Parties and piesDemocrats should be more comfortable discussing economic growth

STEVE BANNON is right. This week, in a New York Times Magazine piece otherwise dedicated to the President’s dance with Congress, he offered this: 

I think the Democrats are fundamentally afflicted with the inability to discuss and have an adult conversation about economics and jobs, because they’re too consumed by identity politics. And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government—which just doesn’t have any depth to it. They’re not living in the real world.

Lose the bit about identity politics, and you have a clear summation of American macroeconomics. Republicans are lost in theory, unburdened by empirical evidence. Democrats don’t seem to have much of a theory at all. And as Republicans dust themselves off and turn to rewriting America’s tax code, Democrats could use a working theory of economic growth. Judging from last year’s campaign, they aren’t ready to commit to one. Should they develop an interest, however, there are several to hand.

Grossly simplified, there are two ways politicians talk to voters about economics. Think of a pie. Republicans promise economic growth, to make the pie larger: more pie for everyone. Hence the now ritual prefix "pro-growth", as in the principles of "Pro-growth Tax Reform" from the Republican majority on the House Committee on the Budget, or "7 Reasons to Love Our Pro-Growth Agenda," a bigger-pie Valentine from the House Committee on Ways and Means. (You shouldn’t have!) But even though they never miss a chance to talk about it, there’s nothing inherently Republican about economic growth.  

In the classic Robert Solow model from the 1950s that economists still use to describe growth, output—what we want more of—is a function of capital (things like bridges, and machines in factories), the supply of people to do work, and technology that makes that work more efficient. More capital, more people or better technology can all lead to more growth.

Republicans focus on capital. Reduce taxes on income from investments, they argue, and investors will use their increased take-home profits to buy more capital. Reduce corporate taxes and make it easier to quickly deduct capital expenses, and businesses will buy more machines. Last year the Trump campaign preferred the analysis of its economic plans that came from the Tax Foundation, a conservative think-tank. Most of the economic growth in that plan, the foundation found, came from making it cheaper to buy more capital. Or, as the Republicans on the Ways and Means Committee put it in their pro-growth valentine, "The Beatles might have been hard at work but millions of Americans unfortunately aren’t. Tax reform boosts investment, which helps create jobs. And that’ll make you feel alright."

Back to the pie. Unlike Republicans, Democrats promise to split the pie up fairly. Expanding access to affordable healthcare by increasing taxes on capital gains, for example, fits perfectly within this promise. Hillary Clinton promised a "fair tax system" that would ensure that "the wealthy, Wall Street, and corporations pay their fair share in taxes". Bernie Sanders built his entire campaign on taking pie away from bankers.  

Mrs Clinton offered hints on growth. Politicians normally present increases in the minimum wage as better pie-slicing. But late in the campaign, Mrs Clinton started talking about it as a way to give consumers more to spend, and to therefore encourage businesses to invest more to serve them. More pie for everyone! But few Democrats joined her, and the party’s platform presented a wage hike as a matter of economic justice. Mr Sanders, for his part, presented spending on roads and bridges as a temporary jobs measure. But there’s a growth argument for infrastructure, too. Roads and bridges, once built, are capital. More capital, bigger pie. Lawrence Summers makes this argument, but he’s an economist rather than a politician.

All of these arguments still focuse on one variable in the Solow equation: capital. Technology is problematic for any politician; when it makes workers more efficient, some become redundant. But that still leaves Democrats with one variable to spur economic growth: the supply of labour. Or, rather: people. Democrats support paid parental leave, and toy with the idea of providing greater support for childcare. This is good for parents (more pie for me!). But it might also keep moms and dads in the workforce. More people, more growth, more pie for everyone. Education, too, is a way of expanding the labour force in specific sectors. Pay to train an HVAC installer, and he makes more money (more pie for him). But he can also help build more houses (more pie for everyone!).

The point is not that every American who cares about economic growth should vote for Democrats. Rather, it’s that Republicans don’t have a monopoly on policies that make more pie. They just have a monopoly on talking about them.