What makes for an Opportunity Economy?

Harris's subsidies and tax preferences cannot compensate for the reduction in private sector investment capital her tax increases would cause.

Political rhetoric can occasionally be influential and revealing, even if usually banal and doltish.

At a minimum, such rhetoric reveals what politicians perceive to be the state of play within the body politic. It can also shape the contours of policy priorities and debate.

That makes the decision by Kamala Harris to dub her agenda the fostering of an “Opportunity Economy” interesting and perhaps potentially important. In such an economy, she says, people need to be able to not just get by, but to get ahead.

This is at least a change in emphasis in how Democrats describe their political economy. Heretofore, the emphasis has been on redistributive justice, correcting what are claimed unfair and unearned wealth disparities. The system is rigged to benefit the rich, went the argument. They should pay more in taxes and that money used on programs to help the less advantaged. 

Tax rates took on symbolic importance. Barack Obama infamously said that he would favor a higher capital gains tax rate even if it produced less revenue for the government. And he turned his back on his own Simpson-Bowles commission, which recommended raising more revenue for the government while substantially lowering tax rates, by greatly expanding the tax base.

Now, Harris still supports an eye-watering array of tax increases on the well off, about which more anon. But the emphasis seems less on redistributive justice against the rich and more on creating opportunities for everyone else. 

That could be a healthy turning point for the discussion and formulation of political economy. If we were debating which set of policies produce greater opportunities, our politics would be far more productive and considerably less destructive.

While Harris’s rhetorical emphasis on opportunity is a welcome development, her policy set would actually restrain rather than unleash it. That’s because she shares the usual Democratic blind spot about the irreplaceable role of private sector investment capital in creating expanding opportunity. 

Harris proposes sharp increases in the corporate income tax rate, the highest individual income tax rate, and the highest capital gains tax rate. She even proposes to tax unrealized capital gains. 

These tax increases are targeted at the rich, but the rich are disproportionately the source of private sector investment capital. Harris’s tax increases would reduce private sector resources by trillions of dollars. In addition to this direct effect, Harris’s tax increases would reduce, in some cases significantly, the potential return on investment from risk capital, sharply reducing the incentive to provide it. Harris’s tax rates would be markedly higher than those in other developed countries.

Like Biden, Harris proposes to partially compensate by increasing government-provided investment capital, through subsidies and preferential tax treatment. She claims ownership of the Biden administration’s massive subsidies for green energy and computer chips. In addition, she proposes increasing the small business startup deduction from $5,000 to $50,000. And a new, generally nebulous, tax credit for what Harris claims to be strategic industries for the future: biomanufacturing, artificial intelligence, data centers, and clean energy.

The first problem with sharply reducing private sector investment capital in favor of government subsidies and tax preferences is scale. Government investment capital, no matter how big, cannot influence the direction and performance of an economy as big and complex as that of the United States except at the margins. 

There are over 30 million businesses in the United States. Commercial banks have outstanding commercial and industrial loans of nearly $3 trillion. American corporations raise an additional $1.5 trillion annually in investment capital from directly issuing bonds or new equity issues.   

Simply put, there is no substitute for the decentralized intermediation of transforming savings into investment capital. No scheme of government subsidies and tax preferences can compensate for a sharp reduction in the pool of potential private sector investment capital.

The other problem with government-provided investment capital is that there are inevitably political strings attached. Harris’s economic white paper clearly hints that the tax credit for supposedly strategic industries will be tied to setting up shop in underserved areas and hiring union workers. This distorts the allocation of capital and business operations. 

Finally, what in the world should give us confidence that politicians can accurately identify the strategic industries of the future and differentiate between those that need subsidies and those that don’t?

Harris’s list provides a useful illustration. AI and data centers are private sector investment capital magnets. Investors and companies are throwing money at them. Yet Harris would give them whatever her strategic industry tax credit turns out to be, a pure deadweight loss to the federal fisc. 

Why? Supposedly to compete with China. China, however, doesn’t have the deep and broad private sector investment infrastructure of the United States. China also subsidizes supposedly strategic industries to retain political control of them. Chinese strongman Xi sees large, independent companies as a threat to Communist Party control, which explains the high tech shakeup he engineered. 

To compete with China, the United States doesn’t have to subsidize everything China subsidizes. There couldn’t be clearer examples than AI and data centers.

Harris also proposes to subsidize old-line industries, such as helping to fund the supposed modernization of the steel industry. There’s a rich irony here. Japan’s Nippon Steel is trying to buy U.S. Steel, to provide the capital to modernize its operations. Harris opposes the purchase, as does Donald Trump. So, private sector investment capital is to be foregone because the parent company would be headquartered in one of America’s closest allies. Instead, Harris would stick taxpayers with the tab.

There’s more to Harris’s Opportunity Economy than these industrial policy proposals. There are numerous social welfare measures as well. There was a time in which some prominent Democrats understood the need for healthy private sector growth to fund a more expansive social welfare state, and what was needed to facilitate that. There was bipartisan leadership for the 1986 tax reform, which was very much along Simpson-Bowles lines: lower tax rates on a broader tax base. 

A Reaganite Republican Party would be very capable of engaging a policy and political debate about creating and expanding opportunity. That was the Gipper’s home field. 

The Trump GOP, not so much. Trump seems committed to making his closing argument almost exclusively about inflaming emotions about immigration, illegal and legal. Despite complaining about wokeism on the left, the MAGA movement is fueled by its own version of identity and grievance politics.

Trump’s fiscal policies are so implausible that there is zero chance that they will be seriously considered, even if Republicans sweep the presidency, the Senate, and the House. And if they were seriously considered, financial markets might have a Truss-like meltdown.

This is a dismal, discouraging, and disheartening election season. Harris’s embrace of opportunity as an important political lodestar, even if very poorly designed in execution, is a rare glimpse of hope for a better day. 

Reach Robb at robtrobb@gmail.com.