How The Republicans Can Get Their Groove Back
Luigi Zingales has a smart piece on City Journal, echoing something I’ve long thought — that the Republicans aren’t the party of small government; they just say they are. He suggests the solution to the Republican party’s malaise is to turn back from being pro-business to being pro-market. I’d add that they need to stop pandering to the religious nutters, which alienates fiscal conservative/libertarians like me. Zingales writes:
In part, too, Reagan’s platform lost its appeal because the Republican Party frequently betrayed it. How can Republicans effectively campaign against big government when the size of government increased by 33 percent during President George W. Bush’s first term, the largest increase in federal spending since Lyndon B. Johnson? How can Republicans portray themselves as free-market paladins when Bush’s last secretary of the Treasury, Henry Paulson, orchestrated the most massive state intervention in a Western economy since FranÃ§ois Mitterrand’s nationalization of the French banking system? The party has much to do before it regains credibility on this score.
…It has to move from a pro-business strategy that defends the interests of existing companies to a pro-market strategy that fosters open competition and freedom of entry. While the two agendas sometimes coincide–as in the case of protecting property rights–they are often at odds. Established firms are threatened by competition and frequently use their political muscle to restrict new entries into their industry, strengthening their positions but putting their customers at a disadvantage.
A pro-market strategy aims to encourage the best conditions for doing business, for everyone. Large banks, for instance, benefit from trading derivatives (such as credit default swaps) over the counter, rather than in an organized exchange: they can charge wider spreads that way, and they can afford to post less collateral by using their credit ratings. For this reason, they oppose moving such trades to organized exchanges, where transactions would be conducted with greater transparency, liquidity, and collateralization–and so with greater financial stability. This is where a pro-market party needs the courage to take on the financial industry on behalf of everyone else.
A pro-market strategy rejects subsidies not only because they’re a waste of taxpayers’ money but also because they prop up inefficient firms, delaying the entry of new and more efficient competitors. For every “zombie” firm that survives because of government assistance, several innovative start-ups don’t get the chance to be born. Subsidies, then, hurt taxpayers twice. A genuinely pro-market party would have resisted more vigorously the Wall Street bailouts, in line with popular sentiment.
And a pro-market approach holds companies financially accountable for their mistakes–an essential policy if free markets are to produce sound decisions.