hoover digest, 2013, no. 3, summer

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T H E H O O V E R I N S T I T U T I O N S TA N F O R D U N I V E R S I T Y

R E S E A R C H A N D O P I N I O N

O N P U B L I C P O L I C Y

2 0 1 3 N O 3 S U M M E R


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T H E H O O V E R I N S T I T U T I O N

S TA N F O R D U N I V E R S I T Y

R E S E A R C H A N D O P I N I O N

O N P U B L I C P O L I C Y

2 0 1 3 N O . 3 S U M M E R


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On the CoverA racecar streaking past the finishline is both an iconic image of sum-mer and a reminder of the story of

American automaking. Indianapolis

once ranked second only to Detroitin cars produced for the growingcontingent of American drivers.The Indianapolis Motor Speedwayin this poster was a place whereearly engines, suspensions, brakes,tireseven rearview mirrorswere tested for the driving public. Even today,car builders and innovators jostle for position on the Brickyard just as driversdo. See story, page 196.

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Hoover Digest 2013 No. 3

ContentsHOOVER D IGEST 2013 NO . 3 S UM MER

THE ECONOMY

9 How to Ignite Economic Growth (Its Not a Mystery)Start with a sound budget, then challenge everything thats hold-

ing the economy back. By . , . ,

. , . , . , and

. .

15 Cloudy, with a Chance of ErrorMonthly job numbers offer only the haziest economic predictions.

By .

18 Skip the Short RunWe need to swear off this endless tinkering. By . .

23 Contrived InequalityA lot of wealthy people deserve their success. Is it asking too much

of the government to recognize that? Maybe so. By . .

27 We Need to Cut Spending. Heres HowThe careful budget that Paul Ryan and others in the House have pro-

posed would ease the economy into a better place. By .

and . .

TAXAT ION

32 Alternative Maximum TaxLets settle on a top number for everybody. By . .


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POL IT ICS

36 The Missing ModeratesPlenty of moderates still existbut theyre forced to choose be-

tween a couple of political parties that rarely serve them well. By

. .

50 The GOP Can Win Back Asian-AmericansAn opportunity that the party of opportunity must seize. By

. .

53 The Quiet AmericansA half-century-old Supreme Court ruling is costing rural voters their

voiceand control over their own destinies. By .

HEALTH CARE

61 Consumer ChoiceIt Works!

In the private marketplace, millions already choose just the healthinsurance they want. Government-run exchange schemes, however,

will get everything all wrong. By . .

64 Promises, PromisesObamaCare makes Americans certain promises. We already know

that at least four of them are false. By . .


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REGULAT ION

68 Protect Me NotA lot of workplace protections protect workers right out of a job.

By . .

EDUCAT ION

74 No Bright Mind Left BehindResearch by Hoover fellow . shows how institu-

tions of higher learning can attract the many qualified, deserving stu-

dents that the admissions process now overlooks. By .

IMMIGRAT ION

79 On the Border, New RealitiesRecession helped slow the river of illegal immigration. Demography

and a stronger Mexican economy may keep it from rising again. By

. .

83 A Price on CitizenshipClashes over immigration policy can be settled with one simple, hu-

mane reform: selling the right to citizenship. By . and

.

I RAQ

87 Ten Years OnSaddam Hussein is long gone, but a peaceful, democratic Iraq re-

mains a long way off. By .

91 Why We Went to WarDisappointment with how the wars in Afghanistan and Iraq turned

out is no excuse for rewriting the record. By .


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AFGHAN ISTAN

98 A Time to Reflect, a Time to ActIn Afghanistan, an Army colonel explains what he learned during his

year at Hoover. By . c.

RUSS IA

108Women of the GulagVoices so indomitable that even Stalin failed to silence them. By

.

I ND IA

116 India UnchainedWhats keeping India from taking on Chinaand the world? By

.

FORE IGN POL ICY

120 Nuclear Arms: No Time for ComplacencyNonproliferation efforts must intensify, step by careful step. By

. , . , . , and

.


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NAT IONAL SECUR ITY

126 Drones SightedThe targeted-killing program gets a ray or two of sunshine. By

. .

131 A Proxy Air ForceBest known for precisely targeted attacks on terrorists, drones are

now being given much broader missions. By .

RACE

136 Gifted HandsWith a mother who refuses to let him fail, a young black man grows

up to be a neurosurgeon. By .

I NTERV IEWS

140 Calming the Political WatersHoover fellow talks about the subtle power of

constitutional conservatism. By .

148 An Endless StruggleScholars Bernard Lewis and Norman Podhoretz ponder the

Arab spring and the chilly season to come. An interview with

.

H ISTORY AND CULTURE

159 Margaret and RonThe unlikely friendship that changed the world. By .


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163 Gambling on AggressionThe cold, warlike calculations of 1914 find an echo in todays North

Korea. Tomorrow it could be China. By .

HOOVER ARCH IVES

168 The Battle of Rockefeller CenterIn the Manhattan fresco he painted during the Depression,

saw a masterpiece. His patrons, however, saw Red. By

. .

190 On the Cover


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Hoover Digest 2013 No. 3 9

THE ECONOMY

How to IgniteEconomic Growth(Its Not a Mystery)Start with a sound budget, then challenge everything thats holding

the economy back. By George P. Shultz, Gary S. Becker, Michael J.

Boskin, John F. Cogan, Allan H. Meltzer, and John B. Taylor.

Washington has become a city of tactics, obsessed with finger pointing,

fear mongering, and political spin. These maneuversdesigned for tem-

porary political or personal gainhave produced incoherent policies and

left the nations pressing problems unaddressed.

The country needs a long-term strategy to achieve its common goals

of personal freedom, noninflationary prosperity, broad-based economic

opportunity and mobility, and national security. With a good strategy as a

foundation, sound economic policies will follow.

A good strategy must be based on principles of the free-enterprise system

in which individuals are allowed to pursue their aspirations with govern-

ments role limited to protecting property rights, setting predictable and

transparent marketplace rules, and providing a safety net, infrastructure,

defense, and other functions if the market falls short. Many current gov-

ernment policies are going well beyond such limits, as shown by excessive

spending and taxes, growing debt, interventionist monetary policy, and bur-

densome regulations that have slowed economic growth and job creation.

The obvious place to begin applying strategic thinking is to the bud-

getthe primary vehicle for setting priorities. Yet, in recent years, the


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budget process has completely broken down, replaced by disorderly man-

agement by crisis.

RESTORING THE BALANCE

We need to go back to an old-fashioned regular budget order. The presi-

dent needs to submit a budget that contains a strategic plan and brings

the budget into balance. The House and Senate then need to pass a bud-

get resolution that sets spending in line with revenues. The congressional

committees responsible for appropriations and entitlements must then

produce legislation required to achieve the budget plan, bill by bill.

Appropriations legislation should focus on the coming fiscal year andthe next, not on ten-year, multitrillion-dollar totals that the current Con-

gress cant control and the public cant understand. Annual appropriations

should concentrate on supporting the basic role of the federal govern-

ment, leaving major support for infrastructure and education to the states.

Recent promising actions by local governments to allow more choice in

K12 education should be encouraged. The defense budget must be based

on a national-security strategy, not on across-the-board cuts, ad hoc for-mulas that simply target defense spending as a share of GDP, or continu-

ing resolutions that put national security at risk.

Entitlement legislation should focus on humanely controlling the

growth of Social Security, Medicare, and Medicaid, thereby saving them

from destruction. Currently, each of these programs is projected to grow

much faster than national income and the revenue to fund it, and their

unfunded liabilities are several times greater than the national debt.

GEORGEP. SHULTZis the Thomas W. and Susan B. Ford Distinguished Fel-

low at the Hoover Institution, the chairman of Hoovers Shultz-Stephenson

Task Force on Energy Policy, and a member of Hoovers Working Group on

Economic Policy. GARYS. BECKER is the Rose-Marie and Jack R. Anderson

Senior Fellow at Hoover and a member of the Working Group on Economic

Policy and Shultz-Stephenson Task Force on Energy Policy. He is also the

University Professor of Economics and Sociology at the University of Chicago.

He was awarded the Nobel Memorial Prize in Economic Sciences in 1992.

MICHAELJ. BOSKINis a senior fellow at Hoover, a member of Hoovers Shultz-

Stephenson Task Force on Energy Policy and Working Group on Economic


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Medicaids growing costs, as the Ravitch-Volcker task force report

recently noted, have severely impaired the ability to finance essential state

government functions. A sensible reform strategy enacted now would

therefore help the economy grow, raise living standards, improve govern-ment services, and avoid abrupt and unpredictable changes that harm

individuals and the economy.

Appropriations bills should focus on the coming fiscal year and the next,

not on ten-year totals that Congress cant control and the public cant

understand.

The key to reform is recognition that real inflation-adjusted payments

per recipient in these programs are projected to rise sharply. While life

spans are increasing and the baby-boom generation is retiring, the main

problem is this rapid growth of payments per beneficiary.

In the case of Social Security, a typical twenty-five-year-old worker

today will get a monthly benefit 50 percent higher after adjusting for infla-tion than the amount paid to todays typical retiree. To solve this problem,

the indexing formula originally adopted in 1977 should be modified for

future retirees so their inflation-adjusted benefits are the same as those

received by todays retirees. It is absurd to claim that slowing the growth of

benefits for those retiring in the distant future is somehow a cut.

For Medicare and Medicaid, the reform goal must be to reduce their

immense cost growth in a humane way. The explosive trends are mainly

Policy, and the T. M. Friedman Professor of Economics at Stanford University.

JOHNF. COGANis the Leonard and Shirley Ely Senior Fellow at Hoover and a

member of the Shultz-Stephenson Task Force on Energy Policy, Working Group

on Health Care Policy, and Working Group on Economic Policy. ALLANH.

MELTZERis a distinguished visiting fellow at Hoover and a professor of politi-

cal economy at Carnegie Mellon University.JOHNB. TAYLORis the George P.

Shultz Senior Fellow in Economics at Hoover, the chairman of the Working

Group on Economic Policy and a member of the Shultz-Stephenson Task Force

on Energy Policy, and the Mary and Robert Raymond Professor of Economics

at Stanford University.


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due to improper incentives created by poor government policies. The fed-

eral governments attempts to impose price controls on hospitals, doctors,

and other health care providers make the problem worse. Price controls

cause the supply of health care providers to shrink, as these controls havedone in every other market in which they have been imposed. The declin-

ing supply amid rising demand produces shortages and reduced access to

health care.

Its absurd to claim that slowing the growth of benefits for retirees of

the distant future amounts to a cut.

Medicare and Medicaid reforms should be part of a larger effort to

improve the private health care system. The best strategy is to allow

consumers to have more skin in the game, provide high-quality readily

accessible information, and permit competition among health plans and

insurers.

Introducing more co-payments that reflect some of the opportunity

costs of health care resources will provide the proper incentives and mod-erate demand. More-informed decision-making will lead to lower insur-

ance premiums and thus more disposable income for Medicare recipients,

and higher wages for workers with employer-sponsored health plans.

Government can play an important role in making accurate informa-

tion more widely available, both by funding its dissemination and by pro-

tecting health care institutions and individuals who provide it. If they are

to be wise and effective consumers of health care, people need to knowwhat works and what doesnt, who works best and who doesnt, and what

prices will be.

The federal government can encourage competition in a number of

ways: by making out-of-pocket health care spending tax-deductible and

thereby in line with the tax treatment of health insurance premiums; by

providing insurance subsidies through which people can shop among

alternative insurance programs; by expanding the availability of healthsavings accounts; and by permitting individuals to purchase health insur-

ance in other states. Insurance companies and health care provider groups

long ago captured state legislatures and insurance regulators, creating


14/200


anticompetitive barriers to entry and thousands of state mandates to pro-

vide insurance coverage and procedures.

The ideal strategy for Medicaid reform would allow states flexibility in

designing and administering their programs in exchange for a level of fed-eral funding that grows in line with population plus inflation. The federal

government should take immediate steps to allow states greater discretion

to reform their programs to curtail costs and maintain coverage.

F IXING INCENTIVES

Sound entitlement reform will have other beneficial effects. The work dis-

incentives now built into our large and growing federal transfer programsimpede economic growth. These work disincentives affect all recipients:

younger workers, senior citizens, healthy workers, and those with dis-

abilities. Social Security, for example, contains significant disincentives

for older people to work. To reduce these disincentives, the government

could introduce a paid up concept so that a person continuing to work

after his or her retirement age would not be subject to either employer or

employee payroll taxes.

If they are to be wise and effective consumers of health care, people need

to know what works.

Franklin Roosevelt rightly called welfare a subtle destroyer of the Ameri-

can spirit. In 2011, the latest year in which data are available, thirty-eight

million working-age households (i.e., with no member age sixty-five andolder), representing 42 percent of working-age households, received benefits

from at least one federal welfare-entitlement program. Among these thirty-

eight million households, the average effective tax rate on additional earn-

ingsa rate that includes the loss of welfare benefits as earnings increase

ranges from 36 percent to over 50 percent, depending on whether the

additional income causes a family to lose Medicaid eligibility.

By discouraging work and human capital investments, these high effec-tive tax rates on such a large segment of the American working-age popu-

lation harm economic growth and reduce employment. Thus, a broad

reform strategy should include a complete overhaul of the entitlement


15/200


system, with reduced work disincentives and improved targeting on per-

sons who are unable to help themselves.

At the end of World War II, strategic economic thinking enabled the

United States to lead the world by encouraging free enterprise and pro-moting a rules-based system for trade and finance. The result was an

unprecedented period of prosperity, which by the 1980s had spread across

the globe, dramatically improving living standards.

Strategic thinking today will produce policies that bolster economic

growth, employment, and American geopolitical leadership. As other

countries again emulate our economic and political system, their prosper-

ity will be to our mutual benefit.Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.

New from the Hoover Press is Entitlement Spending: Our

Coming Fiscal Tsunami,by David Koitz. To order, call

800.935.2882 or visit www.hooverpress.org.


16/200


THE ECONOMY

Cloudy, with a Chanceof ErrorMonthly job numbers offer only the haziest economic predictions. By

Edward Paul Lazear.

On the first Friday of the month, when the latest employment numbers

come out amid much business-media fanfare, the numbers will be parsed

for what they tell us about the economy and where it is headed. The jobs

numbers do contain some valuable information, but they mean much less

than is often assumedbecause, as the Department of Labor cautions,theyre estimates. They are subject to significant revision, they are volatile,

and they tell us very little about the direction of the labor market.

The jobs day information comes from two different sources of data pro-

vided by the Bureau of Labor Statistics. Household data are used to estimate

the size of the labor force and the unemployment rate, and the widely reported

job creation numbers come from data supplied by employers. It is possible,

however, to obtain job-creation numbers by analyzing the household data.Often there is a disparity between the employer-based numbers and the

job-creation numbers that come from household data. In more than half

the months from 1996 to the present, the household and establishment job-

creation figures differed by more than 50 percent. For example, in a month

when the employer-based number is 200,000 additional jobs, it would be

typical to find the household numbers reporting only 100,000 new jobs.

EDWARDPAULLAZEARis the Morris Arnold and Nona Jean Cox Senior Fellow

at the Hoover Institution and the Jack Steele Parker Professor of Human Resources

Management and Economics at Stanford Universitys Graduate School of Business.


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Over longer periods, however, there is significant agreement between

the two data sources. The annual employment levels from the household

survey are very closely related to annual employment levels from the

employer-establishment survey.It is widely accepted that the employer-based establishment data are

better for the purposes of estimating job creation than are the household

data. Unfortunately, even the establishment data are less than accurate, at

least when first announced.

The accuracy of job-creation numbers goes up considerably during more

normal times, when job growth is positive.

Each month, the Bureau of Labor Statistics reports employment and the

change in employment since the previous month. There are subsequent

revisions, one and two months after the first announcement, until the num-

ber becomes final, sometimes up to two years later. The error in any given

month tends to be very large, which means that its reliability is low.

For instance, the average number of jobs created per month duringthe 19962012 period was 78,000. But in the typical month, the initial

estimate missed the final number by 73,000 in one direction or the other.

This means that the average error in the initial report is almost as large as

average job creation itself.

The quarterly numbers are somewhat better, but not by much. The

picture improves again for annual job growth, with the typical error being

about half as large as the average job change itself.In some months, the error is enormous. For example, the initial report

released in January 2011 stated that 130,712,000 Americans were work-

ing in December 2010. Two months later, that number was revised down-

ward to 130,260,000a difference of 452,000. When the final numbers

came in, the actual overstatement turned out to be 366,000. Thats worth

keeping in mind at a time when much excitement can be stirred up by a

monthly jobs fluctuation in the tens of thousands.The December 2010 example is by no means the worst case. In late

2009, the difference between initial reports and revisions was well over

one million. For the entire period studied, the initial estimates of job cre-


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ation deviated from final estimates by at least 50 percent in almost one in

every four months.

Over the very long run, the reported numbers look better. Although

there is significant error in any given month, the overstatements of jobgrowth in some months tend to offset understatements of job growth in

other months. The preliminary data would have yielded job growth of

about 17 million between 1996 and 2012. The actual job growth was 16

million, an error of about 6.5 percent.

Accuracy goes up considerably during more normal times when job

growth is positive (about two-thirds of the time). Then, the average error is

only about one-third as large as the average number of jobs created duringthis period. This still implies that true job growth is missed by 68,000 in

one direction or the other during the typical positive-job-growth month.

Trying to deduce anything about the direction of the jobs market by

referring to such wobbly numbers is essentially guesswork. Indeed, in any

given month, about 70 percent of what happens to job growth in the

following year has nothing to do with changes that occurred in that par-

ticular month. In almost one-fourth of cases, the job growth in any givenmonth does not even move in the same direction as the job change in the

twelve months that follow. Using even the entire previous quarters job

growth provides no better signal of where the labor market is headed.

Employment numbers have value, especially when considered over

long periods, such as a full year. Jobs day chatter is irresistible but almost

without content. Monthly jobs numbers are imperfect portraits of the

recent past and very poor predictors of the labor markets future.Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.

New from the Hoover Press is Bankruptcy, NotBailout: A

Special Chapter 14,edited by Kenneth E. Scott and John

B. Taylor. To order, call 800.935.2882 or visit www.

hooverpress.org.


19/200


THE ECONOMY

Skip the Short RunWe need to swear off this endless tinkering. By Michael J. Boskin.

President Obamas most recent prescription for economic growthmore

government stimulus spending, new social programs, higher taxes onupper-income earners, subsidies for some industries and increased regula-

tion for all of themis likely to have the same anemic results as in his first

administration.

Recall that the $825 billion stimulus program did little economic good,

at a cost of hundreds of thousands of dollars per job, even based on the

administrations own inflated job estimates. Cash for Clunkers cost $3

billion merely to shift car sales forward a few months. The Public-Private

Investment Program for Legacy Assets (PPIP) to buy toxic assets from the

banks to speed lending generated just 3 percent of the $1 trillion that the

program planners anticipated.

And now? Obama proposes universal preschool ($25 billion per year),

Fix It First repairs to roads and bridges, plus an infrastructure bank ($50

billion), Project Rebuild, refurbishing private properties in cities ($15

billion), endless green-energy subsidies, and a big hike in the minimum

wage. The president and Senate Democrats also demand that half the

spending cuts under sequestration be replaced with higher taxes.

These proposals are ill-considered. The evidence sadly suggests that the

initial improvement in childrens cognitive skills from Head Start quickly

MICHAELJ. BOSKINis a senior fellow at the Hoover Institution, a member ofHoovers Shultz-Stephenson Task Force on Energy Policy and Working Group on

Economic Policy, and the T. M. Friedman Professor of Economics at Stanford

University.


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evaporates. Higher minimum wages increase unemployment among low-

skilled workers. A dozen recent studies in peer-reviewed journals, includ-

ing one by the presidents former chief economic adviser, Christina Romer,

document the negative effects of higher taxes on the economy.As for adventures in industrial policy, former Obama economic adviser

Larry Summers wrote a memo in 2009 about the impending $527 million

loan guarantee to Solyndra and other recipients of government largess.

The government is a crappy v.c. [venture capitalist], he wrote. In 2010,

Harvard economist Edward Glaeser concluded in the New York Timesthat

infrastructure is poor stimulus because it is impossible to spend quickly

and wisely. Federal infrastructure spending should be dealt with in regu-lar appropriations.

Will more spending today stimulate the economy? Standard Keynesian

models that claim a quick boost from higher government spending show

the effect quickly turns negative. So the spending needs to be repeated

over and over, like a drug, to keep this hypothetical positive effect going.

Japan tried that to little effect, starting in the 1990s. It now has the highest

debt-to-GDP ratio among the countries of the Organization for Econom-ic Cooperation and Development (OECD)and that debt is a prime

cause, as well as effect, of Japans enduring stagnation.

Models that claim a quick boost from government spending show the

effect quickly turns negative. So the spending needs to be repeated over

and over, like a drug.

The United States is heading in this wrong direction. Even if the $110

billion in annual sequestration cuts were allowed to stand, the Congres-

sional Budget Office projects that annual federal spending will increase

by $2.4 trillion to $5.9 trillion in a decade. The higher debt implied by

this spending will eventually crowd out investment, as holdings of gov-

ernment debt replace capital in private portfolios. Lower tangible capitalformation means lower real wages in the future.

Since World War II, OECD countries that stabilized their budgets

without recession averaged $5 to $6 of actual spending cuts per dollar of


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tax increases. Examples include the Netherlands in the mid-1990s and

Sweden in the mid-2000s. In a paper last year for the Stanford Institute

for Economic Policy Research, Hoover senior fellows John Cogan and

John Taylor, along with Volker Wieland and Maik Wolters of FrankfurtsGoethe University, show that a reduction in federal spending over several

years amounting to 3 percent of GDPbringing noninterest spending

down to pre-financial-crisis levelswill increase short-term GDP.

Why? Because expectations of lower future taxes and debt, and there-

fore higher incomes, increase private spending. The United States reduced

spending as a share of GDP by 5 percent from the mid-1980s to the mid-

1990s. Canada reduced its spending as share of GDP by 8 percent in themid-1990s and 2000s. In both cases, the reductions reinforced a period

of strong growth.

Illustrationb

y

TaylorJones

for

the

HooverDigest.


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An economically balanced deficit-reduction program today would

mean $5 of actual, not hypothetical, spending cuts per dollar of tax

increases. The fiscal-cliff deal reached on January 1 instead was scored at

$1 of spending cuts for every $40 of tax hikes.Keynesian economists urge a delay on spending cuts on the grounds

that they will hurt the struggling economy. Yet at just one-quarter of 1

percent of GDP this year, $43 billion of this years sequester cuts in an

economy with a GDP of more than $16 trillion is unlikely to be a major

macroeconomic event.

Continued delay now leaves a long boom as the only time to control

spending. There was some success in doing this in the mid-1990s under


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President Clinton and a Republican Congress. More commonly the oppo-

site occurs: a boom brings a surge in tax revenues and politicians are eager

to spread the spending far and wide.

Infrastructure is poor stimulus because it is impossible to spend quickly

and wisely.

In any case, the demand by Obama and Senate Democrats that any

dollar of spending cuts in budget agreements (to fund the government for

the rest of the fiscal year and when the debt limit again approaches) be

matched by an additional dollar of tax hikes is economically unbalancedin the extreme. Those who are attempting to gradually slow the growth of

federal spending while minimizing tax hikes have sound economics on

their side.

This essay is based on the authors testimony before the U.S. Congress Joint Economic Committee.

Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.

Available from the Hoover Press is Pension Wise:

Confronting Employer Pension UnderfundingAnd Sparing

Taxpayers the Next Bailout, by Charles Blahous. To order,

call 800.935.2882 or visit www.hooverpress.org.


24/200


THE ECONOMY

Contrived InequalityA lot of wealthy people deserve their success. Is it asking too much

of the government to recognize that? Maybe so. By Gary S. Becker.

The media and many intellectuals criticize the widening inequality in

countries as different as the United States, China, and Brazil. Yet people

everywhere generally accept, and usually admire, differences in incomes

and wealth that they believe result from abilities and hard work, and where

the work done by the wealthy is considered socially valuable. For example,

the great wealth of Steve Jobs or Bill Gates is little criticized because of

their brilliant accomplishments that added a lot to social value. On theother hand, people object when high incomes and wealth are considered

undeserved. The distinction between deserved and undeserved wealth is

crucial to acceptance of or hostility to inequality.

Government policies that favor some people and discriminate against

others are the biggest source of contrived inequality. For example, much

of the wealth of Russian oligarchs came from government favors when

Russia privatized industries after the collapse of communism. Laterthe government consolidated ownership in natural resources and other

industries, adding to the favoritism. Similar government help propelled

the Mexican telecommunications giant Carlos Slim to become the

wealthiest person in the world.

GARYS. BECKERis the Rose-Marie and Jack R. Anderson Senior Fellow at the

Hoover Institution and a member of Hoovers Working Group on EconomicPolicy and Shultz-Stephenson Task Force on Energy Policy. He is also the Uni-

versity Professor of Economics and Sociology at the University of Chicago. He was

awarded the Nobel Memorial Prize in Economic Sciences in 1992.


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Until fairly recently, all countries simply handed telephone ser-

vices, radio and television channels, and mineral and energy rights to

politically powerful companies. Economists pointed out that this was

granting enormous wealth to these companies without getting muchin return. Their writings and other pressures finally forced the United

States and many other countries (but not all) to auction off such valu-

able, scarce property. Protected industries also benefit from tariffs on

goods like sugar and ethanol, and subsidies to oil and other industries.

These artificially raise the incomes of capital and workers employed in

those industries.

The labor market offers other examples. Chinas sharp restrictions onrural migrants obtaining residency in cities has contributed greatly to

Chinas rapid growth in inequality during the past two decades. Mini-

mum-wage laws raise the incomes of low-skilled workers who can find

jobs but lower the incomes of equally productive workers who are priced

out of a job.

Steve Jobs and Bill Gates get a pass: though immensely wealthy, theyre

brilliant and their work has added a lot to social value.

I could give many other examples of government creation of undeserved

inequality, but governments are not the only source of such disparities.

Unions raise the wages of workers in unionized sectors while lowering the

wages of equally productive workers who are forced out of these sectors

and into lower-paying jobs elsewhere. At the same time, unions artificiallyreduce inequality by suppressing the earnings of more-productive union

members, so that the net effect of unions on inequality is not clear. One

blatant example of unions suppressing earnings of more-productive mem-

bers is the union opposition to merit pay for good teachers, even though

good teachers have large positive effects on their students.

Private monopolies and cartels tend to raise the wealth of businessmen

and workers who gain from higher prices created by monopolies. Theburden of these higher prices is borne by consumers, other businesses, and

the workers who must exit monopolized industries because of the cuts in

output that create the higher prices.


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Differences in education and other human capital are the cause of

much of the earnings inequality within rich countries such as the United

States and Japan. Higher education over the past thirty years has wid-

ened earnings inequality greatly, sharply increasing the earnings of col-lege graduates and those with even higher skills. Most people do not

object to higher incomes for skilled workers, but they do object that

many young men and women with the talent to benefit from higher

education are prevented from doing so. These students families and

schools fail to prepare them for college or they lack the family resources

to pay for a college education.

Along with everything else, higher education also widens earnings

inequality.

The effects on children of broken families and uninterested parents are

considerable, yet much more can still be done to remedy the inequali-

ties in college opportunity. Schools attended by poorer children can be

improved by increasing competition among schools, by paying very goodteachers much more than average teachers, and by getting rid of the bad

and indifferent teachers. Student loans might be made more effective

by making the amount to be repaid contingentup to a pointon the

incomes of those repaying the loans. This would reduce the loan burden

on those who turn out to earn relatively little.

The huge earnings and great wealth accumulation of some members

of the financial sector are often viewed with suspicion because the earn-ings are considered more due to luck than abilities. This suspicion is not

universal; the billionaire Warren Buffett, the second-wealthiest person in

America, is much admired even though he made his enormous fortune

from investments in companies. The vast wealth of some hedge-fund

managers, on the other hand, is often criticized. Usually overlooked is the

role of these funds and other investors in arbitraging prices and returns

in different sectors. Hostility to high earnings in the financial sector hasgreatly increased during the past few years because of the role banks and

other financial institutions played (along with governments and other cul-

prits) in the financial crisis that so damaged the world economy.


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Since Rousseau, many intellectuals have been opposed to inequality per

se. Most people, however, distinguish deserving from undeserving inequal-

ity. Clearly, much of the income and wealth inequality in any country

would be considered deserving because it results from greater abilities anddedication. Governments are expected to reduce obstacles to deserving

wealth. Unfortunately, they create many of the undeserved sources of

inequality themselves.

Reprinted from the Becker-Posner Blog (www.becker-posner-blog.com).

Available from the Hoover Press is The Taylor Rule and

the Transformation of Monetary Policy,edited by Evan F.

Koenig, Robert Leeson, and George A. Kahn.

To order,

call 800.935.2882 or visit www.hooverpress.org.


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THE ECONOMY

We Need to CutSpending. Heres HowThe careful budget that Paul Ryan and others in the House have

proposed would ease the economy into a better place. By John F.Coganand John B. Taylor.

In March the House of Representatives approved its Budget Committee

plan, which would bring federal finances into balance by 2023. The plan

would do so by gradually slowing the growth in federal spending without

raising taxes. Still, the plan was denounced by naysayers who asserted thatit would harm the economic recovery and that any spending reductions

should be put off until later. This thinking is just as wrong now as it was

in the 1970s.

According to our research, the spending restraint and balanced-budget

parts of the House Budget Committee plan would boost the economy

immediately. With the Budget Committees proposed tax reform includ-

ed, the immediate impact would be even larger. The entire plan wouldraise gross domestic product by 1 percentage point in 2014, equivalent

JOHNF. COGANis the Leonard and Shirley Ely Senior Fellow at the Hoover

Institution and a member of Hoovers Shultz-Stephenson Task Force on En-

ergy Policy, Working Group on Health Care Policy, and Working Group on

Economic Policy.JOHNB. TAYLORis the George P. Shultz Senior Fellow in

Economics at the Hoover Institution, the chairman of Hoovers Working Groupon Economic Policy and a member of Hoovers Shultz-Stephenson Task Force

on Energy Policy, and the Mary and Robert Raymond Professor of Economics

at Stanford University.


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to about a $1,500 increase for each U.S. household. Ten years from now,

at the end of the official budget horizon, we estimate that the entire plan

would raise GDP by 3 percentage points, or more than $4,000 for each

U.S. household.Our assessment is based on a modern macroeconomic model (devel-

oped with Volker Wieland of the University of Frankfurt and Maik

Wolters of the University of Kiel) whose features include the recog-

nition that the resources to finance government expenditures arent

freethey withdraw resources from the private economy. The model

provides for other essential attributes of the economythat consum-

ers, businesses, and workers respond to incentives, and they are influ-enced by their expectation of future economic conditions when mak-

ing decisions today. None of these features is provided for in old-style

Keynesian models.

The budget plan would raise gross domestic product by 1 percentage

point in 2014, equivalent to a $1,500 increase for each U.S. household.

The House budget plan would keep total federal outlays at their

current level for two years. Thereafter, spending would rise each year,

but more slowly than if present policies continue. By 2023, federal

expenditures would decline to 19.1 percent of GDP from 22.2 percent

today.

Since the Congressional Budget Office projects that revenues will

equal 19.1 percent of GDP in 2023, the House plan would balance thebudget that year. Also by 2023, the publicly held federal debt relative

to GDP would decline to 55 percent from its current high level of 76

percent.

The House budget is hardly austere: the federal spending claim on

GDP would still be considerably higher than it was in fiscal 2000 (18.2

percent) and only slightly below its claim on GDP in 2007 (19.7 percent).

The reductions in the growth rate of spending would be achieved pri-marily through entitlement reforms. The Affordable Care Act would be

repealed. Medicaid and food-stamp administration would be turned over

to the states. Medicare would be fundamentally reformed. Anti-fraud mea- Illustrationb

yTaylorJones

forthe

HooverDigest.


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sures would be applied to federal disability programs. Among the major

entitlement programs, only Social Security would remain unchanged; this

is a deficiency in the plan. As for discretionary spending, the House bud-

get plan would provide for only slight reductions from the levels that areset by the budget sequester.

The long-run economic gains from restraining government spending

would not, despite what critics claim, harm the economy in the short run.

Instead, the economy would start to grow right away. Why?

First, the lower level of future government spending avoids the

necessity of sharply raising taxes. The expectation that tax rates wont

need to rise provides incentives for higher investment and employ-ment today.

Second, since the expectation of lower future taxes has the effect of

raising peoples estimation of future disposable income, consumption

increases today. This change comes thanks to Milton Friedmans famous

permanent income hypothesis that the behavior of consumers reflects

what they expect to earn over a long period. According to our macro-

economic model, the higher level of consumption induced by the Housebudgets effect on consumer expectations is large enough to offset the

reduced growth of government spending.

Third, the new budgets reduction in the growth of government spend-

ing is gradual. That allows private businesses to adjust efficiently without

disruptions.

The expectation that tax rates will stay put provides incentives for higher

investment and employment today.

Our macroeconomic model probably underestimates the positive

impact of the House budget plan. The model doesnt account for the

greater economic certainty that results from preventing the national debt

from soaring to dangerously high levels and from stabilizing the federal

tax burden. Nor does the model account for beneficial changes in mon-etary policy that could accompany enactment of the budget plan. Lower

deficits and national debt would reduce pressure on the Federal Reserve to

continue buying long-term Treasury bonds.


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The U.S. economy has been experiencing its slowest recovery from a

deep recession in modern history. Tragically, fewer people are working

as a percentage of the working-age population than when the recovery

beganand economic growth was only 1.6 percent last year. The largefederal budget deficitsby increasing uncertainty and delaying private

spendingare an important cause of this lackluster economic perfor-

mance.

For too long, policy makers have been misguided by models that lend

support to bigger government or to the politically convenient objective of

delaying any reduction in spending. It is better to recognize the flaws in

this approach and get on with the sensible budget reforms the country sosorely needs.

Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.

New from the Hoover Press is Government Policies

and the Delayed Economic Recovery, edited by Lee E.

Ohanian, John B. Taylor, and Ian J. Wright. To order, call

800.935.2882 or visit www.hooverpress.org.


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TAXAT ION

AlternativeMaximum TaxLets settle on a top number for everybody. By John H. Cochrane.

They keep coming back, like the villains in a good zombie movie, chant-

ing more taxes, more taxes. Long ago, Congress passed the alternative

minimum tax, or AMTa simple flat rate to ensure that in an insanely

complex tax code, no one escapes paying something. Now we need an

alternative maximumtax as a simple, rough-and-ready way to limit the tax

zombies economic damage. Call it the AMaxT.Lets start a national conversation: how much is the most anyone should

have to pay? When do taxes indisputably start to harm the economy and

produce less revenuewhen government takes 50 percent of peoples

income? 60 percent? 70 percent?

I like half, but the principle matters more than the number. Once the

country settles on a number, each of us gets to add up everything we pay

to government at every level: federal income taxes, yes, but also payroll(Social Security, Medicare, etc.) taxes; state, city, and county taxes; estate

taxes; property taxes; sales taxes; payroll taxes and unemployment insur-

ance for nannies, household workers, or other employees; excise taxes;

real-estate transfer taxes; and so on and on, right down to your vehicle

stickers and those annoying extra taxes on your airline tickets.

JOHNH. COCHRANEis a senior fellow at the Hoover Institution and the AQR

Capital Management Distinguished Service Professor of Finance at the University

of Chicagos Booth School of Business.


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On April 15, once this total hits the alternative maximum tax, youve

done your bit and federal income taxes can take no more.

The zombies howl that the top federal tax bracket is still only 40

percent. Surely the rich can contribute a bit more? They forget that theeconomic damage of taxes comes from the total tax bite, not just the fed-

eral income tax.

When do taxes indisputably start to harm the economy and produce less

revenuewhen government takes 50% of peoples income? 60%? 70%?

Marginal taxes are a purer measure of economic damage. If youearn one more dollar, how much do you get to keep? Marginal rates

are higher than average rates in a progressive system: if the govern-

ment takes 100 percent of income above $100,000, then somebody

earning $150,000 pays a 33 percent average tax rate but has no incen-

tive to work at all after he reaches $100,000. Ideally, we would limit

marginal rates, but this is not practical in a simple backstop like the

AMaxT.American governments also like to hide taxing and spending by passing

mandates and regulations, forcing people and businesses to spend on their

behalf. Ideally, we would limit this economic damage as well, but this is

also not practical in an alternative maximum tax.

However, both considerations mean that the true economic damage

will be higher than the AMaxT rate, so we should leave some headroom

in setting that rate.Every cent of corporate taxes comes out of some persons pocket, in

higher prices, lower wages, or lower returns to investors. For example,

even the tax zombies dont dream that we stick it to the big oil compa-

nies by charging gas taxes. To limit this damage, every single cent of tax

that government assesses, at all levels, should be assigned to somebody

and count against that persons alternative maximum tax. It is easiest to

assign all corporate taxes to shareholders. When corporations send you theannual 1099 dividend form, they also report all taxes paid by your shares,

which count against your AMaxT. Some taxes could similarly be assigned

to workers and reported on W-2 forms.


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Yes, there are details to work out. People get big tax bills in some years,

such as when they pay estate taxes. Incomes fluctuate. Smart tax lawyers

could game the system.

This isnt hard to fix. For example, we could use an average of severalyears income or, better yet, scale the AMaxT limit to consumption rather

than income.

Liberals might object to a maximum tax. In setting the maximum level

of taxation, shouldnt we consider the nice roads, free schooling, police,

national defense, thoughtful regulation, and other benefits and services?

This is a valid consideration if one argues about whats fair. But I

propose the AMaxT entirely to limit the economic damage of taxation, agoal you must consider even if you think its fair to take every cent of a

rich persons income.

To limit economic damage, benefits are irrelevant. Suppose that the

government levies a 100 percent income tax, but it is so good at providing

services that each of us gets back twice the value of what we put in. Good

deal? Yes. Functioning economy? No. Each person gets services whether

they do or dont pay taxes. But with a 100 percent income tax, nobodyworks, nobody pays any taxes, and nobody actually gets any services.

How many people are really being taxed at outrageous rates? I dont

know. The U.S. tax system is so complex, with so many layers of taxing

authority, that nobody really knows. Still, an alternative maximum tax is

a win-win bet.

The disincentive effects of heavy taxation settle in gradually.

If there really are few people who pay an extraordinarily high percent-

age of their income, then liberals shouldnt object. They wont lose any

revenue and will enjoy snickering I told you so. If it turns out that there

are lots of people being so taxed, then we will sharply reduce the unin-

tended, multiplicative effect of taxation, and we will measure that fact. A

canary in the coal mine is as valuable chirping as choking.The disincentive effects of heavy taxation settle in gradually. For the

first year or two, all people can do is hire smarter lawyers and work a little

less hard. It takes years for businesses to retrench, close, never get started,


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or fail to expand; for people and companies to move abroad; for students

to give up investing in an expensive MBA or medical school or engineer-

ing degree; for people to stay put rather than follow lucrative opportuni-

ties; or to retire early. All this shows up slowly and gradually drags downan economy and its tax revenues.

So the AMaxT is most important for the backstop promise it makes to

young people and entrepreneurs. Yes, start a company, go to school, work

hard, invest, hire people. We guarantee you that no matter what happens,

no matter how loud the zombies chant, no matter what clever revenue

enhancers they come up with, you will get to keep some reasonable frac-

tion of what you earn. Go for it.Reprinted by permission of the Wall Street Journal. 2013 Dow Jones & Co. All rights reserved.

Available from the Hoover Press is The Flat Tax,

updated and revised edition, by Robert E. Hall and Alvin

Rabushka. To order, call 800.935.2882 or visit www.

hooverpress.org.


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POLIT ICS

The Missing ModeratesPlenty of moderates still existbut theyre forced to choose between

a couple of political parties that rarely serve them well. By Morris P.

Fiorina.

In 2000 the Republicans won the electoral Triple Crown, capturing the

presidency (despite losing the popular vote), the House of Representa-

tives, and the Senate (with Vice President Dick Cheney as tie-breaker)

for the first time since the election of Dwight Eisenhower forty-eight

years earlier. In 2002 they increased their congressional majorities,

an unusual feat in an off-year election, and in 2004 voters re-electedPresident George W. Bush and added slightly to Republican congres-

sional majorities. The six years of unified party control produced by

these three elections was the longest period of unified government the

United States had experienced since the Kennedy-Johnson administra-

tions in the 1960s.

Political scientists refer to U.S. electoral history in the second half of

the twentieth century as the era of divided government. Between the1952 and 2000 elections Republicans held the presidency for twenty-

eight years, but Democrats organized the Senate for thirty-six years and

Democratic majorities ran the House for forty-two years. The result was a

long period when divided party control generally prevailed. In only eight

years (195254, 197680, 199294) did one party control the presidency

and both chambers of Congress. (Divided control also characterized elec-

tions in the states during this period.)

MORRISP. FIORINAis a senior fellow at the Hoover Institution and the Wendt

Family Professor of Political Science at Stanford University.


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The apparent break with previous history in the early 2000s was the

stuff of Republican dreams and Democratic nightmares. Had Karl Rove

succeeded in his announced goal of creating a long-term Republican

majority? For Rove the real prize, as Nicholas Lemann wrote in the NewYorkerin 2003, would be a Republican majority that would be as solid as,

say, the Democratic coalition that Franklin Roosevelt createda majority

that would last for a generation.

Such ambition soon faded, as the presidents approval ratings plunged

in the wake of Hurricane Katrina, the misbegotten nomination of Har-

riet Miers to the Supreme Court, the Dubai ports debacle, Social Secu-

rity private accounts, and the war in Iraq. In 2006, the new Republicanmajority suffered a thumpin, in President Bushs words, losing thirty

seats in the House and six in the Senate, ceding control of both cham-

bers of Congress to the Democrats. Divided government returned.

In 2008 the Republicans experienced another thumpin : Barack

Obama won a decisive victory over John McCain, and the Democrats

enlarged their congressional majorities. For a short period afterward

speculation that 2008 was a transformative election ran rampant. Inearly 2009 James Carville published a book titled 40 More Years: How the

Democrats Will Rule the Next Generation. But in 2010 the Democrats suf-

fered a shellacking, as President Obama put it, losing sixty-three seats in

the House (the largest midterm loss since 1938), six Senate seats, six state

houses, and nearly seven hundred state legislative seats. (Carvilles book,

incidentally, was discounted by 60 percent on Amazon.com.)

Clearly, generations are not what they used to be. Since that brief peri-od of unified Republican government in the early 2000s the country has

entered a period of almost unprecedented electoral instability.

How common or unusual is this period? It turns out that the country

had seen nothing like it since the nineteenth century, when the five elec-

tions of the 188694 period produced five distinct patterns of institu-

tional control. Had the Republicans captured the Senate in 2012, or had

control of the two chambers of Congress flipped, or had Mitt Romneybeen elected with Republicans in control of either chamber, the elections

of 200612 would have tied the historical record for majority instability.

As it stands, the current period holds second place in American history.


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It is important to recognize that this pattern of unstable institutional

control stands in contrast to the macro-stability of the American elector-

ate. That is, control of our institutions is not vacillating between the par-

ties because voters are manic, dramatically changing their party preferenc-es from one election to the next. Nor are they flighty and uncommitted,

voting on a whim now for Democrats then for Republicans. Despite some

gradual demographic shifts, the characteristics of the American electorate

have changed little in the past generation; the way the parties represent

them, on the other hand, has changed a great deal.

THE AMERICAN VOTER, THEN AND NOWFor some sixty years political scientists have been asking Americans, Gen-

erally speaking, do you think of yourself as a Republican, a Democrat, an

independent, or what? The Democrats lost their national majority dur-

ing the tumult of the 1960s, and at the same time more came to identify

as independents. But since the Reagan years, partisanship has been gener-

ally stable, with 3540 percent of the population adopting the indepen-

dent label, a slightly lower proportion the Democratic label, and abouta quarter of the electorate the Republican label. Three decades of data

undermine pundits claims that the country is half Republican red and

half Democratic blue.

Voters arent manically changing their party preferences from one

election to the next.

Sociologists have been querying Americans about ideology for almost as

long, asking people to classify themselves on a scale ranging from extreme-

ly liberal to extremely conservative. There have been no dramatic shifts for

more than a generation. The liberal label traditionally carries less popular

support than the conservative one; only about a quarter of the electorate

adopts it. Moderate is usually the plurality choice, with conservative trail-

ing by a bit. There is no indication in the data that the middle is waningand the extremes waxing. The picture is one of stability.

Pundits often combine conservatives and moderates and pronounce

the United States to be a center-right nation. Its probably an accurate


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characterization relative to other advanced democracies, but there are two

problems with this interpretation.

First, there is no logical reason why moderates should always coalesce

with conservatives to form a three-fourths majority. If conservatives movefar enough to the right, moderates could find themselves closer to liberals

and coalesce with them to form a two-thirds center-left majority.

Second, as an empirical matter, ordinary Americans do not use these

abstract terms in the same way partisan intellectuals do. Self-classified lib-

erals tend to have liberal views on specific policy issues, but self-classi-

fied conservatives are much more heterogeneous; many, even majorities,

express liberal views on specific issues, such as abortion rights, gun con-trol, and drug-law reform.

Perhaps, then, voters have changed on a few touchstone issues that

make all the difference for todays elections. Here the data are more frag-

mentaryspecific-issues questions come and go on surveys. But the Pew

Research Center has conducted surveys on forty-two attitude, value, and

policy subjects since the late Reagan years. Its 2012 report concludes:

The way that the public thinks about poverty, opportunity, business,

unions, religion, civic duty, foreign affairs, and many other subjects is,

to a large extent, the same today as in 1987. The values that unified

Americans twenty-five years ago remain areas of consensus today, while

the values that evenly divide the nation remain split. On most of the

questions asked in both 1987 and 2012, the number agreeing is within 5

percentage points of the number who agreed twenty-five years ago. And

on almost none has the basic balance of opinion tipped from agree to

disagree or vice versa.

In sum, an examination of popular attitudes toward particular subjects

yields the same conclusion as an examination of partisanship and general

ideology. In the aggregate the American electorate has changed little in the

past generation.

Political independents and ideological moderates in the American elec-torate have not declined in numbers, let alone disappeared. Indeed, their

numbers continue to exceed those of partisans and ideologues on either

side. How then, do we explain the indisputable fact that politics in Wash-


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ington and in many state capitols is more bitter, contentious, and polar-

ized than a generation ago?

A large part of the answer is that those most active in politicsthe

political class, including convention delegates, donors, and campaign activ-istshave indeed become more polarized since the 1970s. And the partisan

media and many of the myriad groups devoted to a single cause did not even

exist a generation ago. As a general observation, the higher up the scale of

political activity one goes, the more common extreme views become and the

more intensely they are held; there are few raging moderates or knee-jerk

independents at the higher levels of politics. Although relatively few, those Illustrationb

y

TaylorJones

for

the

HooverDigest.


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in the political class structure politics. Ordinary voters can only react to the

alternatives they are offered, and often they must choose between two polar-

ized alternatives even if they prefer a more moderate choice. Or, of course,

they can choose simply not to vote. The much-discussed decline in electoralturnout between 1960 and 1996 was concentrated among independents

and moderates. Strong partisans did not drop off, suggesting they found the

choices more palatable than did those in the middle.

A second major explanation for todays polarization lies at the root of

a great deal of mistaken commentary about American politics: while the

middle of the American electorate remains as large as ever, it no longer has

a home in either party. As we have seen, the distributions of partisanshipand ideology have not changed shape for a generation, but the relation-

ship between the distributions has changed since the 1980s.

Political scientists refer to this development as a process ofparty sorting. To

explain, consider a hypotheti-

cal electorate in which Demo-

crats are a left-of-center party


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with a right wing, while Republicans are a right-of-center party with a left

wing. Assume that over time demographic changes and electoral strategies

move the parties toward their respective poles. The numbers of Democrats,

independents, and Republicans have not changed. Nor have the numbers ofliberals, moderates, and conservatives. But the parties have sorted: liberals

and conservatives are increasingly aligned with the correct party.

Something like this has also happened in the American electorate. Since

the mid-twentieth century, demographic changes such as the migration of

African-Americans to the north, the rise of the Sunbelt, and immigration,

coupled with electoral strategies described in books with titles like The Emerg-

ing Republican (Democratic) Majority, have produced political parties that aremore homogeneous than they were a generation ago. And the most active and

involved members come from the most extreme reaches of each party.

In consequence, the dynamics of American politics are increasingly driven

by small and highly unrepresentative slices of the population. Consider the

Republican presidential primary contest in 2012. On February 7 the media

declared Rick Santorum a legitimate contender for the nomination on the

basis of three victories: the Minnesota caucuses, in which one of every onehundred eligible voters participated, the Colorado caucus, in which two of

every one hundred eligible participated, and the Missouri beauty contest

primary in which seven of every one hundred eligible participated.

American voters have changed little in the past generation. But the way

the parties represent them has changed a great deal.

Of course, primary electorates have always been small and unrepre-

sentative, but primaries were not as common a generation ago, and the

participants were unrepresentative in different waysthe Democratic pri-

mary electorate in Massachusetts was very different from that in Missis-

sippi. Today primary electorates are more homogeneous across the coun-

try. Democrats appeal to public employees, environmentalists, and liberal

cause groups, while Republicans rely on business and taxpayer groupsalong with conservative cause groups.

Thus, while the electorate at large has changed little during the course

of the past generation, there is a closer connection between partisanship


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on the one hand and issues and ideology on the other, resulting in the

kind of partisan warfare common today. Still, it is important to recognize

that the process of party sorting weakens rapidly as one moves beyond the

political class to the larger electorate. There is still considerable commonground in the electoratebut it is difficult in todays political configura-

tion for anyone in either major party to appeal to it. To take a striking

example, consider abortion.

While the middle of the electorate remains as large as ever, it no longer

has a home in either party.

The activists who attended the Republican presidential nominating

convention in 2012 adopted an abortion plank in the party platform that

essentially said no abortions, no exceptions. Their counterparts at the

Democratic convention adopted a platform that essentially said abortion

at any time, no restrictions, regardless of ability to pay. Now compare those

extreme positions with those held not just by partisans in the electorate, but

by those who characterize their partisanship as strong (strong Democratsare about a fifth of the population, strong Republicans about a seventh).

For thirty years the American National Election Studies project has

included an item that offers citizens multiple positions on abortion, not

just the simplistic pro-choice/pro-life choices offered by some polls. The

2012 data are not yet available, but there has been little variation over time

in the response patterns. In 2008, 11 percent of the strong Democrats

queried said abortion should never be permitted, and 26 percent that itshould be permitted only in case of rape, incest, or a threat to the womans

life. So, more than a third of strong Democrats were closer to Mitt Rom-

neys position on abortion than to that of their own party. Perhaps even

more surprising, 22 percent of strong Republicans said abortion should

always be available as a matter of personal choice, and an additional 16

percent in case of a clear need. So, more than a third of strong Republicans

were closer to the Democratic position than to that of their own party.Turning to those partisans who label themselves not so strong, we find

that more than 40 percent of Democrats and more than half of Republi-

cans are at odds with their partys platform. Similar results hold for other


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so-called hot button issues, like gun control. Setting aside independents,

even partisans in the electorate are out of step with many of the positions

held by their purported leaders.

ON TO 2012

Barack Obama won a handsome victory in 2008. Historically speaking,

Americans do not replace presidential parties in landslidesFDR in 1932

is the exception, not the rule. Obamas 7.2-percentage-point margin in the

popular vote was the fifth largest in fourteen elections in American history in

which one party turned out the otherjust after Ronald Reagans 9.7-point

margin in 1980. In addition, the Democrats scrambled the red-blue map, flip-ping nine states, three each in the Southwest, Midwest, and South Atlantic. In

the aftermath of the election many Democrats believed they had a mandate to

move the country sharply in what they term a progressive direction.

The American people do not give mandates. They hire parties pro-

visionally and grant them a probationary period to prove their worth.

A major electoral victory by the out party generally says no more than

for heavens sake, do something different! Such was the case in 2008.From their post-9/11 heights President Bushs approval ratings steadily

declined to dismal Truman and Nixon levels. Americans first registered

their displeasure with the administration in 2006 and emphatically made

the point in 2008. Obamamania was icing on the Democratic cake.

In the aftermath of the election the Democrats overreached: the Obama

administration governed in a way that caused the defection of marginal

members of its majority. Loosely speaking, Democrats build their coali-tions from the left, Republicans from the right. Each must add to their

base enough of the center to win. After winning, however, activists pres-

sure their leaders to govern from the left or right, possibly reinforcing

what the leaders would like to do anyway, which risks alienating those at

the center. After a narrow victory in 2004 George W. Bush proclaimed

that he had earned political capital and intended to spend it. Many voters,

however, were unaware that they had voted for a Freedom Agenda orfor Social Security private accounts. In his 2010 memoir Bush expressed

sober second thoughts: On Social Security, I may have misread the elec-

toral mandate. Such misreading contributed to the 2006 thumpin.


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Similarly, according to Gallup data, when Obama was elected about 45

percent of the country thought they had elected a moderate and similar

numbers a liberal (nearly 10 percent thought they had elected a conserva-

tive). Nine months later, 55 percent felt they had elected a liberal and only35 percent a moderate, and voters remorse began to set in. Obamas approv-

al ratings among independents were underwater by late summer 2009, pre-

saging the massive swing against the Democrats more than a year later.

The American people dont give mandates. They hire parties provisionally

and grant them a probationary period to prove their worth.

The subject of independents engenders much confusion among politi-

cal commentators. Some advocates of a more centrist politics treat inde-

pendents as an undifferentiated mass of centrist voters. They are not.

Independents are a heterogeneous lot. While some are moderates, others

are largely uninformed about the issues. Many independents are cross-

pressured, attracted to one party on some issue or set of issues and to the

other on different issues. Still others dislike both parties. The label sub-sumes many different types of voters.

At the same time some political scientists have asserted that the lions

share of independents are nothing of the sort; they are rather closet par-

tisans who like the independent label but are actually no different from

the not so strong partisans. There is remarkably little evidence for this

contention. The entire subject cries out for more detailed examination in

an era when as many as 40 percent of Americans take the independentoption when queried in national surveys. Whatever they are, indepen-

dents have provided much of the volatility present in recent elections,

swinging 18 points against the Republicans in 2006 (compared to 2002)

and 17 points against the Democrats in 2010 (compared to 2006).

Health care reform was a large part of the explanation for the Demo-

cratic slide between 2008 and 2010. To this day the law has never achieved

majority support in the polls, and Democrats singular focus on passingit at a time when voters considered the economy and jobs much higher

priorities contributed to the perception that the administration was driven

by its own ideological commitments rather than the problems facing the


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citizenry. The result was the great shellacking of 2010. While the recession

played a major role, Democratic losses were much larger than predicted by

economic forecasting models. Several colleagues and I calculated that the

Democrats might have barely held their House majority were it not forthe vote on the health care bill. In particular, it was the difference between

victory and defeat for Democratic representatives whose districts voted for

McCain or only narrowly for Obama in 2008.

After the 2010 elections Republican expectations for 2012 skyrocketed.

The House majority looked safe, Democrats were defending two-thirds

of the Senate seats to be filled in 2012, and by all indications Obama was

highly vulnerable. But the comedic Republican nominating process illus-trated the problem with a political process driven by party fringes. The

Massachusetts moderate Mitt Romney was never comfortable playing the

role of a severe conservative; poor nominees threw away almost certain

Senate pickups in Missouri and Indiana (after arguably doing the same in

Colorado, Delaware, and Nevada in 2010), and the election results basi-

cally reaffirmed the status quo, a great relief for the Democrats and a bitter

disappointment for the Republicans.

MISREADING THE RESULTS

Various interpretations of what it all meant are piling up. The imme-

diate post-election narrative held that an old, white Republican Party

had been overwhelmed by an electorate newly dominated by minorities,

young people, single women, and well-educated professionals of a decid-

edly more liberal bent. There is an element of truth to this interpreta-tion, but it lets the Republicans off too easily. The facts paint a more

complicated picture.

Obama won about 51.9 percent of the two-party vote in 2012, a bit

better than George W. Bushs 51.2 percent in 2004, but down more than 3

percent from his 2008 margin. Republicans assumed that the excitement

surrounding the Obama candidacy in 2008 had produced an electorate

unusually young, non-white, and liberal, and that with Obamamania onlya distant memory the 2012 electorate would look more like the 2004

electorate. But the Obama campaigns efficient turnout operation made

the 2012 electorate look like the 2008 electorate; indeed, even more so.


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Young people participated at about the same rate in 2012 as in 2008, and

minorities increased their participation. Although Romney won a higher

proportion of the white vote than any Republican since 1988, rather than

the 75 percent white electorate of 2004, the electorate in 2012 was only72 percent white. But the conclusion that Republicans were only victims

of a changing electorate weakens when we look at the 2012 electorate in

terms of numbers of voters rather than their percentages.

Three decades of data undermine pundits claims that the country is half

Republican red and half Democratic blue.

According to the exit polls, African-Americans marginally increased their

participation in 2012by about 300,000, as did Asians and other small

groups by about 400,000, and Latinos registered a big increase, about 1.7

million. These increases clearly contributed to the Obama victory. But pre-

liminary analyses suggest that Obama would have won comfortably even

without any increase in the Hispanic vote or the large majorities Democrats

ran up in this demographic. Despite an increase of about 6 million in theeligible voter population, almost 2.5 million fewer votes were cast in 2012

compared to 2008. Given that minorities cast nearly 2.5 million more votes,

the implication is that almost 5 million fewer whites voted in 2012. (Turn-

out figures are from data compilations by Michael McDonald, the United

States Elections Project, George Mason University.)

We do not yet know in detail where and why white turnout declined.

Some of it is no doubt due to non-political factors, such as the disruptionscaused by Hurricane Sandy on the East Coast, but it seems likely that the

Republicans underperformed even among their targeted demographic. So

while a re-examination of the partys position on immigration (or at least

the rhetoric that accompanies it) is certainly advisable, it should not dis-

tract from the larger problem suggested by the partys weaker performance

in the larger white electorate.

Again, definitive studies remain to be conducted, but a number ofpossibilities merit investigation. My impression is that the Republi-

can embrace of social conservatism has become counterproductive at

the national level. It enabled the party to win control of Congress in


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the 1990s after forty years in the minority, but the views espoused by

Republican candidates chosen in unrepresentative primaries dominated

by social conservatives are toxic to many in the younger generation, as

well as to moderate middle-class Americans who reside in cities and sub-urbs outside the South. Even if they believe that entitlements must be

restructured, regulatory hurdles lowered, and the tax system reformed,

they are reluctant to vote for a party whose candidates make statements

about rape and evolution that strike them as outrageous. I live among

thousands of affluent, educated professionals who regularly vote for

Democrats who will raise their taxes. I doubt that altruism is the expla-

nation. Rather, their alternative is to vote for candidates of a party theysee as more interested in outlawing abortion, stigmatizing homosexuals,

and logging the redwoods.

Whether the Republicans can or will reposition themselves on issues

like immigration, abortion, and gay rights remains to be seen. But

whether they do or not, the status quo affirmed by the 2012 elections

seems likely to persist for four more years. Given a Democratic presi-

dent, the Republican House majority looks safe in the 2014 midtermelections (barring some incredible new manifestation of political mal-

practice). And once again, the Democrats will be defending the large

majority of Senate seats up in 2014, giving Republicans still another

chance to make Senate gains. Events in the real world may force changes

that will surprise us, but there is little in the internal dynamics of the

current political situation to make the next four years much different

from the past four.

A SECOND ERA OF INDECIS ION

I wrote above that the elections of 200410 had produced a period of

almost unprecedented electoral instability. The reason for the modifier

almost was the even more unstable period of 188694, a period embed-

ded in what political historians refer to as the era of indecision, which

extended from the 1874 election that ended the Civil War Republicanmajority, to the 1896 election, when the McKinley Republicans ended the

long standoff and began an extended period of Republican control that

lasted until 1912.


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The nineteenth-century era of indecision has also been called the Gild-

ed Age. It was a time when robber barons built great fortunes, legitimate

and otherwise. Great disparities in wealth opened up between the owners

and investors in the new industrial economy and those who labored intheir enterprises. Today, economic inequality is back atop the political

agenda for the first time since the New Deal.

Independents are a heterogeneous lot.

Social and economic changes in such times create new social and eco-

nomic problems. They disrupt old coalitions and suggest new possibilitiesto ambitious political entrepreneurs. When changes are major, rapid, and

cumulative, as they were before and now are again, their effect

hoover digest, 2013, no. 3, summer

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