The GOP's smart bet on the economy

The GOP tax bill is all about giving Republicans credit for a booming economy. Here's how.

Sen. Mitch McConnell.
(Image credit: AP Photo/J. Scott Applewhite)

The conventional wisdom is firming up that the Republican tax cut bill, which will surely become law now that it just needs to make it through conference, is the action of a party that expects to lose and just wants to pay off its donors before it does. The bill is hugely unpopular for a tax cut, and represents a blatant betrayal of the putative populism of the Trump administration. If they had any prayer of surviving the midterms, they'd never have tried it.

I see a somewhat different picture. It seems to me that, in the age of negative partisanship, the GOP is making the best move they have.

First of all, Republicans now have a legislative victory, and nothing succeeds like success. While I cheekily suggested back in June that the GOP should do literally nothing rather than pursue any of its unpopular agenda, that was partly because I didn't believe at the time that they were capable of passing a bill. But it's obviously better to have a win than a loss. I'd expect the bill to become more popular with those who lean Republican now that it's a win for their side.

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Moreover, in notable contrast to the attempt to repeal ObamaCare, the tax cut has been sold primarily with an argument that is not obscenely contrary to fact. Repeal of ObamaCare was sold as something that would provide better health insurance more cheaply, which was not a remotely accurate description of any version of the bill. The core of the tax cut, on the other hand, is a huge reduction in corporate tax rates — and nobody has really tried to hide this. Rather, its proponents have made the case that the cuts will boost domestic investment, both by raising returns to capital and by encouraging repatriation of earnings by multinational corporations, and thereby boost growth and employment.

To be sure, this is a highly implausible theory under current economic conditions. Returns to capital are already at extraordinary highs, while public investment is starved. The frantic last-minute scribbling that preceded passage only made it less effective on its own terms; for example, the bill may actually discourage spending on R&D. And unless the Federal Reserve believes the rosiest of supply-side scenarios for productivity growth, they are likely to view increased deficits as a predicate to higher inflation, and bias monetary policy accordingly, more than undoing any stimulative impact of those deficits.

But correct or not, it's the GOP's theory — and, more to the point, it's the theory that was articulated to justify the bill. Which means the voters should be able to judge the tree by its fruit, and vote accordingly in 2018 and 2020 — precisely as Senate Majority Leader Mitch McConnell says they will.

Unfortunately, it's going to be very hard for voters to discern its effects in the short term — and the GOP leadership knows that. Had Republicans promised to put a lot of money in people's pockets directly, they'd have a problem — because they aren't doing that. But they promised higher growth. How will voters be able to tell whether they've gotten it?

They'll be able to tell whether their financial situation is better, and whether their neighbors are doing better. But they won't be able to tell whether an improving economy is due to the tax cut or due to factors that preceded it, or are entirely independent of it. And given the observed massive partisan divide on basic economic performance, it's a good bet that any data that does come in will, in the short term at least, be interpreted in the most favorable light by those who already lean Republican. So long as we don't enter a recession, a Democratic attack runs the risk of sounding like an attempt to convince someone the Earth is round when they can see for themselves that it is flat.

Of course, some people are going to see their taxes go up. Those people are going to be furious. But they are mostly people in high tax states who itemize their deductions. A great many middle- and working-class Americans will see their taxes increase over time, because of changes to how brackets are adjusted for inflation, but in the short term the tax hikes in the bill mostly transfer money from the upper middle class to the wealthy. So Democratic attacks on the bill in those terms will look an awful lot like defending wealthy homeowners in blue states — which may undercut rather than enhance any broader message about growing the economy more fairly.

Similarly, the elimination of the health insurance mandate may cripple the exchanges on which millions of Americans rely for health insurance. But while massive premium increases will be unpopular, the question is whether Americans will believe those increases are due to Republican sabotage or due to flaws in the original design of the program. Remember that, even to explain how the program has been sabotaged, Democrats effectively need to blame voters who, after the mandate is repealed, choose not to buy health insurance that they believe they don't need or can't afford. Accurate or not, that's not a winning message.

The tax bill is structured very much as a divide-and-conquer bill, one that punishes Democratic-leaning voters far more than Republican-leaning ones. That kind of politics has proven effective for Republicans. Even if voters wind up splitting the difference and blaming both parties for not coming together in the national interest, that's a net win for Republicans.

Even the guilty plea by former National Security Adviser Michael Flynn has a silver lining in this context. Now that they've passed their tax cut, Republicans in Congress and the Senate should feel freer to do whatever is necessary to hold their seats, whether that's defending President Trump or denouncing him, as the polls dictate. If the GOP can run in 2018 on the economy while the Democrats run on Russia, that's about as favorable terrain as Republicans are likely to get.

The Democrats should still be favored to make gains in 2018. And they'll still be able to run against the tax cut as a huge giveaway to the rich. But if a big business-friendly tax cut doesn't give Republican voters something to be enthusiastic about, they might as well go home. Now the question is whether the Democrats have an agenda of their own to get enthusiastic about — or whether negative partisanship can work as well for them as it has worked for the GOP.

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