California East

This January, New Jersey inaugurated our 56th governor, Phillip Murphy, a committed progressive Democrat and millionaire alumnus of Goldman Sachs, who self-financed his way to the nomination.  Given the unpopularity (indeed, loathing) of incumbent governor Chris Christie, Mr. Murphy's path to Drumthwacket was never in doubt.  Once again New Jersey is entrenched in the solid blue-state column with a governor embracing progressive policies like a "millionaires tax," a $15-an-hour minimum wage, and expanding green energy mandates.

Why?  What is the appeal of this blue state model of government?  Are blue states like New Jersey fairer than red states?

One thing I have noticed is that blue states are more expensive than red states.  From housing, taxes, and electricity to a slice of pizza, you are going to pay more for pretty much everything in a blue state.  The reason is that the cost of everything the government does is added to the price of everything you buy.  This explains a lot.  Blue states have lots of rich people because blue states are the historic centers of America's economic miracle in manufacturing, finance, and now technology.  In turn, blue states have lots of poor people for the exact same reason: they migrated to the blue states because that was where the opportunity was.  At the dawn of the Progressive era, this glaring disparity between rich and poor was noticed, and government action was taken to "solve" this glaring problem.

The progressive model relied on the sweetest political lie ever conceived: Karl Marx's "from each according to his ability, to each according to his need."  In the smiley-face socialism that has taken root in the United States, and especially the blue states, is an abiding belief that progressive taxation will "take according to his ability," while spending generously on public welfare will pull the poor out of poverty by giving "according to his need."  From a purely political perspective, the math is amazing.  You tax the few and give money to many voters, à la Robin Hood.

Despite the obvious political success, there are some nagging doubts cropping up.  When Lyndon Johnson declared the War on Poverty in the 1964 State of the Union address, the national debt stood at $0.3 trillion.  Today, that debt has surpassed $20 trillion in just over two generations.  The poverty rate in 1964 was 19%; today, the poverty rate vacillates between 14% and 16%.  A 25% reduction in the poverty rate is nothing to sneer at, but a troubling amount of multigenerational poverty illustrates the limits of the progressive model.

Why have progressive tax-and-spend economic policies lost their momentum in combating poverty?  Because everything the government does, even if it is popular, is a compulsory addition bolted onto our free-market economy.  A free-market transaction would be something like this: one farmer trades a dozen eggs to another farmer for a quart of milk.  This free-market trade is so simple that it doesn't even need cash to consummate.  Cash is necessary to enable trade where barter is not practical.  The same egg-farmer really wants a steak, but trading 250,000 eggs for one cow is not practical, and he still doesn't have his steak.  But a free-market economy will determine the price of a dozen eggs; the price of cattle; and, after the butcher has completed his work, the price of every cut of meat, including the steak.

Now, suppose that, through a "political process," the "people" decide that they really do not trust those farmers, and we need a Department of Agriculture to keep an eye on them.  The employees of this new arm of the "public will" need to be paid.  How do we do that?  In New Jersey, we tax rich people like the egg-farmer, the dairy-farmer, the cattle-rancher, and the butcher!  These farmers just accept this, right?  No!  They raise their prices to cover the cost of the tax.  It does not matter if the government program is a necessary priority like national defense or a fire department, or a good political idea like Social Security or Medicare, or a useless idea like a bridge to nowhere; the cost of every program, regulation, and court decision, at every level of government, is added to the price you pay for everything you buy.

This takes us to a second critical point.  Economically, there are two types of people: those who have pricing power and those who do not.  The people who have pricing power are able to cover the higher prices needed to pay for new government expenses by increasing the prices they charge for their goods or services.  Obviously, CEOs have pricing power, but plumbers have pricing power, too.  It may not be perfect pricing power.  When the housing market is soft, plumbers suffer like everyone else, but when housing is booming, and your toilet is backed up, you will understand the concept of pricing power pretty well.  The economic point here is that whatever price increases government action adds to everyone's prices, CEOs and plumbers – indeed, anyone who has marketable skills, will eventually see his price (wages) increase to cover new expenses.  You achieve price equilibrium when plumbers' market wages include the new government-created expenses.

The point of this article is not that we need to hold a bake sale to help CEOs and plumbers.  They can take care of themselves.  The point is to consider the other end of the economic spectrum: poor people.  Poor people have to pay these higher prices just like everyone else.  People on welfare receive most of their "income" from non-cash subsidies such as housing, food stamps, and other programs, but what cash they do have buys less and less.  The working poor are in a much more vulnerable position.  Wages have been flat for years, but prices keep creeping up.  People without pricing power keep sliding down the economic ladder.  Those who have pricing power may complain about taxes and prices, but they have the economic capacity to keep up.  Those who lack pricing power get left behind.  New Jersey's and every liberal blue-state politician's first instinct is to help: raise the minimum wage, create a program, give away phones.  But in the end, higher prices, and lost opportunities, swallow up the subsidies and leave poor people financially trapped, with fewer and fewer options.

One final observation: The modern Democratic Party has become a coalition of blue-state rich people (oodles of pricing power) and the non-working poor (who lack pricing power but receive a majority of their income through mostly non-cash subsidies), while the Trump coalition is made up of people in between: plumbers who have pricing power but need a growing economy to keep up and the working poor who need a growing economy, coupled with low immigration, to create a supply and demand shortage, driving up wages for their labor.

All we need to do is convince about 6% of New Jersey voters to keep prices low by embracing free-market prosperity instead of government programs to keep the Garden State from becoming even more like California East.  You got a problem with that?

 Mr. Boyd is the former labor commissioner for the State of New Jersey.

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