This week marks the 240th anniversary of the publication of The Wealth of Nations, the watershed rationale for a free-market economy by Scottish enlightenment thinker Adam SmithAdam SmithGOP rebuffs call to uphold Obama veto Senate poised to override Obama veto Overnight Defense: Debate night is here | Senate sets vote on 9/11 veto override | Kerry, McCain spar over Syria MORE.
240 years later in the 2016 U.S. presidential race, populist candidates like self-described socialist Sen. Bernie SandersBernie SandersAnti-trade senators say chamber would be crazy to pass TPP Vulnerable NH Republican ties reelection bid to Trump Overnight Finance: Congress poised to avoid shutdown | Yellen defends Fed from Trump | Why Obama needs PhRMA on trade MORE (I-Vt.) and Donald TrumpDonald TrumpTrump: 'Check out sex tape' of former Miss Universe Clinton camp debates media strategy vs. Trump Five things Trump can do to regain momentum MORE are running against many of the central tenets of Adam Smith's ideas—and with considerable popular success.
First, 2016 candidates should remember it was Adam Smith's key insight that individuals working in their own interests are led by "an invisible hand to serve public interest" and benefit the broader society.
In particular, Republicans should be reminded of the domestic economic benefits of free trade, particularly those that would come from prospective trade agreements with European and Asian nations.
A recent study by scholars at the Peterson Institute for International Economics finds that a bilateral free-trade agreement with China would increase U.S. exports by almost $400 billion annually, increase U.S. national income by more than $100 billion annually, and add 1.7 million jobs to the U.S. economy over ten years. By contrast, Trump’s proposal to exorbitantly raise tariffs on China ultimately would raise the prices of consumer goods for all Americans, making the cost of living even greater for the impoverished.
At the same time, Democrats should be reminded of the power of lower tax burdens to help low-income individuals access opportunity and work.
President John F. Kennedy championed across-the-board tax cuts and their distributional benefits under the adage that “a rising tide lifts all boats”. Ultimately enacted under President Johnson in 1964, the Kennedy tax cuts were followed by falling unemployment and the 2nd longest period in U.S. history without Recession.
Expansion of the Earned Income Tax Credit (EITC), first introduced by President Gerald Ford in 1975, could also help strengthen labor force participation, which is still close to all-time lows and a phenomenon not entirely due to an aging population given lower participation levels for people of all ages.
Similarly, lower corporate taxes could help stem the current tide of tax inversions where companies reincorporate abroad through acquisition because of America’s high 35 percent corporate rate, currently the highest rate among OECD countries.
Sanders’s and Hillary Clinton’s likely failure to reduce the tax burden on corporations and individuals would continue to drive corporations out of the U.S. and reduce the number of private sector jobs for all Americans, particularly the impoverished.
Second, the fiscal lessons needed to assure our continued prosperity need to be instilled in several 2016 candidates.
New CBO estimates project that if current laws remain in place, internal federal debt will reach 86 percent of GDP in 10 years and 155 percent of GDP in 30 years, not far off from the debt-to-GDP ratios of indebted European countries like Italy and Spain.
Perennial deficit spending is the largest contributor to rising federal debt. Our government increasing the budget deficit to 2.9 percent of GDP in 2016 marks the first time that the deficit has risen in relation to the size of the economy since peaking at 9.8 percent in 2009. In the absence of a policy change, the CBO expects the government to reach a budget deficit of 5 percent of GDP in 2026, putting the country on an even more unsustainable fiscal path, an issue which our next President must address.
Populist candidates like Sanders and Trump have rejected the need for entitlement reform, which the CBO projects will take an increasingly higher share of national spending at the expense of other budget items like education and infrastructure. Instead, they are promoting even larger entitlement programs. This misses an important point: their proposals would all eventually come back to haunt Americans in the form of higher taxation, and not just for wealthier individuals, given the sheer magnitude of their proposed expansion of government spending and the deficit.
Third, the rise of populist candidates like Sanders—with Clinton increasingly tagging on—and Trump arguably mirrors the recent trends in wealth and income inequality documented by economists like Thomas Piketty, who achieved international fame in his 2014 bestseller, Capital in the 21st Century. However, there is growing evidence that trends in wealth inequality are in fact closely related to strict land use regulations (zoning laws) and other elements of "crony capitalism", both structural problems that can be corrected without having to raise taxes.
Looking instead at trends in consumption, now is the greatest time in human history to be a consumer with rapid advances in technology and declining consumption inequality as evidenced by recent research by Alan Auerbach and Kevin Hassett.
That being said, reducing poverty and restoring growth are still real challenges for 21st century America. Adam Smith’s key finding was that economic well-being for all citizens is highly dependent upon individuals having their economic incentives less hindered by governments, a sentiment we believe is echoed by some of the free market strategies outlined above and ignored by leading candidates.
While Adam Smith's time was marked with great strife and inequality, including the economic strife underlying the French Revolution and the American revolution, it was out of this same time period that market economies were born, playing a leading part in quelling the strife of their time and providing the mass prosperity that Smith described.
Hartley is an economics contributor for Forbes and a co-founder of Real Time Macroeconomics LLC. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush.