With the U.S. elections approaching and the world market still recovering from the 2008 financial crisis, the economy has rarely been such an important factor in the political arena. In their second debate, Governer Mitt Romney and President Barack Obama mainly focused on their two different approaches to solve this situation. Obama is mainly proposing to increase government spending, while Romney wants to cut taxes in order to improve the prospects of small businesses. Both these solutions reflects their parties historical beliefs: big government and aid to the low-income sectors of society for the Democrats and small government and greater liberty to entrepreneurs for the Republicans.
But which one of these systems has historically worked better? It’s impossible to answer this question unless we clearly define what these policies are trying to achieve. At first sight, lowering taxes and regulation on firms does appear like the perfect solution for growing the economy. In the latter part of the nineteenth century, people like John D. Rockefeller, James Duke and Andrew Carnegie took full advantage of the almost complete absence of limitations on the entrepreneurial freedom, including low taxes and no antitrust laws. They initiated a process which transformed a young, relatively powerless America into the global superpower it is today.
What we have seen in more recent years, however, is a different result of these policies. Bush’s cuts on taxes and the Federal Reserve’s efforts to keep the interest rate extremely low eventually caused the housing bubble at the base of the financial crisis which we are still feeling the consequences of today. Therefore we might be seduced by the Democrats’ alternative: high government spending and progressive taxes to reduce inequality and therefore benefit society as a whole. Indeed, these policies do sometimes work (see Norway, Sweden and Finland) and do sometimes fail miserably (see Italy and Greece). Government spending is ultimately predicated on bureaucrats. If they are efficient and honest, spending just might be effective.
What makes both these approaches potentially beneficial and disastrous is the context. Political parties should stop defending their positions based on mere ideologies. History has shown us that neither of the two approaches is always successful. Sticking with the same policies and refusing to try something new will help nobody, since neither one of the two strategies is always effective. There are times in which lowering taxes and granting more freedom to entrepreneurs helps to grow the economy and there are other times in which a strong, centralized government can lead the country to economic prosperity.
So what should we do now? One option is what The Economist calls “true progressivism,” which aims to reduce inequality and, at the same time, increase economic growth. This can be achieved through efficient antitrust laws, government investment in public education and fewer teachers’ unions. The incentives to create businesses and jobs will be left untouched, while more educated students from all walks of life will have the opportunity to enter the work force.
The problem, however, is that neither the Democrats nor the Republicans will undertake these reforms. Punishing the rich is an appealing argument for the Democrats and cutting the size of government is appealing for the Republicans. Until they will both realize the necessity of putting the welfare of the country before their desires for votes, it will take a long time before we see long-term and sustainable economic progress.
Davide Pini is a sophomore Economics and International Studies double major from Parma, Italy.