How to Help the Middle Class

(Marcos Brindicci/Reuters)

Ed Conard, former business partner of Mitt Romney and author of Unintended Consequences and The Upside of Inequality, appears on the most recent episode of Conversations with Bill Kristol. The interview is worth your time. It arrives at a moment when conservatives are debating what economic policies are best for the middle class. Conard challenges some widespread assumptions and offers intelligent if controversial suggestions.

First, like his American Enterprise Institute colleague Michael Strain, Conard says the middle class is neither stagnating nor disappearing. He cites a study last year by the Congressional Budget Office that found middle class incomes grew around 45 to 50 percent between 1979 and 2015, and 10 percent in the years since. Also, Conard’s review of the academic literature leads him to conclude that the middle class is either stable or shifting upward. He cites a recent Pew study that found the share of Americans living in middle-class households falling from 61 percent in 1971 to 52 percent in 2016. When you look into the numbers, he says, most of the decline in the “middle class” over the last 40 years can be attributed to people’s enrichment. Much of the rest is from an increase in low-skilled immigration.

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Politicians and journalists often compare America unfavorably to Nordic countries. Conard says this is a convenient appeal for votes and ratings.“If you look at the average Scandinavian American, today he’s earning about 50 percent more than the median Scandinavian in Scandinavia.” America provides more innovation, more growth, and more jobs, at higher wages, than our European allies. “France hasn’t created a new large company since the 1970s.”

Nor are Europe’s politics any more enlightened than our own. The continent is divided over immigration, sovereignty, aging populations, and slowing economies. “For any level of capability, 20 percent less pay and their companies are providing 20 percent less employment per worker,” Conard says. “So 20 percent less hours. Almost the difference between full time and part time.”

The middle class is better off in the United States because, Conard says, the payoffs to innovation are greater here. That produces economic inequality, but it also creates value that leads to rising wages. American policy should therefore focus on incentivizing the creation of value, not increasing the size of the tax wedge that drives down payoffs. That’s why Conard supports the 2017 tax cut, and opposes the economic programs of Gavin Newsom, Andrew Cuomo, Elizabeth Warren, and Bernie Sanders.

“Are the educational outcomes better in California because of the taxation they put on the Internet?” asks Conard. “Have they created better housing for middle class workers in San Francisco as a result of the taxation of technology that’s driving the growth of the entire world, driving middle class incomes in the entire United States? Are we seeing better education outcomes here in New York as a result of it? No, it’s all going into the pocket of municipal union workers. Do we have better infrastructure in New York because of the higher tax rates? Are poor people better off because of the higher tax rates?”

Low interest rates signal that America is awash in capital, Conard says. The real constraint on growth is talent. He’d like the United States to bring in skilled entrepreneurs from abroad, while restraining low-skilled immigration, to generate innovations and rising middle-class incomes. It’s a sentiment reflected in President Trump’s recent immigration proposal.

Tax cuts, deregulation, and high-skilled immigration are not as fashionable as wealth taxes, single-payer health care, and industrial policy. But they have helped make the American middle class better off than its European counterpart. The question isn’t how to become more like Europe. It’s why we’d even want to try in the first place.

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