The next 100 years

Arthur Brooks is the president of the American Enterprise Institute, one of Washington's leading think tanks. His books include Who Really Cares: The Surprising Truth About Compassionate Conservatism (2006) and Gross National Happiness (2008).

Q: Which economic predictions regarding 2010 should we trust? The game is completely open on what's going to happen. We all know that we're in the midst of the most severe recession in the past 50 years, and that economists didn't predict it. If you look back at the summer of 2008, you'll find the Wall Street Journal poll of economists saying we were going to experience in 2009 2.5 percent positive economic growth and 5.5 percent unemployment. It didn't exactly turn out that way, did it? It just means that nobody predicted what was going to happen. That means, of course, we can't predict going forward.

Q: Fair enough, but surely our runaway federal spending will have an impact. There's a possibility, of course, of another dip in the recession, and that would happen because American dollars had become so weak that there's a tipping point and the Chinese and others decide they don't want to be in our currency anymore. How do people buy American dollars? We have debt. The way that we finance it, to a large extent, is that we sell bonds. We're borrowing money from foreigners, but they have to show up to these auctions to buy them, and it's not unrealistic that sometime in the middle of 2010, the Chinese won't show up to buy our bonds. And if there's nobody to show up to buy them, you can't fund runaway spending the way that you did before, and that would create severe macroeconomic problems.

Q: How's our economic reporting? We have lots of things that we're not even reading about in the press anymore. The commercial real estate market, which is five to six quarters behind the residential real estate market, is imploding. It's now more than 30 percent down nationwide in its value. What happens then? It means that a lot of people are not going to renew their leases on offices, and that's going to make a whole lot of corporate landlords go broke. We don't know if that would cause the next wave of the economic crisis.

Something else you don't read about, because it's all esoteric, is a policy called forbearance. We have lots and lots of toxic assets on the balance sheets of banks, and we're pretending they're not toxic. We're not making banks value those things that the market rates. If we did, a lot more banks-hundreds more banks-would go broke overnight. Sooner or later we're going to have to value assets that banks have at something like market rates.

The White House is banking on the idea that we're going to get pretty strong economic growth going forward, and we're going to grow our way out of this thing and it's going to be a distant memory within a year. But we just don't know if that's going to be the case.

Q: It's superficial to look at the stock market and say, "It's way up from its dismal lows," because the deeper indices are shouting trouble. Absolutely. Macro-economically we are in extremely precarious state. We could have another bad shock, and probably at best we'll have weak growth. Generally at this point in a recession, which is to say after the recession is technically over, you have 4 and 5 percent annualized economic growth for a couple of quarters later. We don't. We had a program called "Cash for Clunkers." This is the Cash for Clunkers economy. It's astonishing that we're trying to base the evidence of our success on the government buying old cars.

Q: Much of the fall was spent debating healthcare. Some people say that trip wasn't necessary. It's senseless to argue that the current American healthcare system doesn't need reform. It does. It needs reform for one really big reason and one not-so-big reason. The big reason is that a lot of people don't have healthcare coverage, and in an already rich country, that's not good. We can argue about the numbers-how many are illegal immigrants, how many are legal-but millions and millions of people in this country, which is the richest country in the history of the world, don't have basic healthcare. For a lot of people like me that's bad stewardship. So we want to fix that. We need reform.

No. 2 is that healthcare is really expensive and we have double-digit inflation. That's less of a problem because in a rich country we get to decide whether or not we want to bid up the prices of certain goods and services. Cars are a lot more expensive than they used to be, too, because they're much better products than they have been. We have wonderful healthcare in this country, and of course it costs more. Still, the fact that it's so expensive is a problem. So we need reform.

Q: What kind should we have? The current party in power, the current administration, and the current Congress say that we need to throw out the whole system and little by little replace it with much, much more socialized medicine. What they want is a single-payer plan: Everybody has healthcare covered by government, kind of like Canada or the U.K. and a lot of other countries. Americans don't want that not because it sounds really inefficient, although it does, but rather because Americans have their values tied up in the free enterprise system. It does violence to how people see the world and the United States to nationalize one-fifth or one-sixth of the American economy.

Q: So what's a stealthy route to nationalization? OK, you're going to have a government option for everybody who can't buy health insurance. Well, that would start with 5 or 10 million people, and within 10 years it would be 100 million people, and guess what? That's a secret way to get us single-payer socialized medicine in this country; that's just how you do it. Or, nonprofit cooperatives that would have to be subsidized by the government, which would lead to the same route. This is what they want. They want a pretext for basically nationalizing American healthcare and an excuse to redistribute more income in the American economy.

Q: Is the drive to nationalize healthcare a special case or part of a bigger picture? The current administration has two guiding principles, basically. Overseas, what they call diplomacy, which we call appeasement. At home, what they call fairness, which we call redistribution. Redistribution comes about because, for the current administration, the problem is that some people have more and some people have less. That's not a problem for me: I want more equality of opportunity for people to pursue their skills and passions, and individual opportunity will lead naturally to different outcomes.

Q: Once Congress finishes with healthcare, one way or the other, what will be a hot issue during the rest of 2010? Tax reform is coming around. Right now, the maximum tax rate at the margins for Americans is 35 percent. January of 2011 it's going up to 39.6 percent, and we're getting rid of some deductions that will basically make it 41 percent, and we're talking about a surtax for healthcare, about popping the cap off payroll taxes-and we're going to have to deal with the alternative minimum tax at a certain point. The result: People are going to be paying more and more and more. The problem is that the data show that raising taxes on the rich won't raise any revenue because the rich are really good at avoiding taxes-through really clever, devious ruses like working less, starting fewer businesses, creating fewer jobs, and not being entrepreneurs.

When people see that raising taxes cuts off opportunity for them, their kids, and their grandkids, and when we have to pay for the deficit by taxing the middle class, which inevitably will happen, this is going to become a hot, hot issue. It will start emerging in 2010. This is one area where AEI is utterly locked and loaded. We have the data and we're ready to go on this. I can't wait for that fight.

Q: But what about all the people who don't pay federal income taxes? Most Americans think they pay federal income taxes, but 43 percent don't. [They do pay Social Security and Medicare taxes.] This time next year 49 percent of Americans will have no federal income tax liability and it's going up and up and up. When is the tipping point where so few Americans have skin in the game, where so many Americans are takers and so few are makers, that we say, "You know what? This is pretty sweet. I kinda like this system because someone else is paying." That's what one side is counting on actually happening.

Q: Do most Americans, including some who pay no federal income taxes, think that's right? Sixty-six percent of Americans think that everyone should have some skin in the game, that everyone should be subject to some federal income tax liability because we all should be participating in what the government is doing. Nobody should have a free ride; everybody should at least feel it a little bit.

Q: Some conservatives talk of moving from a productivity tax to a consumption-based tax system by scrapping income and capital gains taxes, and replacing them with a national sales tax such as a value-added tax. It's a really smart idea: It's much fairer. It wouldn't penalize productivity. It wouldn't wreck entrepreneurship. It would be more affirming to our values. But there's a joke about politics. It says, for the longest time a value-added tax or a consumption tax has not been politically viable because the left wing realizes that it's really regressive and the right wing realizes that it's a tremendous money-pump on the American people. When it wins, when we're going to get it, is the day that the left wing understands that it's a money pump on the American people and the right wing understands that it's regressive.

Q: So you think this change is coming. We're going to get something like that, but we're not going to scrap the old tax code. We're going to keep having the income tax, we're going to keep having the capital gains tax, we're going to keep taxing productivity and investment, but on top of that we're going to keep using the money pump and have a value-added tax, which basically treats the American people like a big ATM machine. You know, just ratchet it up a little bit and every time they have to pay more. So the trouble is that we open up the possibility of simply a new major kind of taxation.

Q: Will "cap-and-trade" environmental legislation make it? The poor disproportionately get killed under cap and trade, and the data are very clear on this. The poor pay four times as much in new energy prices in percentage of their income as the rich do, and under those circumstances it simply does too much violence to the idea of the vulnerability of the poor, unless we simply don't pay attention to that. It also hurts a lot of regions of the country that politically are inconvenient to hurt. My guess is that we won't see cap and trade.

Q: You and I don't like what the Democrats are doing-but do we also have a Republican problem? The November 2008 election with its big Democratic sweep was not a repudiation of conservatism but a repudiation of Republican mismanagement, of Republicans substituting power for principle, year after year after year. Americans don't like that. You want evidence that the Republicans didn't govern according to principle? They did nothing about the Corporation for Public Broadcasting, the National Endowment for the Arts, the National Endowment for the Humanities, things that are openly subversive agencies for principles that conservatives hold dear.

Q: So what do you hope will happen politically in 2010? The worst thing that can happen for American Republicans right now is that the Democrats fail too fast. That there's too much oxygen in the market too quickly, because the Republicans haven't changed in their leadership. It's an extraordinary thing: The people who were in charge in 2008 are largely still in charge of the Republicans. There are the same candidates floating around as possibilities in the next presidential election. A lot of Americans are seeing a lot of change they don't like, but they still don't see a very realistic alternative, and that presents certain challenges.

Q: Do you have any good news for conservatives? Seventy percent of Americans agree that the free enterprise system is the best way to organize the economy despite severe ups and downs. That comes from the Pew Research Center, not some right-wing data source. Every question along those lines suggests that we're a 70/30 nation: 70 percent free enterprise; 30 percent against free enterprise. In other words, if you want left-wing principles and social democracy in the United States, you have to change American culture.

Q: Can candidates with strong conservative principles win elections? Margaret Thatcher won in the U.K. Ronald Reagan won in the U.S. Our task has to be one of principle and not of political expediency in the 2010 midterm elections. It's a short-term vs. long-term problem: We're not working for one year or two years or 2012, but for the next hundred years. We're working for the free enterprise system that's going to benefit our kids and grandchildren and generations to come. The free enterprise system is a gift to America and America is a gift to the world, but only under the right circumstances. Those of us who believe these things need to hold our colleagues', friends', and leaders' feet to the fire.