Thursday, August 17, 2017

Democrats Need to Learn to Love Business More

by Roy C. Smith  

November 2016 was disastrous for Democratic Party office holders nationwide. Not only was the presidency lost to a person most democrats thought was horribly unqualified, so was control of both house of Congress.  And, according to the National Council of State Legislatures, over the past decade Republicans have gained control of 68% of state legislatures, the highest proportion ever. Some polls suggest that only 25% of voters identify themselves as “liberals” and two-thirds think “big government” is the main threat to the future.

This has occurred despite evidence that wage rates had been stagnant for years, US levels of income inequality have reached peak levels for modern times, and several years of blaming Wall Street and big business for the sufferings of the American “middle class.”  

Rescuing the middle class from all this was a strategy Barack Obama devised. But what the middle class was, was unclear. According the Urban Institute, the middle class represented 78% of the US population in 2016, of which the “upper middle class” was 29% (up from 13% in 1979), and the “lower middle class” was 17% of the population (down from 24% in 1979). “Working Class” Americans that account for approximately a third of the population, according to some sociologists, are sometimes defined as those without college degrees who are part of the lower and middle sectors of the middle class.

Democratic Party supporters over the years have come from the working class, minorities, women and an assortment of intellectuals and entertainers. It has relied heavily on support from labor unions, though union membership dropped to 11.3% of the workforce in 2013, down from 20.1% in 1983. The percentage of union members in the private sector was only 6.7% of the workforce, while those in the public sector represented 35.3%.

In 2016 the Democratic Party, represented by its centrist standard bearer Hillary Clinton, was splintered by assaults from two different directions: socialist Bernie Sanders, who promised a more radical platform, and by Donald Trump, who appealed to some deep-seated concerns of working class people angry with the way things had turned out for them.

The thumping Democrats took at the polls has called for a rethink of what the party considers to be its basic principles. Democratic Party strategists Mark Penn and Andrew Stein recently published an OpEd in The New York Times (“Back to the Center, Democrats”) calling for a shift to the center, but others have insisted that it move further to the left instead. Senator Elizabeth Warren, a likely candidate for the Democratic nomination for president in 2020, said in a recent speech, “Liberals (i.e., the far left) are not a ‘wing’ of today’s Democratic Party, we are its heart and soul.” She went on to indict a “rigged system,” that imposed basic inequities on women, African-Americans, undocumented immigrants, and LBGTs.   

The election revealed that many middle class Americans feel that both Republicans and Democrats have done a poor job running the country over the past two eight-year administrations. During that time, economic growth has averaged just 2% per year (as compared to 3.5% for the prior 50-years), despite government stimulus plans and steady increases in public entitlements (health care and social security now account for 60% of the federal budget) that have raised the federal debt level to 106% of GDP, the highest since WWII.

The dilemma for Democrats is that Keynesian policies don’t work well when unemployment is low (4.3%) and the debt level is at its limit, and to decrease income inequality it would have to increase entitlements, and/or raise taxes on the upper middle class and the affluent, something Barack Obama was unable to do.

Further, many in the middle class may not be suffering as much as advertised. For example, most of the country’s $89 trillion of “household net worth” reported by the Federal Reserve in 2016 is owned by middle class Americans.  This is the sum of families’ savings, pensions, real estate and other investments at market values, less mortgages and other debts, after taxes, tuitions and other essential payouts. Household net worth has grown by a third since 2006, despite the financial crisis and recession, indicating that average American families have not been missing out on prosperity improvements over the past decade, and may indeed be more concerned by higher taxes, more entitlements and increased federal debt.

So, perhaps not all of the 250 million Americans classified as middle class want to be rescued by policies that might hurt them elsewhere. Most of America’s 5.5 million small businesses are owned and operated by middle class people wanting to preserve and expand what they have worked hard to create.

American has long had a love affair with its small business community that produces 46% of US GDP and much of its growth. But the love affair has not extended to larger enterprises, even though about 50% of all private sector employees work for the 12,000 or so “large enterprises” that are publicly owned (of which only about 5,000 are traded on the NYSE or NASDAQ). This is partly because of innate distrust of Big Business in America, but also because of criticism, litigation and general disparagement of it by Democrats during the Obama years. Large enterprises, however, are essential to US economic growth, make most of the investment in research that provides the technology innovations that sustain the economy, and pay most of the taxes of the private sector.  Large and small corporations together employ 85% of working Americans. It makes little sense to turn them into enemies.

When it is explained to them, most Americans seem ready to believe that the governing principal of the American enterprise system, the world’s most successful for 200 years, has been free-market capitalism. But this particular form of capitalism operates within an active and robust democracy, which through its legislatures and courts imposes rules and regulations that limit the role and influence of corporations. And, the system has evolved significantly over the years to institutionalize rights of workers, women, and minorities and to check abuses of size and power.  Most Americans know how important the free enterprise system is to the country’s future prosperity and don’t want to risk damaging it.

Democrats today seem convinced that Donald Trump’s personal behavior and inexperience will cause him to stumble, and they will slide back into power. But there is no evidence as yet that anyone else, Democrat or Republican, has a level of support equal to Mr. Trump’s 40% approval rating, however low that may seem to some.  If the only thing going for Democrats is that they are not Trump, then they may be much weaker than they think. Voters have kept them from office for a reason – they don’t have confidence in their ability to govern, especially if the party moves further left.

Democrats need to pay attention to Messrs. Penn and Stein and move the other way, back to the center. At a recent conference for Democrat bigwigs in Aspen, Jon Cowan, president of Third Way, a research group, echoed their sentiments and added “income inequality is severe,” and some parts of the system are unfair, but these are not central concerns to most Americans and many of the approaches to addressing them interfere with their own aspirations. There was plenty of pushback to the idea, of course, but no consensus emerged as to how the party’s message or policies ought to change.

When asked what the main concern of voters was in 1990, Bill Clinton said “it’s the economy, stupid,” emphasizing how obvious this was. The economy is in worse shape today, and it is still the main concern, but there are fewer government resources available to try to fix it.

Rather than attempt big programs to address unfairness in the system, which Congress is unlikely to approve, Democrats should realize that being more business-friendly, less litigious and regulatory-minded might enable the free enterprise system to catch its breath and get back to its job of improving the growth rate.  That is something voters did like in the Clinton years.


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