Creative Destruction, Crawford Style

...When Bill Gates and Co...

...That's what's happening to the incomes of unskilled workers as foreign workers offer their services at far lower wages, and immigrants, legal and illegal, compete for jobs in America...

...Conservatives should also be asking whether our energy policy makes any sense...

...And yet, and yet...

...As the Economist recently put it, "For most Americans the income tax is much less important than the payroll tax...

...but we don't want to let them use that power also to control the market for cheese, which other firms can provide more efficiently...

...But it would not be folly for compassionate conservatives to ask themselves two questions...

...Surely, conservatives can approve of such a prying open of markets to allow the free flow of capital and technology, especially in the case of a country so vigorous in support of the free flow of labor across borders...

...Nothing in economic theory teaches that these workers are less worthy of the concern of policymakers than the consumers who benefit from low-cost imports, especially in an era in which the theorists' assumed perfect markets do not exist: Currency manipulation is rife, the theft of our intellectual property runs into the billions, and barriers to the sale of America's important exports—the three "A"s of aircraft, agriculture, and audiovisual products—are quite high...

...The antitrust laws, properly enforced, do not allow firms with a monopoly of one industry (think computer operating systems) to lever it into control of other phases of the industry, or to force equipment manufacturers to buy their products to the exclusion of those of their competitors...

...Such a tax on oil use would, of course, generate huge revenues, not a good thing from the point of view of anyone already appalled by the president's LBJ-like expansion of government...

...Tax dangerous oil consumption, not wealth-creating jobs" is a slogan that just might have some popular appeal...

...Progress destroys the value of existing assets, and replaces those values with new ones, as wireless communication today threatens the value of wires in the ground by creating an increasingly attractive alternative means of communicating...

...Secretary of State Condoleezza Rice told the Senate Foreign Relations Committee earlier this month, "I can tell you that nothing has really taken me aback more as secretary of state than the way that the politics of energy is—I will use the word warping—diplomacy around the world...

...TR would not have hesitated to advise the Mexican authorities that if they want to continue shipping us their poor and do not want us to interdict the billions in remittances that these workers send home, they had better end their ban on our investment in their oil industry...

...Let's hope that Rob Portman, moved from U.S...

...No need here to rehearse the virtues of free trade, or to detail the way trade-opening measures have contributed to world economic growth...

...But they most definitely allow firms to grow just as big as their initiative and efficiency will carry them...

...It may not be at a threatening level relative to the size of the economy, but it is an economic stimulus we do not need, and it eats into borrowing capacity that we should reserve for the inevitable next downturn...

...Start with tax policy...

...Russia, in which oil is seen by Vladimir Putin more as a weapon in the geopolitical wars than as a commodity...

...But free trade creates losers as well as winners...

...It is not unreasonable for those who prefer to err on the side of caution when it comes to preserving the American dream to read the data as telling us that inequality is increasing, and that economic and social mobility are decreasing...

...Bush was right to listen to Larry Lindsey during the 2000 campaign and endorse a tax-cutting program that would do two things: prevent an economic softening from turning into a major recession, and encourage risk-taking and job-creation with tax cuts that benefited both those in the lower middle class, and, more obviously and controversially, high earners ("the rich," to liberals) and corporations...

...Other forms of innovation—think Southwest and Jet-Blue—also benefit consumers by destroying the value of the monopoly positions of incumbent carriers, positions that decades of regulation enabled them to retain, and a few years of open competition destroyed...

...Trade Representative to head of the Office of Management and Budget in last week's White House shake-up, deserves his reputation as a deficit hawk...

...The French non was immediate and unequivocal...

...Manly (if I might borrow from Harvey Mansfield), muscular, unswerving in pursuit of America's interests, broadly defined...

...For a while Bush did all of that, applying those broad principles to the particular circumstances in which the nation found itself...

...Globalization—of which more later—has introduced billions of low-wage workers into the worldwide work force...

...Nor can we ignore the fact that the majority of Americans profess satisfaction with their lives (57 percent "very satisfied," 28 percent "somewhat satisfied," only 13 percent "dissatisfied") and that consumer confidence remains high...

...countries notify those countries that our government is on Microsoft's side in its efforts to wriggle out from under adverse findings by the European competition authorities...

...They do not allow mergers that substantially lessen competition...

...The Bush tax cuts thus met the compassionate (many families of modest means relieved of their tax burdens and benefiting from expanded child tax credits) conservative (maximize incentives) principles that brought the Texas governor to the White House...

...No problem: Those revenues can be offset by reductions in the regressive, job-destroying payroll tax now levied on salaries...

...The data are, to put it mildly, hazy, and we must beware falling into the trap, set almost daily by the New York Times and the liberal media, of mistaking anecdotes for data...

...For those who share the president's infatuation with wood chips and switch grass, I recommend a study of the massive failure of government-favored coal liquefaction projects in the 1970s...

...Not all of these workers are members of trade unions that have a history of exploiting monopsony power, as did auto and steel workers in the days when domestic manufacturers were not faced with effective competition from imports, and could pass on to captive consumers any wage increases needed to buy peace in the plants and quiet in the boardrooms...

...it has forced domestic producers to become more efficient in producing goods that American consumers want to buy...

...What economics can teach is that attempts to prevent the adaptation of the economy to the new circumstances of global trade will either be costly or futile...

...Freer trade has enriched American consumers by forcing down the prices of everything from T-shirts and sneakers to computers and television sets...

...Indeed, competition from foreign workers is no longer confined to the unskilled and to the manufacturing industries: Some skilled workers and the service industries are also under threat...

...I hasten to add that I am less certain of the answer to this second question than I am to the first, especially in light of the facts that America's corporate tax rate is now at the high end of the international tables, and that the Bush tax cuts already exempt so many middle income families from income tax—32 percent of all those who file income tax returns have zero or negative tax liabilities, and the bottom 60 percent of earners pay only 0.6 percent of all income taxes...

...America's future lies with firms not now in existence producing goods and services we cannot now imagine, which means that incumbents cannot be allowed to bar the entry of ambitious newcomers...

...They do not allow dominant firms to use unjustifiable discounts or threats of supply cut-offs during periods of shortage to freeze out competitors...

...Indeed, the net effect of immigration on economic growth remains the subject of studies and counter-studies...

...Perhaps even more important, by preventing dominant companies from creating barriers to the entry of newcomers, the antitrust laws help to preserve the social mobility that we conservatives tout as a key ingredient of American exceptionalism and the American dream...

...The Federal Trade Commission and the antitrust division of the Justice Department recently announced a series of hearings to consider revisions of existing restrictions on the sorts of business practices allowed to firms with dominant market positions...

...Which brings us to Theodore Roosevelt...

...For one thing, by preserving competition these laws narrow the areas in which direct government regulation is necessary...

...The fact is that what worked for compassionate conservatism in 2000 won't get America where he wants to take it now, in the new world of 2006...

...The losers are producers— those who have invested capital in companies that changing circumstances make uncompetitive with overseas suppliers, and workers employed by those companies...

...Conservatives are entitled to be disappointed that their president prefers to have his bureaucrats pick technological winners rather than leave that decision to the market...

...But here we run into another complication—the ineptitude of government in general, and this administration in particular...

...Where there is competition, rival firms are forced to provide consumers with reasonable prices and acceptable quality: Adam Smith's invisible hand makes the long arm of the regulatory authorities an unnecessary appendage...

...The president is right to want to encourage the development of oil-saving technologies, although it is a mystery why auto companies need subsidies to develop products for which they believe the market is clamoring, and which would not be needed if we were to price oil properly...

...That would be fairer than taxing gasoline alone: It shares the burden between regions of the country that use oil for heating (the Northeast), and regions in which drivers cover long distances to get to work and the supermarket (the West...

...Monopoly must be regulated, and we have an alphabet soup of agencies that do that, and not terribly well...

...Greater reliance on getting the price of fossil fuels right by having them reflect all the costs of their consumption, and less reliance on government subsidy schemes, would remind us more of the Bush who rode into town from Crawford, and less of the Bush who now lives among the Washington bureaucracy...

...A vigorous antitrust policy should be near and dear to the hearts of conservative believers in the efficacy of free markets and a minimal role for government in the mar-ketplace—if they can survive the anti-anti-trust rants on the op-ed pages of the Wall Street Journal and the administration's diminished attention to the role of free markets in producing prosperity and keeping the size of government to a minimum...

...Venezuela, controlled by an anti-American Castro clone who has already seized several oil fields from major oil companies...

...Compassionate conservatives can satisfy the demands of their conservative heads by regaining control of our borders—yes, we can and should build a wall that will slow the flow of illegals to a mere trickle—and of their compassionate hearts by swallowing hard and agreeing to conditions under which the illegal immigrants already in our midst can be made welcome...

...Why such hearings are necessary when an independent commission has just completed its own review and is preparing its report is unclear...

...And he has been right, at least until now...

...Great idea, poor implementation...

...The preferred transfer technique, the compassionate one and one the Bush administration adopted, is to help with job retraining...

...Even the president's severest critics cannot deny that he has led the fight for freer trade...

...There is considerable controversy among academics as to the effect of these developments on wage rates in America, with some arguing that the availability of cheap pool-maintenance labor increases the demand for pools and the skilled men and women who design and build them...

...The widening gap between the skilled and unskilled is having the salutary effect that free-market conservatives would hope for: It has increased what economists call the education premium, to which hundreds of thousands are responding by pursuing higher education in community colleges...

...That will take bolder steps...

...to surrender the illicit portion of their monopoly position and pay a $600 million fine, the administration launched a veritable blitz on Microsoft's behalf...

...Conservatives should be showering the White House with appeals to preserve the antitrust laws from their enemies...

...Most important of all, we are entering an era in which the wealth of nations will depend on their ability to innovate, to discover better ways of doing things, and new things to do...

...So conservatives concerned with national security, with the "warping" of our diplomacy, with the ability of our economy to continue growing, and with the need to develop market-oriented environmental policies, should be clamoring for a tax on oil use...

...Finally, there is immigration policy, the current political hot potato...

...exports, and he made a historic offer to eliminate all trade-distorting agricultural subsidies if our trading partners would do the same...

...It is no good to suggest the impossible: We can't load 11 (or is it 13...

...Compassion is fine, but only when accompanied by skill at policy implementation...

...And Bush is right, too, to want to remove any uneconomic barriers to the development of domestic resources...

...Adam Smith, for one, saw no inconsistency between the free trade he espoused and measures to ease the pain of those adversely affected by it...

...Which is where compassionate conservatism distinguishes itself from a market-based ideology that ignores the transition costs inevitably incident to change...

...Such restructuring need not result in a net increase in the tax burden, especially if we shift the revenue burden away from payroll taxes and towards the more progressive income tax...

...The arguments in favor of making imported oil more costly to use are virtually unanswerable: Higher prices would cut consumption and encourage new technologies far more efficiently than government bureaucrats who think they can pick technological winners, despite a dismal history of playing at that game...

...Iran, which is threatening to turn off its spigot if the world angers it by moving against its nuclear weapons program to forestall it from achieving its stated goal of wiping Israel from the face of the earth...

...The history of regulation in the telephone, electric, gas, airline, trucking, and other industries should have believers in free markets, and opponents of government meddling, lined up to save other industries, and the consumers they serve, from a similar fate...

...Yet, we are doing nothing about the fact that we rely for a steady flow of oil on the likes of Saudi Arabia, which uses its oil revenues to finance terrorists in the hope of diverting them to external targets, but whose oil facilities are nevertheless subject to attack and disruption...

...Nor can we allow the flow to continue unimpeded...

...A few weeks ago our government launched a global effort to persuade antitrust officials in the European Union to be nice to Microsoft and forgive it its sins, or at least not penalize the company for them...

...Iraq, in a state of turmoil...

...Equally important, given the rapid rise of incomes at the upper end of the scale: Is now not the time to reexamine the distribution of the tax burden with a view towards tipping it a bit more in favor of those who have not shared fully in our increasing affluence...

...Rather than attempt to slow change, it is better policy to transfer some of the gains of the winners to the losers...

...The cost of that addiction should be borne by the addicts, Americans who drive their cars and heat their homes with a fuel that is dangerous to the nation's health...

...There's more, but you get the idea: To remain the source of ideas—an important goal given that the liberals' policy cupboard is bare but may not remain so, and that much of the contents of the compassionate conservatives' cupboard is stale—compassionate conservatives have to forget the triumphs of 2000 and 2004, and ask how best to apply their principles in a much changed world...

...But there can be no denying that there has been little improvement at the lower end of the skill and wage scales...

...That reliance—addiction, if you prefer—forces us to send billions of dollars to regimes that finance terrorists or, at minimum, do not wish us well...

...Most Americans style themselves conservatives: They like the opportunities and standard of living that the freemarket system has made available to them, they don't like taxes, and they generally believe we are the good guys when international disputes arise...

...When George Bush rode out of Texas under the banner of compassionate conservatism, he was on to something...

...But that's not the only reason to worry that the Bush administration might be about to undermine the antitrust laws...

...million people onto buses back to Mexico...

...Nor are high earners in need of further incentives to take risks and work harder...

...Schumpeter's creative destruction is good news for innovators and bad news for incumbents...

...Yes, he has had to take an occasional step back (steel and apparel) in order to take two steps forward...

...The next area of economic policy that compassionate conservatives might rethink relates to trade...

...Google may have been invented by two kids in a dorm, but it is not beyond the realm of reason to believe that the government's antitrust suit inhibited Microsoft from strangling its principal potential competitor at birth...

...It would be folly to attempt to stem the globalization tide...

...moving ahead, with its fiscal house in order, the results of growth distributed in a way that most could regard as fair, and continuing to rely largely on the free market system that has produced the greatest and most widely distributed material prosperity the world has ever seen...

...But those signing on with Bush expected him to meet these needs while also keeping the nation's economy Irwin M. Stelzer, a contributing editor to THE WEEKLY STANDARD, director of regulatory policy studies at the Hudson Institute, and a columnist for the Sunday Times (London), consults with a variety offirms...

...Yes, we want firms to become dominant if they have the proverbial better mousetrap...

...But neither of those measures is likely to break our dependence on oil imports soon, or probably ever...

...and unstable regimes in Africa, all now supported by oil-hungry China, a leading investor in Iran...

...So followers of Smith should be devising ways to strengthen the competition that creates the Schumpeterian "perennial gale of creative destruction" that forces firms to innovate or die, and to offer products that combine high quality and low prices in a combination that consumers find attractive...

...Given the strength of the economy, the clear disinclination of Congress to cut spending, and the president's proven inclination to expand spending on new entitlement programs, is now not the time to address our fiscal deficit...

...But, as he refreshes his team, he faces three years that might prove a dreary descent into irrelevance unless he also refreshes his domestic economic policies...

...Eliminate competition, and the regulators take over, setting up expensive procedures to help them guess what the market would have produced if competition had existed...

...Then, times changed, but the policies adopted to implement compassionate conservatism didn't...

...If incumbent firms are left free to engage in what in the trade are known as predatory or exclusionary tactics, or to conspire to throw their combined weight at any new competitor, the entrepreneurs who become the nouveaux riches and challenge existing wealth will be a thing of the past...

...That intervention matters: These countries must ratify any decision by the antitrust authorities to penalize Microsoft...

...The winners are consumers, as any stroll down the aisles of Wal-Mart will make clear...

...Corporations find themselves awash in cash, profits are claiming a record portion of national income, hedge fund operators are busy acquiring huge modern paintings for the whitewashed walls of their multimillion-dollar lofts, and even Wall Street deal makers can find little to complain about...

...But he has authorized successive trade representatives to negotiate bilateral Free Trade Agreements that will in aggregate cover 54 percent of U.S...

...TR is the idol before whom compassionate conservative foreign policy wonks bow—the one reason an Andy Warhol portrait of Teddy Roosevelt hangs on my office wall...

...Trade policy should include workable programs for sharing the gains of consumers with deserving workers in the goods and services-producing sectors...

...But that was then...

...we are too conservative to condone lawlessness by rewarding illegal immigrants with citizenship...

...Many workers hurt by imports have played the game the way we have asked them to—work hard, educate your children, pay your taxes...

...But conservatives seem to have lost their way when it comes to antitrust policy...

...Left to their own devices, with no antitrust laws to worry about, it is a good bet that the now-bankrupt, inefficient high-fare carriers would have been able to deny new entrants access to airport gates and markets, either by predatory fare-cutting or by overloading contested routes with excess capacity...

...Consumers benefiting from cheaper goods can reasonably be asked to allocate some of their gains to the losers, so as to ameliorate the pain of the transition and thereby reduce the opposition to change...

...If we know anything about innovation, we know that we cannot rely exclusively on the laboratories and research operations of existing firms to provide all of the drive an economy needs if it is to move forward...

...It communicated its "substantial concern" at Microsoft's treatment to Europe's trustbuster, Neelie Kroes, and had its embassies in all 25 E.U...

...Meanwhile, the middle class is not sharing as fully in the economic recovery as maintenance of the American dream requires, and compassion would suggest is desirable...

...Suddenly, the world changes, and through no fault of their own they find themselves unable to compete with labor in countries in which labor is abundant and cheap...

...were ordered by the E.U...

...Increase the supply of anything, including labor, and other things being equal, its price will be held down...

...But Americans are also compassionate: They want to share their good fortune with what the Victorians would call "the deserving poor," and since welfare reformers cleared the rolls of the most undeserving, they are content to leave most of the apparatus of the New Deal in place...

...Moreover, they recognize that as the country grows richer and its citizens grow older, the role of government might have to expand to include a greater commitment to easing the burdens of age and sickness, something a growing and increasingly affluent country can afford without increasing the portion of national income claimed by government...

...Now the economy is hardly in need of any stimulus: It is growing 3 or 4 percent or more, creating hundreds of thousands of jobs every month, and exhibiting enough signs of overheating to have the Fed raise interest rates...

...But I am certain that it is a question compassionate conservatives should be asking, since the progressivity of the income tax structure is not reflected in payroll taxes...

...It is only by allowing American know-how and capital to become available that Mexico can increase its oil production and its role as an alternative to Middle East supplies...

...And common sense suggests it is better to be the owner of a swimming pool than the person who cleans it, and the buyer rather than the sewer of shirts, when the supply of low-wage workers increases...

...The Great Scot also famously touted the social (let's call it compassionate) and economic (let's call it conservative) virtues of free, open, competitive markets...

...Surely there is more to a sensible trade policy than doing what little can be done to salvage the Doha round of World Trade Organization negotiations, negotiating bilateral free trade agreements with willing partners, and enacting retraining programs that cannot be implemented...

...it has enabled the Fed to keep interest rates lower than they would be if inflation were a greater threat...

...To cite just one example of the gap between aspiration and achievement, Congress passed and the president approved a Trade Adjustment Assistance program in 2002, providing among other things that older workers displaced by foreign competition receive from the government half the difference between the wages at their old jobs, and what they are able to earn at such jobs as they find after being laid off...

...we are too compassionate to allow employers to exploit illegal immigrants and in the process depress the wages of American citizens, or to deny the sick health care and the young an education...

...Because the number of hoops through which an applicant must jump seem to be infinite, only 1,403 workers received checks from this program between August 2003 and December 2004...

...All of these are the benign results of the sorts of policies that conservatives elected George Bush to push through a reluctant Congress...