By David Henderson
Oren Cass believes conservatives have blundered by outsourcing GOP economic policymaking to libertarian “fundamentalists” who see the free market as an end unto itself, rather than as a means for improving quality of life to strengthen families and communities. The former domestic policy director on Mitt Romney’s 2012 presidential campaign quit his job as a senior fellow at the Manhattan Institute to launch a new group called American Compass that aims to reorient the right. He previewed their plans in an exclusive interview on Monday afternoon.
This is the first paragraph of a long Washington Post piece on Oren Cass: James Hohman, with Mariana Alfaro, “The Daily 202: Conservative intellectuals launch a few group to challenge free-market ‘fundamentalism’ on the right,” Washington Post, February 18, 2020. The title, by the way, is accurate. It’s Cass’s understanding that’s off.
Don Boudreaux, over at CafeHayek has done a nice job, as always, of homing in on a basic problem Cass has in understanding what free-market advocates believe. By the way, if you start a whole group based on a misunderstanding, what are the chances that you get a good result?
I want to focus, though, on another economic point Cass gets wrong. Of course I’m assuming that the reporters stated his thoughts correctly. In this case, though, since Cass has a track record of saying similar things, I think the odds that they got it right are high.
Here’s how the WaPo reporters quote Cass:
Likewise, if you are generating growth by trading off the non-market work that people historically performed within their households for a model where everyone goes to work and then they pay each other for the things they used to do in their own household, that’s not great either.
Actually, it is great, and a little economics shows why: it has to do with marginal tax rates.
The big advantage of non-market work within the home is that it’s not taxed. So, for example, if my wife raised our daughter in our home, which she did, and, as a result, did little free-lance work during our daughter’s formative years, the time spent raising our daughter was not taxed. But if instead my wife had done more free-lance work and put our daughter in day care for a few hours a day, the money we paid for day care would have been taxed. Similarly, if I had done gardening at our house, the time I spent gardening would not have been taxed. But if I hired someone to do gardening, which I have done, the money he makes is taxed.
Given those facts, what can we say when we observe people working outside the home and hiring others to do work inside the home? We can say is that even with the tax disadvantage, it’s worth doing. The tax system was distorting the choice between unpaid work at home and paid work. So when we observe people nevertheless finding it worthwhile to work outside the home and pay those taxes, that means that in spite of the higher taxes they still find it worthwhile.
And these taxes can be substantial, even on middle-income people. Remember that we’re thinking on the margin here. A middle-income man or woman will likely pay a marginal federal tax rate of at least 12%, a Social Security plus Medicare tax rate of 7.65% (and it really is 15.3% because even if the person is an employee, the income is taxed at 15.3% and that’s part of the tax wedge), and, likely a state income tax rate of at least 4%, for a total of 23.65%. And, the marginal federal tax rate for a substantial slice of the middle class is 22%, making the overall marginal tax rate 33.65%.
Cass could reply that I’ve got it wrong in the case of the parent outsourcing child care rather than doing it at home because I’m not taking account of the wellbeing of the kid. If that would be his reply, though, it’s not a good one. One of his recent tweets about his new enterprise emphasizes the importance of family. So let’s talk about families. While some families can make bad choices, who is likely to have the best interest of the child at heart: the parent who knows the kid intimately or Cass, who doesn’t even know the kid’s name?
There is one bright spot in the report, not that Cass sees it that way. The reporters write:
Running as a populist, Trump challenged Republican orthodoxy on free trade and tapped into the disaffection of blue-collar workers in the heartland who have been left behind by the growing, but uneven, economy. For the most part, however, he [Cass] said conservative elites in the think tank world have not followed suit.
We often hear that the Republican Party has caved to Donald Trump’s bad ideas on trade. And I admit that this is one of my very big worries. But that quote above made me slightly less worried.