How to Shrink the Economy: Follow Hillary's 'growth' prescription

Hillary Clinton is a reflection. Whatever the left wing of the Democratic party embraces, she reflects. Not in toto, however. That would locate her too far to the left and jeopardize her quest for the presidency. She’s a partial reflection.

Yet her sympathies are clear. And that’s the point. Her goal is no enemies on the left. To achieve this, she’s adopted two of the left’s most dubious new ideas. One is forcing employers to increase their employees’ wages. The other is operating as if tax rates don’t matter.

Like Bernie Sanders, the Vermont socialist who is the Democratic party’s embodiment of left-wing values, Clinton is no champion of free markets—and never was. Coercing businesses into hiking wages is the antithesis of the free market approach identified with presidents such as Ronald Reagan and John F. Kennedy.

They slashed individual income tax rates. The result: strong economic growth that boosted productivity and its by-product, wage increases. Clinton endorses growth, but unconvincingly. In a July speech she proposed to raise tax rates on capital gains, claiming it would lead to strong growth and help the middle class. Sorry, but tax increases are far more likely to impede growth than spur it.

Government coercion will help some—at the expense of others. On this Clinton is just short of all-in with the Sanders left. In her speech, she endorsed a minimum wage of $15 an hour, with a hedge. For now it would apply only to fast-food workers. For others, a $10.10 hourly wage would be a “good starting place,” according to Clinton.

There was more. “You may have heard that I am a fan of Chipotle,” she said, “and it’s not just because of their burrito bowl.” She praised the restaurant for providing paid vacations and sick leave, plus tuition reimbursements, for its part-time workers. Paid leaves have the effect of replacing lost wages. 

But there are economic downsides. A higher minimum wage causes employers to hire fewer workers than they would at a lower wage. Higher fringe benefits are costly to employers. “It makes it more expensive to hire workers,” says Steve Moore of the Heritage Foundation. Those with more than 50 employees are already forced under Obamacare to provide health insurance. Like Sanders, Clinton would pile on new costs of doing business.

In many cases, businesses have alternatives to paying for all this. They can automate, as banks and restaurants have and gas stations did long ago. Companies can hire part-time staff or contract employees to whom they are not obligated to pay benefits, health insurance, or pensions. Clinton would, in effect, incentivize alternatives. 

Surely Clinton is aware of this. The phenomenon of reduced payrolls is all around her. She may not buy airline tickets online rather than from a ticket agent—she campaigns by private plane—but millions of “everyday” Americans do.

Clinton is also aware of the powerful economic impact a tax cut can have. When Bill Clinton was president, he reached a deal in 1997 with congressional Republicans to cut the rate on capital gains, the money earned from investments, from 28 percent to 20 percent. Gains doubled and tax revenues grew 50 percent between 1996 and 2001. And the federal budget was balanced twice.

Hillary Clinton was first lady when this occurred. It wasn’t a secret. Yet she’s now joined what has become “a religion” with leftist Democrats, Moore says, the belief that tax rates don’t matter. In other words, rates can be raised through the roof without slowing growth or reducing tax revenues.

So from Clinton we get a plan to double the capital gains rate in the first two years of an investment, then gradually decrease it to its current 20 percent over the next four years. This would come on top of the additional 2.3 percent rate already imposed to fund Obamacare. Clinton insists her scheme would encourage investors to make long-term investments and discourage them from bailing out too soon.

Is Clinton serious about this? Or is she merely trying to appease her party’s left wing by proposing higher tax rates on Wall Street and wealthy investors? Sanders, her chief rival for the 2016 Democratic presidential nomination, is hard to beat. He’s declared himself comfortable with a top income tax rate of 70 percent (currently 39.6 percent). And he would lift the cap on income subject to the Social Security tax.

Given her strategy, Clinton isn’t required to match Sanders tax hike for tax hike. She only has to somewhat reflect him. And for campaign purposes, she can get away with a proposal that has practically no chance of approval by Congress, ever.

My guess is Clinton will have difficulty explaining why her proposal is pertinent. Today’s slow economic growth isn’t the result of short-term investment. It’s caused primarily by a shortage of investment, period. Her complicated capital gains tax plan would probably reduce investment even further.

Perhaps Clinton has lost touch with what works and what doesn’t. “Don’t let anybody .??.??. tell you that, you know, it’s corporations and businesses that create jobs. You know, that old theory, trickle-down economics. That has been tried. That has failed.” She’s wrong. The supply-side tax cuts of Kennedy in the 1960s and Reagan in the 1980s supercharged the economy in their eras. Tax hikes never have.

The sad message of Clinton’s surge to the left is that it signals the death of the “new” Democrats who joined Republicans to pass tax reform in 1986, cut the top income tax rate to 28 percent, and accelerate economic growth. Tax reform was approved in the Senate 97-3.

“Where are the Bill Bradleys and Dick Gephardts today?” Moore asks. “A Democrat who voted for a 28 percent top tax rate today would be run out of the party.” Indeed, Sen. Bill Bradley and Rep. Dick Gephardt, early Democratic supporters of tax reform, are long gone.

Not only is Hillary Clinton still here, but she has created the strong impression that economics is not her strong suit. 

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Fred Barnes is Executive Editor at the Weekly Standard.