Economic policy in a volatile time

The United States appears to be in the middle of a major political realignment. Really, this topic is in the domain of historians and political scientists, so I’ll largely confine myself to writing about what this means for economic policy. To be honest, it is difficult to make a thoughtful assessment of where we are headed. Perhaps the best way to think about this is to consider the coalition debates surrounding abortion and how it challenges internal alliances within political parties.

If polls are to be trusted, there are about 15 percent of Americans who think abortion is always wrong, though most would allow it to save the life of the mother. If one believes life starts at conception, this is a wholly moral viewpoint. These people are mostly motivated by faith, and find themselves overwhelmingly supportive of GOP candidates, at least on this issue.

There is another, similarly sized share of Americans who do not believe that abortion decisions are within the appropriate sphere of government control. They feel government should not be permitted to interfere on these matters, as it outside their competence. That is a decidedly Libertarian viewpoint, but for most of the past few decades, Libertarians have tended to lean towards the GOP. Still, this is not a typical GOP position on abortion legislation.

Any one of us could hold both views at the same time. The problem is that these two views have very different policy choices. A party forced to make these choices faces considerable strain and will surely lose some members to the other side. That’s normal in the give and take of politics. What makes this time different is the vast number of these tensions taking place amid an increasingly polarized political environment.

Both parties tend to have elected representatives that are politically farther away from the median voter than at any time in recent decades. There are still moderates, but leading a political party whose elected officials are heavily filled from those on the extreme fringe of public opinion is a challenge. The main obstacle lies in crafting policies that keep the coalition from splintering.

Several economic issues at the federal and state and local levels risk fracturing the coalition of both parties. In recent years, both parties have developed large shares of their coalition on both sides of major issues like trade, tax and industrial policy. One broad observation is that the fringe of both parties tends to be in more agreement with their political foes than their own centrist party members.

The progressive left has long-opposed free trade and supported industrial policy that delivered incentives to favored industries. For the past few decades, moderate Democrats and the GOP disagreed. Today, there is a growing share of Republicans who align more closely with progressives on these matters. Donald Trump was able to corral these voters and reversed decades of success in trade while shoveling cash to favored industries.

These ‘economic nationalists’ or Republican Socialists may be a tenuous part of the GOP coalition. Or, they may be the new power in the party. Most voters won’t change party alignment due to trade or tax giveaway. But, in combination with cultural and foreign policy questions, we could see highly volatile political coalitions in the coming years.

I think the evidence is pretty strong that the broad economic policies promoted by the progressives and ‘economic nationalists’ will be unsuccessful. Still, it’ll be difficult to clearly see policy failure because these policies affect us all. I should also add that the diehard Sanders and Trump supporters have not proven to be especially susceptible to evidence-based policy analysis.

However, at the state and local level, broad policy differences drive people to vote with their feet. This means that policy successes and failures are far more likely to appear in states, cities and counties than in the nation as a whole. This is a feature, not a bug, of our national system of government, but its value lies in learning from facts and the experience of others.

Over the past few decades, local economic policy has become more polarized. The results are increasingly obvious. It is counter-intuitive to many, but nearly all growth is occurring in places where state and local taxes are higher. Part of this is because affluent people are increasingly clustering together, but part of it is due to families placing more value on public services. Remember, taxes are the price of public services. Families and business alike choose where they locate based on value, not price.

A half-century ago, the American Housing Survey didn’t even ask families who moved if it was because of school quality. Today, that is the number one reason families move. Higher taxes provide more money for schools, which affects quality. While school quality isn’t solely about money, the research evidence is pretty clear that money does matter. Far more importantly, families think it matters, as migration data have made clear for three decades. Businesses follow these families to tap into the workforce and consumer base, so the places that create jobs are increasingly the places who educate students well and provide other services.

The good news is that state and local economic policies are not a party monolith. Both Kansas and San Francisco have recently demonstrated the economic futility of extremist tax and spending policies that are unconnected to the quality of schools, roads and public safety. Here, GOP and Democratic candidates were punished for their extremist policies.

However, places that emphasized the low-tax, low-spending model have performed poorly in the key measures of job growth, population growth and income growth. Conversely, places that pay insufficient attention to fundamental governance issues, like public safety, or who overpay for services likewise perform poorly on economic fundamentals of growth.

Altogether, these developments will place great pressure on political coalitions built around economic issues. In both parties, we now having growing shares of voters who align more closely with a growing share of voters in the other party than with their own. This misalignment is more pronounced when local and national economic goals surrounding spending and taxes lack coherence. The economic policies of tax incentives, student loan forgiveness, trade, tax rates, and many others have never been more disconnected from the core Republican and Democrat arguments of the 2000s than they are today.

So, on economic policy alone, we live in fractured times surrounding party alignment. I don’t have any good predictions on where this will end up, only that we are in an especially volatile period of economic policy alliances in our political parties.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].