeral. This history is important for two reasons.
First, Lincoln had the opportunity to join three political parties in his life: the Whigs (the capital party), the Republicans (the freedom party) and the Democrats (the populist party). He chose the first two, and railed relentlessly against the last until the day he died. Andrew Jackson and the Democrats of that era were staunchly against eastern capitalists, against the idea of national bank, against free labor and against Clay’s “American System” (what we would call pro-growth policies).
Clay famously said he would “rather be right than president.” He got what he wanted during the elections of 1824, 1832, and a third time in 1844, losing to the party of the anti-bank Jacksonian Democrats each time. The 1832 election, pinnacle of what historians call the “Bank War,” was won by Andrew Jackson. He quickly pulled all Treasury funds from the Second Bank of the United States, had its charter revoked, and saw it fail. It was a searing loss for the young Lincoln, who blamed the succeeding years of recession on the anti-capital policies of Jacksonian Democrats.
Lincoln’s ghost warns us about today’s progressives whose regular theme is the widening income gap in America. A sample, from Columbia University economist Joseph Stiglitz: “The top 1 percent seized more than 65 percent of the gain in total national income [from 2002-2007]. While the top 1 percent was doing fantastically, most Americans were actually growing worse off.” Lincoln might well have countered: Did Jeff Bezos seize hundreds of millions of dollars Americans through his nefarious Amazon.com? Did rich Hollywood actors Vince Vaughn and Jennifer Aniston seize our money and make us worse off with their entertainment? Or did Americans trade for these goods as free people?
Freedom was always Lincoln’s core message, and he believed in the American system of free markets because he saw that they brought real progress. He argued forcefully for new industries and federal investments, and against subsidizing old sectors. The renowned scholar Gabor S. Boritt wrote in his exhaustive economic history that Lincoln held “Jacksonian policies so largely responsible for the hard times [in the early 1840s] that he dared to based a full year’s campaigning on the call for national banking.”
Twisting Lincoln and the North’s crusade to end slavery, which Lincoln called “the cause of the war” in his second inaugural speech, in the name of equality can only be done by confusing what was meant by equality in 1860. Equality meant equal opportunity to work and be secure in your property, not, as progressives wish, a more equal income distribution.
Reframing the Inequality Debate
The quagmire in the war of ideas can be blamed on elements on both political parties. There are ignorant right-wing populists and arrogant left-wing progressives who prefer (and politically profit) from the quagmire. Too many Republicans are reflexively hostile to immigration and too many Democrats are hostile to business and markets in general. Both stances are economically weak, but they persist because they poll well. The bipartisan fringe suspicion of central banking is also unwarranted, and runs counter to Lincoln’s lifelong defense of banking’s central role in promoting development.
Populism is, of course, nothing new. Lincoln had to accommodate the anti-immigrant Know-Nothing coalition in his day, just as he had to choose his words carefully not to offend farmers who reflexively distrusted eastern bankers. What is new and dangerous in 2015 is political smugness. The progressive left is not self-critical, or even curious, about the failings of its anti-poverty policies.
America’s recent mid-term elections were a referendum on economic performance, not class warfare. The United States has repeatedly run trillion-dollar deficits under President Obama, yet labor force participation rates were decimated instead of stimulated. People feel double-crossed by the unfulfilled promises of the ironically named and incompetently launched Affordable Care Act.
“There was the widespread surprise over the scale of the Republican sweep, not just in the Senate but also the House, where with 250 seats they have the largest majority since 1929,” says Elizabeth Drew, describing the historic and unexpected shift. Last spring, 10 U.S. Senate races were considered competitive. Actually, the forecast was accurate in only one case. Democratic candidates were swept out in nine of the 10 races, and nearly lost Virginia, too. Cory Gardner won in Colorado by three percentage points. Joni Ernst won in Iowa by nine points. Tom Cotton won in Arkansas by 17 points. Democrats don’t even want to think about Montana. For over 100 years, the Montana Senate seat had been held by a Democrat, but Republican Steve Daines won it in November by almost 20 points.
The Democratic response? “It’s a bad map,” said Obama before votes were cast. Nancy Pelosi denied it was a wave election, calling it an “ebb tide” as if the “epic turnout collapse” (David Wasserman’s phrase) was some kind of accident by voters.
As for voters themselves, they told Gallup pollsters that the economy and unemployment were top concerns, whereas the “gap between rich and poor” was a single-digit issue (as it has been for the many decades Gallup has asked this question). Still another Gallup poll taken after the election found that the Democratic brand is in tatters: “A record-low 36% of Americans say they have a favorable opinion of the party.” According to Ron Fournier, a respected journalist at National Journal: “Two-thirds of voters say the country is seriously on the wrong track, up 12 points since 2012.” Fournier paints a picture of a frustrated public, hungry for fresh ideas that can restore the American Dream.
Ten percent of the U.S. economy’s potential GDP and 9 million people from a workforce of 150 million are missing in the aftermath of the financial crisis. But in place of a serious discussion of policy, the left warned of greedy bankers and secular stagnation. Despite raising income taxes on the high income taxpayers, President Obama claimed one more tax hike was the tonic.
Turn the channel and you’ll see economist Joseph Stiglitz citing his book, “The Price of Inequality,” or maybe the documentary by former Treasury Secretary Robert Reich, “Inequality for All.” Go to the movies to escape, but no, it’s a rich-poor dystopia in the future, too. There’s Matt Damon’s “Elysium” or Jennifer Lawrence’s “Hunger Games.” And maybe that’s the message. We don’t live in those worlds any more than we live in the strange dystopian world described by Thomas Piketty.
There’s been an awful lot of debunking of “Capital” since “Piketymania” was declared on the cover of Bloomberg Businessweek. Kevin Hassett of the American Enterprise Institute and Alan J. Auerbach, a professor at UC Berkeley, presented a paper at the 2015 American Economic Association meetings in January that documents pretty serious data problems in “Capital.”
MIT graduate student Matt Rognlie presented an insightful comment on the MarginalRevolution.com blog months ago that led to a formal invitation to present his critique at prestigious Brookings economics conference just weeks ago. Rognlie’s basic point is that capital ain’t what it used to be. The industrial notion of smokestack factories has been largely supplanted by fast-depreciating microchips, software, and brand equity. “[H]ousing—accounts for nearly 100 percent of the long-term increase in the capital/income ratio,” he writes. And one of us wrote an essay showing that the underlying arguments for Piketty’s r>g hypothesis actually suggest not taxing capital at all.
Besides, as George Mason University economics professor Garett Jones has argued, Piketty’s dystopian projections are possible only if wealthy people never, ever consume. The criticisms have basically ended the book’s status as a serious contribution in policy circles. But in the world politics, well, that’s a different matter.
Simply put, wouldn’t America be better off having 50 entrepreneurs like Steve Wozniak and Mark Zuckerberg rather than zero, even if they make Gini coefficients worse? Innovators may exacerbate inequality as a consequence of their success, but are the rest of us really worse off because of them?
There’s one outstanding line in “Capital’s” 685 pages in this regard. It epitomizes the progressive worldview: powerful, exaggerated, technically defensible, economically nonsensical, right there on page 261: “And the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910. Basically, all the middle class managed to get its hands on was a few crumbs.”
Notice how he conflates the idea of “poor” with “unequal.” For Piketty to say the middle class of 2010 is materially no better off than the middle class of 1910 is not just wrong, but brazen. A century of progress amounts to crumbs? And no, it’s not a mistranslation. Piketty says it again and again throughout the book. This is the progressive mantra.
Crumbs equals air conditioning, smart phones, the vaccine for polio, global eradication of smallpox, Lasik surgery, scotch tape, rock music, radio, television, cable television, downloadable digital video, credit cards, the Internet, satellites, cruise control, electronics, antibiotics, and over a billion Facebook friends. These things did not exist in 1910. They cost very little but generate immeasurable consumer welfare.
Two important patents were granted in 1910 – one for traffic lights, another for the washing machine. China outlawed slavery in 1910. Women were allowed to vote Washington in 1910, but it would be another decade before Republicans could overcome Democratic resistance to it nationwide. In 1910, the infant mortality rate in the United States was 20 times higher than today. But here is the kicker: per capita GDP was $5,000 in 1910, a fraction of what it is today. Crumbs?
Lift Piketty’s hefty “Capital” and you have in your hands the central contradiction of modern progressivism: a disbelief in human progress.
The Opportunity Agenda
We believe the way out of the class-war quagmire is to focus on opportunity for poor Americans. First and foremost, Americans want to work. So where are the jobs? Government regulations and red tape enacted by Obama have slowed economic growth and repressed workforce participation. Second, tax rates matter, especially for Americans caught in what social scientists call the “poverty trap” of well-intentioned welfare programs that actually penalize poor people for making more money. But most importantly, Republicans should shine a light on the real inequality in America, which is not about wealth or income, but education.
The definitive national assessment of national literacy finds an outrageous gap among Americans, summed up in the USA Today headline: “1 In 7 U.S. Adults Are Unable to Read This Story.” Forget the identity politics used to divide Americans by race, gender, income – the reality is that one in seven Americans are functionally illiterate. They cannot understand an electricity bill or decipher “Charlotte’s Web.” They will never read these words. And the fault for that is almost entirely the state monopoly over primary education.
When poor and middle-class parents watch their kids disserved by public schools – with no choice to liberate their own children from weak teachers, excessive bureaucracy, and outdated courses – they know the progressive agenda has failed them. Here is the high ground for the politics of growth and an opportunity in the coming campaign. It’s not a matter of big government, rather it is effective government, meaning that the government must operate as well as fund public goods like health, education, transportation, you name it.
To be sure, the conservative case for fiscal balance is more important than ever. The federal government cannot continue to spend billions of dollars every day that it does not have. But conservatives need to make a bold, new case in the war of ideas about the shape of government that is arguably more important than the fight over its size. The inefficiency of government-run education is the clearest case, and reshaping it is the way to win the war of ideas. For example: argue not to cut education expenditures -- rather, give the funds directly to parents so they can shop for the best education for their children.
When government spends money on research, it should fund basic science, not try to manipulate markets by investing directly in well-connected companies. In other words, keep DARPA and drop Solyndra.
The federal government of 1862 had little funds, but its land was plentiful. Why not give it away, raw, directly to any American who would work for it? That was the Homestead Act. Opportunity in the form of 160 acres in exchange for five years’ work to improve it was Lincoln’s deal, and it led to tremendous economic development of the West.
In our time, a government focused on opportunity for everyone to succeed will have to completely rethink the way taxes and regulations affect incentives. Too many “progressive” laws are effectively anti-work. The growth of federal regulations in the past half century correlates with the decline of startup companies and new jobs.
It won’t be easy to win this war of ideas. It might be impossible for progressives to actually believe in progress. But our fight to reshape government was Lincoln’s, too. Wage labor, in his day, was a new kind of economic relationship that was called worse than slavery by southern critics, just as it was being mocked by anti-capitalist Europeans.
Let’s remember: Marx’s “Das Kapital” was published in 1867. Free labor was Lincoln’s mantra: “The penniless beginner in the world, labors for wages awhile, saves a surplus with which to buy tools or land, for himself; then labors on his own account another while, and at length hires another new beginner to help him.” This, Lincoln said, is “the prosperous system, which opens the way for all—gives hope to all, and energy, and progress, and improvement of condition to all.”
This article originally appeared at RealClearPolitics.com, and LPAF Policy Advisor Glenn Hubbard co-authored the piece with Tim Kane, a research fellow at Stanford University's Hoover Institution.