October 1, 2014

Why Do Two Wrongs Have to Make a Political Compromise?

This week we've heard more about what's likely to be in the mix in the next economic stimulus/recovery package.  We've learned that there are more tax cuts in the picture—this despite the skepticism expressed over the past few months about how effective another round of tax cuts would be in boosting consumption, given the already-mediocre marks  many economists gave them the last time around, and the current state of American consumers, who are now less than enthusiastic about even being labeled ”consumers.”

A Wall Street Journal story breaking the news about $300 billion of new tax proposals found surprise among some experts:

William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.

"On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side," Mr. Gale said. His biggest question about the latest proposal concerns the credits for hiring new workers or refraining from layoffs. Much of that money would likely go to companies that would have hired more people anyway, he said, adding that it is impossible to know what firms would have done without such a credit…

There's a good point. There is a lot of deficit-spending that policymakers want to do, and while everyone seems to suspect that direct government spending may have more merit relative to tax cuts this time around, there's still not quite enough faith that we could do that much intelligent spending that fast. Even if there might be some "dumb" tax cuts being proposed (in terms of how effective they are as stimulus), maybe they're not any "dumber" than some of the spending that's being proposed.

The WSJ story goes on to offer this explanation of the tax-cut components of the stimulus/recovery package:

An array of business tax cuts could help overcome such GOP opposition, enabling the Democrats to present their plan as a balanced mix of tax cuts and spending. It also would likely encourage business interests to lobby hard for its enactment.

Mr. Obama's team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two…

Similar rumblings were found in a Washington Post story:

"The monopoly on good ideas does not belong to a single party. If it's a good idea, we will consider it," Obama told House and Senate leaders at an hour-long closed-door meeting, according to one attendee.

Obama, making his pitch two weeks before taking office, won generally favorable reviews from GOP leaders, particularly because of his decision to increase the tax-cut ratio to 40 percent of the overall package.

The problem with all of this talk is that the so-called "balanced" mix of tax cuts and spending, designed for political "compromise," is not the kind of "balance" responsible budgeteers advocate--where you either make hard choices, or at least choose a mix that is justified on economic grounds (based on what maximizes economic benefits over costs).

Instead, it's more of the same kind of thinking that has led to fiscal irresponsibility in so-called "bipartisan" (instead really, inherently "partisan") negotiations over the past eight years. It's the "you only get yours if I get mine" attitude–in contrast to the alternative "I'll give up some of mine if you give up some of yours" one. The "balanced" shares of the packages going to tax cuts versus spending may be similar in both cases, but the level of deficit-spending is very different.

I think we also ought to recognize that it's not just "the monopoly on good ideas" that doesn't belong to a single party--the market for bad ideas is similarly "bipartisan."

In the context of the massive stimulus package we seem to be publicly committing to (maybe $800 billion or more over two years), I worry that the policymakers on both sides of the aisle will cling stubbornly to each of their own economically-dumb but partisan/politically-smart ideas. And the economists, who are the ones usually most likely to worry and speak up about the dumbness in policies, might in this case be inclined to project a "dumb is better than nothing" attitude. Even with the large stimulus I do believe we need, I would still like to say that dumb is not better than nothing, because even today, dumb policies have a price.

--Diane Lim Rogers