False Directions

After four years of the Trump administration’s support of tariffs and protectionism, conservatives are struggling to reconcile their free enterprise roots with their desire to shape Americans’ economic choices in the way they see fit. American Compass is one such conservative group that claims they are “developing the conservative economic agenda to supplant blind faith in free markets.” In their guide, Rebuilding American Capitalism: A Handbook for Conservative Policymakers, their mission is “to restore an economic consensus that emphasizes the importance of family, community, and industry to the nation’s liberty and prosperity.” Unfortunately, for any policymaker, the guidance of this handbook will neither restore liberty nor generate prosperity.

Not only do the prescriptions they provide not achieve their own stated goals, but their diagnoses of the problems they see ailing this country, unsurprisingly, are also deeply flawed. 

Addressing the American Compass Diagnosis 

This handbook starts with a scathing rebuke of what it labels “blind faith in free markets” and the “market fundamentalism” that American Compass claims has been at the heart of the right-wing economic agenda for the past 40 years. America’s recent economic system, however, has not been that of free-market capitalism, but of corporatism or crony capitalism. Under crony capitalism, corporations and government are intimately intertwined; government erects barriers to entry, protects existing corporations, and regulates competition out of existence. Capitalism is a system based on private property protections that enable voluntary exchange and lead to the formation of prices. Not only has the US economy not become freer over time, it has become more restricted and regulated while property rights have continued to erode. This is due, in large part, to cronyism.

A proxy for the magnitude of market regulations is the size and scope of the administrative state, which has only continued to increase. The Code of Federal Regulations grew from 71,224 pages in 1975 to 185,984 pages in 2019, which is four times the number of pages (fewer than 44,000) that contain the laws passed by Congress. Companies have increased their investment in influencing government; total spending on lobbying grew from $2.31 billion in 1998 to $4.1 billion in 2022, a 77% increase in 14 years. Occupational licensing, one of the most common forms of labor regulation, has exploded. In 1950, 90 occupations were regulated and there were 1,670 state laws regulating occupations; in 2022, 225 occupations were regulated (a 150% increase) which consisted of 4,836 laws (a 189% increase). Efforts to weaken Americans’ property rights, such as the use of eminent domain and civil asset forfeiture, have become common practice in the US. It is estimated that between 3 and 4 million Americans have been displaced from their homes since WWII. Between 2000 and 2020, federal and state governments seized at least $68.8 billion in private property. 

Despite this increased cronyism, the American economy has managed to increase the standard of living for the average American by leaps and bounds, contrary to what American Compass would have you believe. The handbook paints a bleak picture of American society and claims that “over the past 50 years, corporate profits rose by 185% [and] wages rose by 1%,” implying that Americans’ standard of living has barely increased. That claim could not be farther from the truth. This particular wage statistic does not describe all workers but only a subset of US workers, specifically production and nonsupervisory employees, who make up roughly 65% of the labor force. The real average hourly earnings of all private employees in the past 16 years rose by 65%, and the real hourly earnings for manufacturing employees in the past 50 years rose by 614%

To accurately capture income’s impact on standard of living, one must focus on consumption measures of well-being instead of exclusively focusing on income measures. The Time Well Spent report, published by the Federal Reserve Bank of Dallas, details the “minutes of work” it takes to purchase various products. Due to increases in worker productivity and cost-saving innovations, Americans now need to work fewer minutes to purchase nearly everything. For example, since 1920, the time it takes to work for a square foot of housing has decreased by over 28%, a three-pound bag of tomatoes has decreased by over 80%, and a three-pound chicken has decreased by over 91%. Furthermore, these measures are severely understated since the quality of the goods described has been increasing over time. Consider this: a house in 1920 did not have the space, central HVAC, double pane windows, or the microwave oven a house built in 1998 had—and even still, Americans worked fewer minutes to buy the higher-quality home.

From statistics based on their own Cost of Thriving Index, American Compass claims that “in 1985, a typical male worker could provide middle-class security for a family of four … on 40 weeks of earnings. … In 2022, providing for that same middle-class security would require 62 weeks.” This index is based on food, housing, healthcare, transportation, and education costs.

This index does not consider how the quality of each of these items has increased. Transportation, for example, has become much safer. Traffic fatalities have dropped by two-thirds from 1975 from 3.35 fatalities per 100 million vehicle miles to 1.11 fatalities and safety standards have been vastly improved. Homes have become more energy efficient and safer over time and food availability and diversity have increased

The index also does not account for the fact that the average number of hours Americans work each week has fallen since 1985. Today, the average number of hours males aged 25-54 work in 2023 is 40.5 hours; in 1985 that number was 44 hours. American Compass analyzes only male income—perhaps because of American Compass’ preference for male breadwinners—excluding the wages of working women. Between 1967 and 2012, the percentage of mothers who are breadwinners or co-breadwinners increased from 27.5% to 63.3%, contributing substantially to the ability of a family to provide middle-class security. Women have also surpassed men in college graduation rates, in 2022 39% of women completed four years of college or more compared to 36.2% of men

The benefit package the average American receives from their employer has increased dramatically over time. The average number of days off from full-time work for vacations and holidays went from 5 days in 1900 to 20 days in 2000. The percentage of workers with access to paid family leave more than doubled for private industry and civilian workers from 2010–21. Some employers, such as Starbucks, started offering fertility benefits for their hourly, and even part-time, workers to attract and retain workers. Over 94% of large firms and over 67% of small firms provide paid sick leave to full-time employees today. Today, 69% of private industry workers have a retirement plan compared to about 25% in 1950. 

Addressing the American Compass Prescription

Aside from misdiagnosing the source of economic phenomena, the American Compass handbook’s policy prescriptions contain a variety of logical and economic errors. These errors can be placed into three categories: a fundamental misunderstanding of how capitalism improves “the common good,” an unfounded confidence in government’s ability to pick profitable businesses, and a baseless assumption that increased domestic production is a net economic positive.

Subsidizing the “Common Good”

The section in the handbook titled “Productive Markets,” details the “policy reforms necessary to align investment and the pursuit of profit with the public interest.” These reforms include subsidies for a wide range of causes including worker-led benefits, college education, non-college career pathways, and having children. There are two main issues with this prescription: firstly, the “common good” or “public interest” is an ill-defined and unachievable goal, and secondly, their effort to define the “public interest” via surveys is problematic.

Allowing the price mechanism to alert entrepreneurs and consumers of the highest and best use of goods and services is the key to real economic growth. Even if we could insulate such a policy from special interest groups and cronyism, it is impossible for any government to know which sectors and industries are worthy of subsidy. 

Defining the public interest is so difficult in fact, that the Nobel Laureate Kenneth Arrow defined this phenomena as Arrow’s Impossibility Theorem. This theorem mathematically demonstrates that when voters have three or more choices no voting scheme can convert the ranked preferences of the individuals into a collective ranking. American Compass solves this problem by simply defining the public interest as policies that fit their priorities.

To capture the “common good,” American Compass asks survey respondents questions such as “How would American workers prefer a worker organization to be run? Run by employees alone or run jointly by employees and management?” and “Should the federal government provide more support for families with children?” To provide helpful guidance, however, one would need questions that include the tradeoffs for these outcomes. One such bounded question would be “How much more would you be willing to pay in taxes for the government to support families with children?” Dr. Ben Powell demonstrated that responses to bounded and unbounded questions are very different when he conducted research on the responses of South American factory workers to questions about how they would like to be compensated.

Protectionism to Combat Globalism

The handbook has a “zero-sum” view of economic prosperity which is best illustrated here: “China supplanting the United States as the world’s most important economy would mean by definition a decline in Americans’ prosperity and economic security.” Economic prosperity is not a fixed pie in which one country gains at another’s expense.

American Compass encourages policymakers to erect “high tariffs to insulate the domestic markets” and claims that “protective tariff[s] allowed American manufacturing to grow rapidly, bringing power to the nation and wealth to its citizens.” Tariffs are taxes on goods and services that consumers would otherwise have purchased. The political process of deciding which tariffs to pursue results in open doors for the most politically connected to gain protectionist advantages from the government. The US Harmonized Tariff Schedule summarizes the tariffs the US imposes on various goods. This document is over 4,300 pages and contains designations such as a different tariff for a 100% and a 50% cotton T-shirt. It also details various tariffs imposed on tuna products depending on how they were packaged (i.e. “whole or in pieces” or “in airtight containers”); a different packaging method meant a different tariff.

The US sugar industry has been engaged in such regulatory capture and has been protected since 1934. Thus, the price of US sugar is 2–3 times higher than the world sugar price. Economists estimate that removing this tariff would “increase US consumers’ welfare by $2.9–$3.5 billion each year” and generate “job creation of 17,000 to 20,000 new jobs in food manufacturing and related industries.” Tariffs are taxes on people who want to buy from the most productive producers, like those who would like to purchase cheaper sugar abroad. 

Another disappointing part of this guide is the authors’ prescription to “eliminate the trade deficit.” The text routinely implies that having a trade deficit is harmful to the American economy without explaining exactly why. Contrary to what the term implies, the trade deficit is not debt. When an economy runs a trade deficit, more goods flow into the economy, in exchange for dollars, than flow out of the economy, which means that these dollars return to the US as a capital account surplus. This surplus represents the amount of foreign investment that is coming back into the US in our dollars. More investment translates into higher productivity, expansion of industry, and new businesses and innovation. I have a trade deficit with my local grocery store: I always buy cheese from them, yet they don’t ever buy anything from me. My trade deficit with the grocery store is ever-expanding, yet I am not poorer because of it—nor is this trade deficit at all unsustainable. 

In 2022, Americans imported $575.69 billion in goods and services from China. That translates into $1,693.20 worth of Chinese products per American. However, the authors call to “repudiate China’s status as a WTO member and free trade partner.” Alienating China as a free trade partner would make every one of those goods and services more expensive for Americans, lowering their standard of living. Geopolitical concerns may factor in this calculation in ways too complex to analyze here, but the fact remains that increased tariffs will force us to make more things in the USA, and this will increase employment just as outlawing power tools will increase employment. That policy approach would destroy worker productivity and hence earnings—tariffs do the same.

Crippling a country through tariffs and/or sanctions is not only harmful to the US economy, but also potentially militarily dangerous. The US arguably drove Japan into the arms of Germany and Italy during WWII after a decade of trade embargoes and sanctions, and provoked their attack on Pearl Harbor.

Subsidizing Domestic Industry 

Any industrial policy will be wrought with political incentives and American Compass’ industrial policy is no different. Their plan is to subsidize a national bank to “reshore domestic manufacturing … and secure critical industry.” Just like industrial policy of the past, which failed to anticipate that “critical infrastructure” would include semi-conductors and AI technology, this industrial policy is based on the American manufacturing economy of a bygone era. The United States’ economy is primarily made up of services, not industry and manufacturing. In 2021, services made up 77.6% of GDP while industry only made up 17.9% of GDP. Subsidizing dying industries that government officials select based on their nostalgia for the past is going to do nothing but impede American economic growth. Allowing the price mechanism to alert entrepreneurs and consumers of the highest and best use of goods and services is the key to real economic growth. Even if we could insulate such a policy from special interest groups and cronyism, it is impossible for any government to know which sectors and industries are worthy of subsidy. 

This plan seeks to “create demand for domestic manufacturing” by “establish[ing] a 50% local content requirement (LCR) for goods that are critical to national security or the industrial base as defined by the Departments of Commerce and Defense, mandating that domestic labor and domestically sourced intermediate goods account for at least half the value in those critical goods.” If promoting domestic industry is inherently economically beneficial, we ought to have a 100% local content requirement. Since the authors recognize that a 100% LCR is economically infeasible, they ought to realize that a 50% LCR is inherently arbitrary and furthermore ought to realize that prices already guide consumer and producer actions to produce goods with the LCR which both maximize profit and gets consumers the best price. 

One need only look at the impact of the Jones Act to be able to predict the disastrous consequences a policy like this proposal would have. The Jones Act requires US ships and American crews to carry any cargo that is shipped between any US ports. There are tremendous costs associated with these restrictions including transportation, environmental, production, and infrastructure costs. Much higher shipping costs have resulted in an inordinate amount of cargo to be shipped by truck in the US. The Maritime Administration estimates that this “congestion in the nation’s transportation system costs Americans $200 billion every year, wastes 4.2 billion hours spent in traffic, and wastes 2.9 billion gallons of fuel used while idling.” 

Economists and students of economics will find the economic policy prescriptions in this handbook lacking. Unfortunately, the authors are eager to feed their readers an antiquated (and unfortunately destructive) view of how the economy works. What is clear is how little the authors seem to know about political economy. Their policy proposals don’t recognize the dangers of giving government more power over the economy and this oversight reveals the fundamental problem with this handbook: the authors seem to believe wielding economic control over others is fine if it is in line with their ideal social and economic outcomes. This is a position that I believe is fundamentally illiberal, and opposed to the free enterprise system that liberalism requires.