There's More to Economic Policy than Taxes

The following statement came up in a recent conversation. It's useful to share, since it summarizes a lot of thought about taxes:

Is the Republican model impossible economically? It just seems that there have to be economists with impecible records that support it (this may be a wrong assumption). Yet, it just seems, at a basic level, that if taxes are lowered people have more money. If people have more money they spend it. If taxes are lowered a business may have the opportunity to expand with its new capital or higher a new employee creating more revenue for them and more taxes for the government. It just seems that cutting income taxes has the opportunity to create greater revenue in regards to the other taxes that we have implemented.

We can call this the revenue for growth hypothesis. While part of the deductive logic on tax cuts for growth is very persuasive (especially on taxes as a cost), we need to very precise in our definitions. For example, whenever we start talking about these things, everything depends on what we mean by "impossible economically." Essentially, it all comes down to what we mean by "success" in policy.

All other things being equal (that great economics phrase), tax cuts should lead to more spending and should lead to more growth. After all, there was a massive tax cut in the stimulus program that Congress passed. Both Republican and Democrat administrations have argued for tax cuts for this very reason (here's Paul Ryan and here's Barack Obama; they're saying, broadly, the same thing).

But if you just stop there, you're missing the whole point. Taxes aren't the only way of managing an economy, and you often make sacrifices when instituting a tax cut. Is this tax cut justifiable in the terms of the amount of debt it will add (because they always do)? Is it worthwhile in comparison with the amount of government programs that we will cut?

It becomes a lot harder to justify all of this through simple deduction. While there might be persuasive arguments on either side of an argument, you can't see them for what they really are until enacted.

This is where we start to see problems in many of the right's arguments. Do tax cuts for rich people (which is what they are exclusively proposing; Barack Obama is already committed to keeping the Bush tax cuts for everyone else), create jobs, raise incomes, encourage growth? According to that report that the Republicans just tried to suppress, no, tax cuts for rich people don't lead to much economic growth. This is the result of a broad, 65-year empirical study from a non-partisan working group (the government body that conducts research for Congress so that they can make better decisions). I believe that most economists (when they drop their partisan hats), would agree with this.

But what about other things that Republicans do for the economy? What about fighting inflation, something that they're good at while Democrats are not? As it turns out, Princeton political economist Larry Bartels has looked at this problem, and he's found that Democrats have both higher total income growth rate and more equally shared income growth. Job growth has also been better under Democrat presidents, as has the increase in consumer confidence and total GDP per capita growth.

The same is true for conservative parties abroad. The Tories in UK, for example, have pushed an austerity budget that was widely praised by Republicans in the US. It turned out to be an economic disaster, pushing the UK into its second recession in four years.

When Republicans do increase incomes, it is almost exclusively for the rich. The difference is actually so stark that almost all of the increases in American inequality over the last 30 years can be attributed to Republican policies.

This seems to be part of the problem with bad general economic performance under Republicans, as there is a strong link between inequality and anemic growth. The IMF, for example, has presented extensive research on how inequality is bad for growth.  The World Bank agrees. These are about as mainstream of economic organizations that you'll ever find.

Most importantly, amidst all of this "cut the government" kind of fever, you have to look at the things you sacrifice when you don't tax all that much and you don't tax the rich at all. The income tax, after all, was explicitly designed to tax just those at the top, because there were much better things to fund. Universal health care, family planning policies, strong infrastructure, investments in education, open borders and even affirmative action will all do much more for sustained economic growth than tax cuts alone. All of these policies will reduce inequality and broadly raise living standards too, and all of these policies are opposed by the Republican party.

So this should leave you scratching your head. The Republican party, in its current form, has reduced all of the possible economic policy considerations to only two things: reduce taxes and reduce regulations. Everything else they oppose. You would think that with all of the social and economic problems currently facing the US - debt, technological change, climate problems - that our government would embrace a broad set of alternatives to solving them. But not this Republican Party; not right now. Until I see the kind of open thinking, transparency and willingness to embrace empirical conclusions that mark all good policy, I'm left thinking that any vote for a Republican party member will ultimately damage the economy.

It's sad too. I'm not that much of a leftist. I like Milton Friedman. I have strong sympathies for individual freedom, and there's lot about Obama's Democratic Party that I don't care for. The drone strikes, war on drugs and continuing assaults on personal freedom are abhorrent. But as long as one of our two major parties spends the vast majority of its time denying reality and spinning ideological fantasies, it's the best I've got. As the Economist says, go with the devil you know.