The New Populism in Congress
And what it means for business
December 26, 2006
by Irwin Stelzer
EARLY IN JANUARY victorious congressional Democrats will swarm into the offices from which they have evicted their Republican foes. Republicans who have lost their seats will find reasons to get work as Washington lobbyists, rather than return to the hometowns they have always said they love. Republicans who have retained their seats will be moving to the smaller offices to which they had consigned the Democrats when they controlled office assignments. And made to make do with shrunken staffs. I was about to say, "And now on to the serious business of governing," but that would diminish the importance that congressman attach to office and staff size.
Still, after unpacking, Congress will turn to legislating as a frightened business community braces itself for a flood of hostile legislation, and nerve-jangling investigations.
The president has already announced his support for an increase in the federal minimum wage from $5.15 per hour, the level set a decade ago, to $7.25 by the spring of 2009. Congress wants to catch up with the many states that have put in place minima that exceed the federal level. Democrats also want to catch the populist wave that is rising in America. Voters feel that the middle class, or the average worker, has not shared in the economic growth of recent years. Wages have not risen as fast as profits, and the recent spate of multi-million dollar Wall Street bonuses has caused many workers to figure that some financial high flyers make as much in an hour as they make in a year. Throw in tales of rigged corporate compensation through pervasive backdating of options, and you have a political atmosphere in which a rise from $5.15 an hour to $7.25 over almost two years doesn't sound particularly generous.
Diana Furchtgott-Roth, a labor market expert and colleague of mine at the Hudson Institute, reckons that the rise will directly affect 8 percent of America's 152 million workers: the 2 million who now earn the $5.15 hourly minimum, and another 11 million earning between $5.15 and $7.25 per hour. Add fringes, and the effective minimum cost faced by employers will come to about $8, meaning, says Furchtgott-Roth, that "those who produce under $8 just won't get hired." Since 60 percent of workers now earning the minimum are employed in the restaurant industry, I asked a leading operator of food franchises what the effect of the rise might be. He responded that he plans to accelerate the introduction of new labor-displacing technology. Not good news for the many students he otherwise would employ.
The Democrats will next turn to the voters' annoyance with rising healthcare costs, more and more of which are being passed from employers to employees. Never mind that the prescription drug bill pushed through by the president already subsidizes purchases to the tune of billions of dollars; voters think drug costs are too high and the Democrats think they know what to do about it. They will pass a bill giving the federal government the power to negotiate with the pharmaceutical companies to buy drugs in large volumes at knock-down prices. "Goodbye profits and goodbye research on new cures," say lobbyists for Big Pharma. But they seem less certain than they once were that they can kill the bill in the Senate, or failing that, persuade the president to veto it.
Then there is what the president won't get. He won't get an extension of his tax cuts, which don't expire until 2010. Democrats see those as gifts to the rich and any vote for renewal as ignoring the new populist groundswell. They are unimpressed with the argument that business and individuals need to plan investments now based on the tax code as it will be in 2010 and beyond, and want to go to the country as opponents of the super-rich, who are providing grist for the mill of the leftish press by snapping up multimillion flats and the modern art with which to decorate them, and by splashing out for the expensive cars, clothes, and bling that have sent high-end retailers' profits soaring this Christmas season. For those for whom high-end isn't high enough, we have reported gifts of $1 million worth of flight time on private jets and, for the wife who has everything, a $20,000 face lift.
Proponents of free trade will also find life less pleasant. Treasury Secretary Paulson might think it progress to get the Chinese engaged in a long-term "dialogue," but he doesn't have to stand for election in 2008, by which time he will have lined up his next Wall Street gig. Congressmen facing pressure from trade unions will demand that any new trade agreements require our trading partners to adopt U.S.-style labor and environmental standards. Never mind that such a requirement will reduce the advantages of trade and slow the phenomenal improvements in overall living standards that have been associated with it. Congressmen are more concerned with short-term political gain than longer-term economic advances in living standards.
Not all of the action will be on the legislative front. Congress is lining up a series of investigations designed to emphasize big business abuses. BP CEO Lord Browne will be hauled in to explain the fatal fire in BP's Texas refinery and the allegedly sieve-like condition of the company's Alaska pipeline. That testimony will be under oath, creating the danger of perjury indictments should the BP CEO's memory slip on some minor detail he is asked about by Henry Waxman and/or John Dingell.
There is more. Drug companies will be called upon to defend the prices that the Democrats hope to reduce if they can get their legislation past the president; oil companies will have to explain why they need tax breaks to swell their already swollen coffers even more; and contractors will have to confront tales of misuse of federal funds from Iraq to New Orleans.
Not exactly a prescription for a happy New Year for the business community, reaping the harvest it sowed by increasing its financial support for Democratic candidates.
Let me take this opportunity to wish all of those who have waded through these sometimes arcane descriptions of economic life a wonderful Christmas and a Happy New Year.
This article orginally appeared in the Weekly Standard online on December 26, 2006
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.