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GRAY: Reforms in service of innovation and prosperity

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ANALYSIS/OPINION:

A silver lining for Republicans in the recent election is the opportunity to rethink some basic policy positions. Any re-examination should recognize that the Republican Party now has 30 governors and has retained the House despite support for Rep. Paul Ryan's entitlement reform proposals. The point here is that the fiscal issues should be resolvable and that what needs focus in the economic sphere are regulatory policy and the resulting crony capitalism that denies long-term opportunity to all Americans and discourages the innovation that has powered our economy for the past 100 years.

Warren Buffet's op-ed article in The New York Times on Monday suggests raising revenues to 18.5 percent of gross domestic product and cutting spending to 21 percent. This is pretty close to the deal that President Obama and House Speaker John A. Boehner (who also was re-elected) agreed to last year, before the president came back for 50 percent more revenue than the $800 billion offered by the speaker.

This should be doable, in the absence of public support for ignoring entitlement reform: The president did not run against it while the victorious House Republicans did run for it. Maybe the revenue figure has to be a little higher, but there is nothing in the election results to support doubling the revenues offered by the speaker or raising rates in lieu of tax reform and broadening the base.

It is with reform — of the tax structure, regulations and entitlements — that Republicans should grab the high ground. Take the example of "carried interest" that heavily favors hedge and equity funds at the expense of small businesses generally. This gimmick allows Wall Street to convert ordinary income into capital gains for taxation at a much lower rate. It's not just unfair; it diverts young talent away from true risk-taking that makes new things, toward Wall Street paper-shuffling that creates little innovation.

Speaking of Wall Street, take a look at the gargantuan financial institutions that are "too big to fail" and get hidden taxpayer subsidies at the expense of retirees and local banks. The local and regional banks are the principal sources of capital for the small businesses that create most of our jobs and our innovation. Here again there is a misallocation of human capital, as well as the massive head-fake that Dodd-Frank resolves the causes of our current economic misery when it only creates uncertainty that makes it worse.

And don't forget the regulatory component of entitlement reform. Surely, we can see our way to promoting competition between big insurance companies across state lines, as well as more competition and innovation in pharmaceuticals by placing greater emphasis on rapid approval of innovative drugs without the gigantic and redundant patient trials that only the biggest companies can manage and fund. It would help in this regard not to be so sensitive to the private jet-setting trial lawyers who trigger great waste in our health care system (and teachers unions that block competition in the delivery of quality education).

Some of our foremost innovators — Peter Thiel, who founded PayPal and was an early backer of Facebook, comes quickly to mind — believe that the age of innovation is over because of the regulatory onslaught and the tendency of incumbent firms to use government regulation to curb competition. This tendency to special-interest favoritism was Adam Smith's worst nightmare. His biggest fear was that government that is too big inevitably will intervene to protect the powerful and thus interrupt the normal productive business of commerce that, when properly policed, encourages traders to treat their counterparties the way they would want to be treated themselves.

There are many, to be sure, who think Mr. Thiel is too negative. Perhaps he does ignore developments outside of Silicon Valley, like the great energy revolution created in Houston — by the little guys, not the big boys. Let Houston be an example of what the little guys can do without interference or help from either the government or big business — and a warning that the government still has the opportunity to halt this revolution by overplaying its heavy regulatory hand.

C. Boyden Gray previously served as White House counsel and U.S. ambassador to the European Union, and helped lead the Reagan administration's regulatory reform efforts.

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