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The Struggling Regions Newsletter

Issue 04 - December 10, 2019

“Justice demands that the interests of the working classes be carefully watched over by the administration, so that they who contribute so largely to the community may themselves share in the benefits which they create.”

— Pope Leo XIII, Rerum Novarum (On Capital and Labor), 1891.


Last month, Senator Marco Rubio (R-FL) delivered a speech at Catholic University of America that outlined his vision of “common good capitalism,” sparking a debate among conservatives that  still rages on. The fact that this relatively mild speech proved to be so provocative is itself rather noteworthy.

Drawing on Catholic social doctrine, particularly Pope Leo’s Rerum Novarum encyclical, Rubio argued that a healthy economic system should work for everyone, finding a cooperative balance between the interests of capital and labor. “Put another way,” says Rubio, “businesses have a right to make a profit, but they also have an obligation to reinvest those profits productively for the benefit of the workers and the greater society. Similarly, workers have a right to share in the benefits of the profits they helped create.”

One doesn’t have to be Catholic or even Christian to believe capitalism should serve the common good. The idea of the nation state as a “commonwealth” — literally, the wealth we hold in common — has its genealogy in Christianity, but can also be understood in purely secular terms. Indeed, any time  economists refer to abstract “social welfare” they are drawing from the very same cultural wellspring, albeit with a different vocabulary.

For conservatives like Kevin Williamson, on the other hand, capitalism is nothing more or less than the enforcement of contracts and private property under a minimalist government. Writing in National Review, Williamson even argues that Rubio’s speech reflects “fascist economic thinking,” and dubs the idea of reforming capitalism in line with the “common good” (in scare quotes) as a “quasi-metaphysical project.”

The paradox, of course, is that enforcing a system of private property is itself a quasi-metaphysical project rooted in a conception of the common good. None other than John Locke believed all land was owned in common in the state of nature. It is only by working to improve upon newly discovered land that it becomes private property, and only if its enclosure does not impede excessively on others. Does that make Locke a RINO?

Locke further argued that one forfeits property if one fails to cultivate it productively, or lets it fall into a state of disrepair. Self-ownership may be intrinsic, but our institutions of private property are fundamentally contingent in nature; part of a social contract that aligns private interest with public benefit. Rubio is therefore perfectly consistent with the classical liberal tradition when he criticizes over-financialization, i.e. the pursuit of financial rents at the expense of tangible investments. In contrast, the Randian libertarian for whom private power and enrichment is prior to the common good is committed to an anachronism.

Liberalism as Durable Political Settlement

Indeed, far from “fascist economic thinking,” the ideas contained in Rubio’s speech are most closely associated with the German “social market economy” that emerged after fascism’s defeat. The architects of Germany’s post-war economic reform (the Ordoliberals) were deeply influenced by Catholic social doctrine, as well, including the Rerum Novarum. The model they came up with was still a rules-based market order, but one that gave labor a voice and ensured private investment supported a flourishing middle class. This is reflected in Germany’s cooperative model of trade unionism, and its integration with worker-centric social insurance, banking, and vocational programs.

The German model is not unique in this respect. As the historian Michael Lind argues in his forthcoming book, The New Class War, the wide varieties of capitalism that emerged in the 20th century broadly reflect settlements struck between powerful classes and interest groups within each country. The Danish system of “flexicurity,” for example, combines flexible labor markets with robust income and re-employment support programs, and quite literally emerged from a mutually beneficial bargain between organized labor and capital.

Political liberalism emerges not from some idealized social contract, but from the very real and durable political settlements required to maintain civic harmony. This makes liberalism less like a comprehensive ideology and more like something which lives on the boundary of conflicting worldviews, navigating what Acemoglu and Robinson have dubbed the “narrow corridor” between lawlessness and tyranny, reaction and revolution. Capitalism and liberal democracy thus aren’t secured by some dogmatic axiom or at some constitutional moment, but must be renewed perennially as shifting demographics, identities, technology, and trade cause past settlements to turn brittle.

The rise of far-left and far-right populist movements across Western democracies suggests our 20th century political settlements have finally begun to break down. Rubio’s speech is just one articulation — a first draft — of what a new settlement could look like, drawing on lessons from history and his faith. And while “common good capitalism” may sound radical to the gatekeepers of American conservatism, as the Red Queen said to Alice, it sometimes takes all the running you can do just to keep in place.

Rich State, Poor State

Last week, the Struggling Regions Initiative released a compelling new paper by our senior fellow, Joshua McCabe: Rich State, Poor State: the Case for Reforming Federal Grants. The report is a historically rich primer on America’s broken system of fiscal federalism, combined with a set of three concrete reform proposals to ensure federal funding for education, Medicaid, and social assistance is equitable for states with the greatest fiscal need. Here’s a taste:

One of the enduring myths of American political discourse is that many states in struggling regions have mistakenly pursued a “low-tax, low-service” growth strategy while thriving regions have wisely pursued a “high-tax, high-service” strategy. Massachusetts, for example, spends twice as much per pupil on education as Mississippi. As a consequence, Mississippi remains mired in poverty while Massachusetts prospers. The problem is that this story gets it backwards. Massachusetts can afford to spend more precisely because it is prosperous. Mississippi is limited precisely because it is poor. 

The two states look very similar in terms of top marginal income tax rates (5 percent in Mississippi; 5.05 percent in Massachusetts) and sales tax rates (7 percent in Mississippi; 6.25 percent in Massachusetts). In terms of fiscal effort, Mississippi actually dedicates a larger proportion of its total taxable resources to education in particular (3.19 percent in Mississippi; 2.82 percent in Massachusetts) and public spending in general (16.7 percent in Mississippi; 12.2 percent in Massachusetts). In reality, being poor means Mississippi generates less revenue with more effort than wealthy Massachusetts.

As McCabe points out, the U.S. is the only rich, federalist democracy to lack a dedicated “equalization” grant for poorer regions. Instead, the federal government provides conditional grants to states that could in theory correct for these fiscal disparities. Yet existing federal grants are on the whole regressive, providing windfalls of federal aid to rich states and squeezing already budget-strapped poor states.

This has obvious implications for horizontal equity, but also for economic development. Indeed, the per capita income of the poorest U.S. states stopped converging to rich states decades ago. Without fiscal equalization, America essentially has a low-grade version of the Eurozone crisis: Rich states accumulate surpluses while the poor periphery suffers from depressed demand, elevated unemployment, and the reactionary politics one expects under permanent austerity.

In other news, House Democrats are voting to repeal the state and local deduction cap...

— Samuel Hammond
Director Poverty and Welfare Policy
Niskanen Center

Assorted Links

Pete Buttigeig on the surprising success of Somaliland.

“How to spread tech innovation across America.”

The legacy of slavery on black incarceration rates.

Michael Bennet’s war on poverty.

Tight labor market alert: Workers “ghosting” employers during interviews.

The bottleneck in U.S. higher education.
Our Latest Research
Jonathan Gruber and Simon Johnson make the case for research hubs located away from the coast — the third in a series of On Common Ground essays, a partnership between the Niskanen Center and the Washington Post.
How did affluent neighborhoods in Detroit and LA become Opportunity Zones? Robert Orr digs into the Treasury Department revision that made it possible.
Support for struggling communities can transcend our racial divide. As Anuska Jain and Samuel Hammond argue in the Bulwark, "Deindustrialization Isn’t (Just) a White Working-Class Problem."
What comes after capitalism? Samuel Hammond reviews the new book from inequality researcher Branko Milanovic, Capitalism, Alone.

Copyright © 2019 Niskanen Center, All rights reserved.

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