Politicians who advertise themselves as “fiscal conservatives” sometimes campaign on crowd-pleasing pledges to cut taxes and simultaneously reduce budget deficits. These are difficult promises to deliver on in practice, since the budget deficit equals government spending minus tax revenue.
Aspiring fiscal conservatives may be interested in learning four innovative tricks that are commonly used by American politicians who like to promise what seems impossible. Each of these feats has been perfected over three decades or more. Indeed they first acquired their colorful names in the early years of the Ronald Reagan presidency:
April 1 is Census Day. Evidently Glenn Beck and Michele Bachmann have been encouraging Americans to boycott the census — to refuse to fill out the whole form. This protest follows from their small government ideology.
I am not always sure what they, or Republicans, or Tea Party participants mean by small government. They say they want a government that intervenes less in the economic sphere. Perhaps they don’t like the idea that the census numbers are used, among other things, to determine the allocation of federal spending across states, because they don’t think it is the business of the government to redistribute income. That is “socialism.” Even “Stalinism.”
In time of war, there is a tendency for both political parties to rally around the president, as we saw (all too well) in Iraq after September 11.In time of financial panic, there is often a similar inclination.The two presidential candidates, for example, are being careful in their statements.I don’t blame them.The issues are too complex to be taken on inside the context of a political campaign.Both candidates realize that the danger of a verbal misstep that the other side can try to blame for worsening the crisis is far greater than the likelihood that either one will come up with a brilliant solution that will gain widespread support or will solve the problem, let alone both.
Politicians have always faced the temptation to give their constituents tax cuts.But in recent decades “conservative” presidents have enacted large tax cuts that have been anything but conservative fiscally, and have justified them by appealing to theory. In particular, they have appealed to two theories:the Laffer Proposition, which says that cuts in tax rates will pay for themselves via higher economic activity, and the Starve the Beast Hypothesis, which says that tax cuts will increase the budget deficit and put downward pressure on federal spending.It is insufficiently remarked that the two propositions are inconsistent with each other:reductions in tax rates can’t increase tax revenues and reduce tax revenues at the same time.But being mutually exclusive does not prevent them both from being wrong.
The Laffer Proposition, while theoretically possible under certain conditions, does not apply to US income tax rates:a cut in those rates reduces revenue, precisely as common sense would indicate. As detailed in a new paper of mine “Snake-Oil Tax Cuts,” for the Economic Policy Institute, this conclusion was the outcome of the two big experiments of recent decades: the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03.It is also the conclusion of more systematic scholarly studies based on more extensive data. Finally, it is the view of almost all professional economists, including the illustrious economic advisers to Presidents Reagan and Bush, even though it contradicted the views of their employers.So thorough is the discrediting of the Laffer Hypothesis, that many deny that these two presidents or their top officials could have ever believed such a thing.But abundant quotes show that they did.
The Starve the Beast Hypothesis claims that politicians can’t spend money that they don’t have.In theory, Congressmen are supposedly inhibited from increasing spending by constituents’ fears that the resulting deficits will mean higher taxes for their grandchildren.The theory fails on both conceptual grounds and empirical grounds.Conceptually, one should begin by asking: what it the alternative fiscal regime to which Starve the Beast is being compared?The natural alternative is the regime that was in place during the 1990s, which I call Shared Sacrifice.During that time, any congressman wishing to increase spending had to show how they would raise taxes to pay for it. Logically, a Congressman contemplating a new spending program to benefit some favored supporters will be more inhibited by fears of constituents complaining about an immediate tax increase (under the regime of Shared Sacrifice) than by fears of constituents complaining that budget deficits might mean higher taxes many years into the future (under Starve the Beast). Sure enough, the Shared Sacrifice approach of the 1990s succeeded.Compare this outcome to the sharp increases in spending that took place when President Reagan took office, when the first President Bush took office, and when the second President Bush took office.As with the Laffer Hypothesis, more systematic econometric analysis confirms the rejection of the hypothesis.
These matters are not solely of interest to historians or economists. The presidential campaign of Senator John McCain appears set to drive its wagon down the same road in which Reagan and Bush have already worn deep ruts. The candidate is apparently selling the same snake oil:he says he believes that tax cuts increase revenues.His principle policy director disavows the Laffer Principle, just as the economists who advised Presidents Reagan and Bush did.But the views of the economic advisers are not what determines what these presidents do.
“The Queen in Alice in Wonderland said that, with practice, she was able to believe as many as six impossible things before breakfast.Most of us are more limited in our capacity for credulity.If John McCain believes both the Laffer Proposition (tax cuts raise revenues) and Starve the Beast (higher revenues lead to higher spending, anathema to conservatives), then as a good conservative, his duty is clear.He ought to run on a truly novel platform of higher tax rates!Why?Higher tax rates would reduce revenues (this is what Laffer says would happen) and thereby reduce spending (this is what Starve the Beast says would happen).
So both the Democratic and Republican parties have officially nominated their candidates.Remarkably — from the vantage point of just a few years ago – both Senators McCain and Obama are on record as supporting strong action for aggressive cuts in US emissions of greenhouse gases (GHGs). In June 2008, the floor manager’s version of the Lieberman-Warner bill – S. 2192: America’s Climate Security Act of 2007, which would cut emissions more than 50% by 2050 — came close to passing the Senate.Some think that with the likely Democratic gain in Senate seats in November, and a more supportive White House, a form of the bill may well pass next year.
(Incidentally, the July Snowmass presentations regarding Integrated Assessment models of the effects of such emission-reduction policy plans, which I plugged in my preceding blog post, are now accessible to the public.)
But issues of competitiveness and how to address it have risen to the top in the climate change policy debate among politicians.The Lieberman-Warner bill – would have required the president to determine what countries have taken comparable action to limit GHG emissions;for imports of covered goods from covered countries, the importer would then have had to buy international reserve allowances – equivalent to a tariff. (The same with some of the bill’s competitors such as the Bingaman-Specter “Low Carbon Economy Act” of 2007.)
Ten years ago this summer, President Clinton’s Council of Economic Advisers, of which I was a Member, responded to requests from the Congress, which was then under Republican control, to explain in analytical terms what would be the economic effects of the Kyoto Protocol on climate change that had just been negotiated among the members of the UN Framework Convention on Climate Change.Our response was a document called the Administration Economic Analysis.It relied on some of the leading Integrated Assessment Models, and showed that the costs of Kyoto could be relatively low provided international trading of emission permits were freely allowed, and provided developing countries participated in the system.Not zero costs, as wishful thinking by some techno-optimists would have it.Not prohibitive costs, as some skeptics would have it.But moderate costs — relatively low if measures could be implemented sensibly.
Senator Obama is on a vist to the Middle East and Europe.Senator McCain went to visit Colombia earlier in July.These trips suggest a seriousness of purpose that American presidential candidates often lack.They offer us hope that the candidates want to learn how to do the job well.Furthermore, they offer a hyper-attentive world grounds for hope that the next president will have a higher level of interest in other countries than did his predecessor.
So far as I know, it is unprecedented for the two party candidates to do foreign policy trips before the election. I can think of three reasons why we are seeing this now.First, because the primary elections started early this year, there is a hiatus between the end of the primaries and the party conventions.Thus the candidates can spare the time to go abroad.Second, foreign policy has risen much higher on the agenda of concerns of typical American voters, since September 11, 2001, and since the invasion of Iraq. (And of course Obama wants to put to rest McCain’s past jibes about not having visited Afghanistan and Iraq.)Third, Barack Obama and John McCain are not the usual inward-looking, domestically-oriented parochial governors that we all too often get as presidential candidates.Both are US Senators, and both in their youths had very formative adventures in foreign countries (both in Southeast Asia, as it happens).Thus both, if nothing else, have the cosmopolitan outlook that a world leader needs.