Tuesday, October 17, 2006

Why Democrats Should Become More Libertarian

Michael Strong, Copyright FLOW, 2006

The current issue of Cato Unbound is devoted to the issue “Should Libertarians Vote Democrat?” The issue includes essays by well-known Democrats articulating the ways in which they see a possible rapprochement. Certainly many libertarians are angry and disappointed with Bush Republicans; one described him as the worst president in the past fifty years. Others are actively encouraging fellow libertarians to vote Democratic. Given the fact that Democrats are increasingly marginalized in elections, it would behoove them to consider additional constituencies, especially one that is angry with Republicans and therefore ripe for the picking.

Although the number of people who vote for the Libertarian Party is small, the number of people who are culturally liberal but fiscally conservative is large. Pew Research comes up with 9% of the population as libertarian based on three fiscal questions and three cultural questions. If the Democrats captured this libertarian swing vote by moving in a more consistently libertarian position, they could re-form an electoral majority. A broader interpretation of “libertarian” will give Democrats an even larger advantage.

A Libertarian Democratic Party that was serious about small government and deregulation, now that the Republicans have shown that they are not, could, if credible in their promises, appeal to Wall Street, business, entrepreneurs, and the middle class. At present, Republicans are winning by pandering to the religious right. What if the intellectual leaders of the Democratic Party shifted it in the libertarian direction so that the libertarian-inclined, who have hitherto either voted Republican, libertarian, Reform Party, or not at all, became inspired to support far more libertarian Democrats?

The Democratic Strategist recently printed an essay titled “Message of Misery,” on how the Democrat’s litany of economic catastrophe is not resonating with voters:

$23,700. That is the household income level at which a white person became more likely to vote for a Republican over a Democrat in congressional races in 2004.

The authors of this article point out that the reason that Democrats have been losing is not because Democrats have been framing the issues poorly (Lakoff), nor is it because voters have been deceived by Republicans into voting against their economic interests (the “What’s the Matter with Kansas?” thesis). Their research shows that voters simply don’t buy the anti-capitalist doom and gloom rhetoric put out by Democrats. Their research shows that 80% of Americans think it is “still possible to start out poor in this country, work hard, and become rich,” and when asked to identify the biggest threat to America’s future 61% chose “big government” compared to 27% who chose “big business.” That 61% is the foundation of a libertarian majority.

Bright young techies are increasingly libertarian; Wired Magazine has libertarian roots and many old Leftists complain about how libertarian cyberspace is. Last year the Wall Street Journal ran an editorial on tech entrepreneurs that described them as embarrassed by the religiosity of the Republicans and by the teachers unions and trial lawyers on the Democratic side. Libertarian Virginia Postrel’s excellent book on the need for a dynamic society, The Future and Its Enemies, was endorsed by Democratic Silicon Valley gurus Steward Brand and Esther Dyson.

Wall Street, and business interests more broadly, are another constituency the Democrats should consider capturing: A recent study by the National Bureau of Economic Research (NBER) analyzed the expected outcome of the Bush – Gore election during the 24 hours of dramatic uncertainty as predicted by the Iowa Electronic Markets and compared the expected outcome with stock market fluctuations during that period. They found that an anticipated Republican victory raised equity values by about 2%. Based on more circumstantial evidence they found historical trends supporting the notion that Republican victories tended to raise equity values by about 2% going back to 1880.

It has long been a stereotype that Wall Street votes Republican. If equity values are 2% higher under Republicans than under Democrats, there is a very powerful reason for this preference. The New York Stock Exchange alone has a market capitalization of about $20 trillion, with NASDAQ adding another $5 trillion out of a global market capitalization of about $45 trillion. Presumably Wall Street takes seriously the anti-capitalist rhetoric and past behavior of the Democratic Party, which has traditionally positioned itself as more eager to tax, spend, and regulate. From a Wall Street perspective, the election of a Democratic president reduces equity market values by about $500 billion dollars - about what we spend on all of K-12 education each year simply vanishes as soon as a Democrat is elected through the anticipated destruction of opportunity.

Fifteen years ago the DLC revived the Democratic Party by moving it towards a more market-friendly direction. Clinton and Gore are policy wonks who understand that markets are fundamentally positive: Clinton, the only Democratic President to serve two terms since FDR, has described himself as a libertarian and has praised Milton Friedman-Prize Award Winner Hernando De Soto as the leader of “the most promising poverty alleviation initiative in the world.” He pushed through NAFTA and welfare reform, both more libertarian initiatives than anything we’ve seen from Bush. While Gore is not Clinton, he recently came out in favor of exchanging payroll taxes for carbon taxes, a move that frankly acknowledges the negative economic consequences of payroll taxes while allowing Gore to remain true to his core issue. Gore is proving that it is possible to be a serious environmentalist and yet take markets seriously at the same time.

Smart policy wonks like Clinton and Gore have found ways in the past to reconcile markets and their identities as Democrats. A new age of libertarian Democrats could continue in this direction and go much further and faster, reviving the Reagan and Gingrich revolutions to reduce the role of government under a Democratic banner that simultaneously ensured that the poor and the environment were cared for.

With regard to the poor, Milton Friedman’s proposal of a Negative Income Tax was the ultimate inspiration for the Earned Income Tax Credit, one of the most effective government-initiated poverty-alleviation moves in the past thirty years. This could be expanded as other government programs were eliminated or Libertarian Democrats could consider Charles Murray’s recent proposal to give every American $10,000 per year and completely dismantle the welfare state. With respect to the environment, Libertarian Democrats could come out in full favor of property rights or environmental trust solutions (as advocated by Peter Barnes) to environmental issues while showing a commitment to repeal counterproductive environmental regulation. The libertarian and economics literatures are filled with thousands of market-friendly policy proposals that show the path to a dramatically smaller government that would actually be more effective at reducing poverty and improving the environment than is the welfare and regulatory state. Partisan bigotry, especially among academics, has prevented or delayed the adoption of many of these prudent and effective measures.

The greatest obstacle to movement in this direction comes from the Left wing of the Democratic Party that remains essentially anti-capitalist. Much of academia and the leaders of many advocacy organizations retain attitudes that are quasi-Marxist in their passion for equality, as they understand it, and their hatred of business, capitalism, and America. Others, perhaps more pro-business and pro-America, nonetheless regard the anti-market policies of FDR and LBJ as successful policies.

The last thirty years have seen the Chicago economics free market perspective largely vindicated in the world of academic economics. About half of economics Nobel laureates have had some association with the University of Chicago. More importantly, many “free market” ideas that were once considered marginal have become mainstream: monetary policy and tariffs did contribute to the Great Depression, whereas inequality of wealth did not; Rent controls reduce the quantity and quality of housing; Increases in economic freedom in the developing world result in increases in economic growth; tradable emission permits are an effective means of reducing pollution. These and thousands of other policy issues have been more or less decided in favor of “free market” economists in the past thirty years. People respond to incentives.

There will always be special interests that oppose free market policies, and there will always be populist demagogues that rally popular support against free market policies. But an increasingly large range of leftist policy notions that were once intellectually credible and morally respectable have fallen from grace in the face of facts. The free market economists have won battle after battle in the past thirty years not because they were funded by right-wing think tanks (though sometimes they were), but because the empirical record has turned out overwhelmingly to be consistent with their predictions.

Because the pain of repudiating FDR and the legacy of the 60s is too great, I don’t anticipate a rapid change of mind among the left-liberal intelligentsia. I’ve experienced this pain myself; when I discovered that the left-liberal establishment was largely wrong on economic issues I became depressed for two years. Everything that I had believed was false: The reviled Milton Friedman is actually a better friend of the poor than is the legendary J. K. Galbraith? Well, yes, he is. Had Friedman’s advice on economic development been followed in 1960 rather than Galbraith’s, billions of human beings would be better off today. Economic freedom, as advocated by Friedman for decades, is positively correlated with GNP per capita. Economic liberalization, as advocated by Friedman for decades, has resulted in dramatic increases in wealth and standards of living in Chile, China, India, Ireland, Estonia, and elsewhere.

A new consensus on globalization is forming in which it is increasingly acknowledged that poor people in developing nations benefit more from job creation than from hand-outs. Oxfam, the global NGO, now supports reduced trade barriers as a way of alleviating poverty. Corporate Responsibility Newswire has acknowledged that new factories built by American companies in Mexico improves the standard of living of Mexicans. The moral high ground is increasingly with globalization rather than against it; even Joseph Stiglitz, famous as the Nobel economics laureate who wrote a book skeptical of globalization, is now clearly in favor of globalization as long as the developing nations reduce their trade barriers first.

While there are continuing disputes in economics and economic development, the scope of the discussion has moved dramatically towards the direction sketched by Friedman, Hayek, and others fifty years ago. While there may well be some elements of the left-liberal economic perspective that survive into the future, by and large the bulk of that perspective, the premises on which the liberalism of the 30s and 60s was built, continues to look weaker and weaker.

For decades now, left-liberals have followed a strategy of denial, reluctantly conceding point after point once the evidence against them becomes overwhelming, while still dogmatically insisting on the rest of their program in those areas where they have not yet been defeated by the evidence. The problem with this strategy is it positions them in a posture of permanent retreat in the face of the facts.

Moreover, there is reason to believe that more retreat in the face of more evidence is still to come, especially from the results of prediction markets. Prediction markets are increasingly being used in businesses to forecast outcomes, and properly designed markets are proving to be remarkably accurate at foreseeing the future, at least compared to the opinions of experts. Prediction markets incentivize accuracy because only the accurate predictions receive financial rewards. By contrast, both academic and public policy debates bias decisions through rhetoric, emotion, status, and popularity rather than empirical validity alone.

It is only a matter of time before prediction markets will be set up to evaluate the prospective outcome of public policy initiatives. At that point, we will be more focused on the actual outcomes of proposed policies and we will receive information about the outcomes of those policy initiatives more quickly than is the case at present. Again, some left-liberal policies may survive the test of real-world outcomes, but I predict that much will not: Will increasing teachers’ salaries increase test scores? Will expanding government health care coverage improve health? Will government job training programs increase the earnings of the poor and unskilled?

As we continue to focus on the real results of policies, rather than academic promises, we will continue to discover that government is rarely an effective agent. Most of us, the 61% who said that “big government” is the greatest threat to our future, already know this. An increasing number of wise, but chastened, Democrats understand this as well. Libertarian Jonathan Rauch’s excellent popular account of public choice theory, Government’s End, was endorsed by David Broder, Patrick Moynihan, and Senator Bill Bradley. In the 1960s, bright young idealists aspired to be civil servants; now they aspire to be entrepreneurs. Although people still rally to the cry of “national health insurance,” when it comes down to it no one is inspired by government action anymore. The alternative to a more libertarian Democratic Party is to simply wait for the Democrats to complete their self-destruction and then have it out between the conservatives and the libertarians.

Democrats like to believe that they are intelligent people who care about the poor and about the environment. For most of the past hundred years, they have also believed that free market advocates are people who don’t care poor or the environment and that the smart liberals must use government to create a more just society. But consider: 70% of inner-city African-Americans are for school choice.footnote Opponents of charter schools claimed they would cream away the best students; in fact, charter schools cater disproportionately to poor, minority, and at-risk students, those who are currently being least well-served by our “public” schools. Many urban areas are experiencing black flight from urban public schools; Detroit Public Schools lose about 20,000 students per year to charter schools, and by 2008 a majority of students in Detroit will attend charter schools. Why can’t those who care about the poor and the environment focus on pragmatism rather than an obsolete party identity?

As Gurcharan Das said of Nehru’s policies in India, “We set out to create socialism but instead created statism.” Social entrepreneurs and socially responsible corporations are fulfilling the aspirations of the left without government involvement. The idealism and passion for the good that inspired the Left is valuable. Government was just the wrong means. It is time to admit this openly and move on.

A Democratic Party that authentically appealed to libertarians could be as socially liberal as it pleased; gay marriage, medical marijuana, abortion rights, and other issues are currently supported by many people who are unhappy with the Republican Party but who do not currently consider the left wing of the Democratic Party to be sane when it comes to government and the economy. Libertarians are often among those who are most committed to civil liberties and to the avoidance of war. A sincere and sustained commitment to reducing the size of government, by any party, could bring forth new funding and new voters, and result in a burst of economic growth and dynamism that will benefit all Americans; indeed, it would benefit the entire world.