Louis M. Guenin – Lecturer on Ethics in Science, Harvard University Posted: 10/25/2012 8:50 am
To repair its economy, the U.S. urgently needs finely-tuned macroeconomic policies and institutional changes. For this challenge, a rational voter would not rely on a political stance that, after helping to bring about the Great Recession, has foundered in self-contradiction. Such is the fate, as recounted in Part I, of Republican pseudoconservatism.
Whereupon attention turns to the alternative. It happens that the opposing Democratic view draws on conservatism in manifesting esteem for government and its history, a forgiving attitude toward government’s failings, and a cautious disposition toward incremental change. But conservatism is brought up short by a standard criticism: it does not generate substantive policies for all the challenges presented in a modern economy. As conservatism bids us esteem an established order, and to change gradually, it does not decide whether one established order is better than others, or what we should change.
The Need for Expertise in Economics
For macroeconomic problems, one needs economists’ rigorous analysis and policy prescriptions. Such a contribution lies beyond the capabilities of politicians, M.B.A.’s, and pundits (including those who imagine themselves economists but are unable to read the journals in this highly mathematical field). Because economic conditions change rapidly, expertise must be continuously relied upon to monitor performance and finely tune responses.
We observe an asymmetry in willingness to listen to economists. Since at least the work of Keynes, the leading lights of the economics profession have advised Democratic administrations. The affinity between this profession and that party arose from mutual commitment to economic growth and full employment of resources. Republicans have assigned greater importance to minimizing inflation. For long, a Republican economist was as rare as a camera-shy politician. Now there are some. But they are decidedly a minority. Meanwhile pseudoconservative anti-intellectualism and the “Republican War on Science” (recounted in Chris Mooney’s book by that name) scorn economics. Among familiar modes of attack on the natural sciences have been revisions by political operatives of government scientists’ reports, and claims that global warming is a “fraud.” Pseudoconservatives have declared that because economists’ predictions do not always come true, and because economists do not always agree with one another, we should ignore them.
Like the earth’s atmosphere, a national economy is a complex chaotic system. We should no more regard failures of macroeconomic predictions as impugning the singular knowledge of economists than we should regard failures of weather predictions as impugning the singular knowledge of meteorologists. A purported science whose investigators did not routinely disagree about hypotheses and theories would not be a science.
We should care greatly whether an administration or party heeds economic advice, and, if so, whether the advice is mainstream or of some other ilk.
History Illuminating the Predicament
Fiscal policy guided by mainstream economic advice succeeded splendidly during the Clinton administration (1993–2001) as the U. S. achieved a record-setting combination of strong growth in GDP, low unemployment, budget surpluses, and low inflation. Then the succeeding Republican administration (2001–2009) insisted on improvidently reducing taxes and on commencing war against Iraq. By dint of the resulting lower revenues and increased expenditures, the national debt jumped from $5.7 to $10.6 trillion. On top of this fiscal profligacy, the effects of a pseudoconservative favorite, deregulation, contributed to a financial catastrophe that began the Great Recession in 2007. In 2008 IV, GDP fell by an annualized rate of 8.9%, the largest such rate of decline since 1958.
For a needed boost in aggregate demand, the present administration’s immediate response was the American Recovery and Reinvestment Act of 2009. But in order to gain pseudoconservative votes in Congress, the amount of stimulus was set too low. The Act did boost national income and employment sufficiently that the Great Recession officially ended in 2009. But it has been observed that when financial crises initiate recessions, the lingering effects lengthen recovery. When Recovery Act funds were exhausted, state and local governments reduced their budgets and workforces, and there has not been any subsequent stimulus.
The legacy of the prior administration includes tax rates so low, and incomes so diminished by the Great Recession, that federal tax revenues have since been depressed at historical lows. Even though expenditures have been sharply reduced, the result of the depressed revenue stream has been to increase the debt to $16.2 trillion.
Ever since the midterm elections of 2010, fiscal policy has not been controlled by the administration, but instead dictated by the pseudoconservative-controlled House of Representatives (which, under Article I, § 7 of the Constitution, originates revenue bills). There rests responsibility for the recent effects of fiscal policy, including the refusal to reduce debt by a tax increase on taxpayers who, by virtue of wealth, would not in that event reduce their spending.
Prudent Fiscal Policy
Because members of Congress consistently vote in party blocks on major issues of economic policy, the coming election presents voters with two alternatives. The following compares them. It reveals the present administration following economic advice to strike a balance between expansionary fiscal policy and deficit reduction, and the Republicans following an anti-government strategy not reliably grounded in economic reasoning.
Expenditures. When growth is slow, unemployment high, the conventional macroeconomic reasoning says that government should increase expenditures so as to boost aggregate demand for goods and services, and thereby induce growth in GDP. Presently when the rate of inflation and interest rates are low, this could be done with little inflationary or interest rate risk.
But the recent history has left us in a dilemma. On the one hand, increasing expenditures to boost GDP is rendered worrisome by the magnitude of the national debt. On the other hand, reducing expenditures so as to reduce debt will reduce GDP, and by a multiplier that may exceed 1.
Observing how these circumstances “make deficit reduction a crucial but delicate endeavor,” the current administration’s proposed fiscal policy (Report of the Council of Economic Advisers 2012, which bears reading to illustrate subtle and practical macroeconomic reasoning) provides for deficit reduction by (1) additional revenue from higher taxes on the wealthy without dampening demand (of which more below), (2) expenditure reductions (but not gutting of social programs as pseudoconservatives propose), and (3) budgeting for programs enhancing productivity and international competitiveness, including education, training for fields in which the U. S. holds a comparative advantage, research and development, clean domestic energy, and infrastructure (“roads, rails, and runways”).
Inasmuch as increases in the national debt will not affect Main Street in the short run—interest rates are low—it may cogently be argued that we ought not panic by reducing expenditures too drastically in the short run. The administration’s policy wisely provides that reductions will be “phased in gradually to avoid disrupting the economic recovery.” Reliable projections also show the Patient Protection and Affordable Care Act reducing Medicare costs, and hence the deficit.
The pseudoconservatives’ fiscal policy, radical and unwavering, is to “starve the beast” (as described in Part I). Having deprived the government of nutrition (tax revenue), they will not pass up any opportunity to slash expenditures. “We want to shrink it down,” says one of their advocates, “to the size where we can drown it in the bathtub.” They persist no matter how much anyone warns that reducing expenditures reduces GDP, no matter what the disruption or hardships.
For the psychological gratification that largely motivates this, the scheme seems futile. The federal government will always be enormous. The Department of Defense alone guarantees that. What, one may ask, would be satisfying about lesser enormity?
To defend their radical attack, pseudoconservatives suggest that shrinking the government will help the economy. This is a canard. It ignores that by definition, GDP = C + I + G + E, where C is consumption, I is investment, G is government consumption expenditures and gross investment, and E is net exports. Any reduction in G is an immediate reduction in GDP. Because the reduction will diminish demand for goods and services, the eventual multiplied effect may exceed the amount of the reduction. Any dismissed government employees are consumers sent into unemployment. As for secondary effects, declaring that a smaller government is better for the economy does not make it so. It seem unlikely that businesses will order new equipment, or that consumers will buy more groceries, if they hear that the enormous government is smaller than it once was.
When pseudoconservatives train their sights on regulation even after a near meltdown, they romanticize markets and free enterprise in offering an exaggerated version of liberalism before the industrial age. Deregulation recently implemented that version, and we have the Great Recession and near collapse of the financial system to show for it. Of course regulatory improvements can improve productivity. The current administration pursues “smart regulations,” regulations tested by whether incremental benefit is greater than or equal to incremental cost. But regulatory improvement is a far cry from contriving to “hack” the government “in pieces,” to use Burke’s words for the starvationists’ program.
The pseudoconservatives also claim that the federal government should balance its budget just as profit-maximizing firms and state governments do. Here they fail to apprehend the role of fiscal policy as a tool of economic regulation. Sometimes the federal government should (or should not) spend money not merely for programmatic reasons, but because the economy needs higher (or lower) federal expenditures to boost (or dampen) demand. Balancing the budget now could plunge the country into a depression. One does not learn macroeconomics by running a firm.
Government, they add, does not create jobs. On the contrary, government employs millions of people. Government expenditures contribute greatly to aggregate demand for goods and services, and their cascading effects through the economy induce employment in many industries.
Taxation. Wealthy taxpayers do not much increase or decrease their purchases of consumer goods because their April 15 check to the IRS is lower or higher. Their marginal propensity to consume is low. Should they realize any tax savings, most of it will be left in their investment accounts. Hence reducing their taxes will not result in much of an increase in consumer spending; it will increase the deficit by the amount of the revenue loss. Raising taxes on the wealthy will not much diminish consumer spending; it will decrease the deficit by the amount of the revenue gain. On the other hand, most working people exhibit a high marginal propensity to consume. Reducing their taxes will significantly boost consumer spending, and promote fairness in easing their burden.
For the foregoing reasons, the administration’s proposed fiscal policy provides for both tax increases and tax reductions tailored according to marginal propensities. Rates for wealthy taxpayers (presently at historic lows) would rise so as to reduce the deficit and moderate expenditure reductions. Because “the nation needs to raise demand for its goods and services in the short run to strengthen and sustain the economic recovery and put more people back to work” (Report of the Council of Economic Advisers 2012), taxes would be reduced as effected by the Recovery Act, taxes would be reduced on incomes below $250,000, and the payroll tax cut and unemployment benefits would be extended.
The pseudoconservatives stick consistently to the panacea “Always reduce taxes.” They do not tailor reductions and increases for effectiveness according to marginal propensities. They profess to be supporting a uniform rate of reduction across brackets. Almost all Republican members of Congress have executed a written pledge, composed by a lobbyist leader of the “starve the beast” scheme, that they will never vote for any tax increase.
The pseudoconservatives are apt to mention the “supply side” prediction that lowering taxes will so greatly stimulate the economy that tax revenues will increase. When economists doubt whether such effect will occur, that suits the starvationists just fine. They do not want tax revenues to rise anyway.
On this and matters generally, the pseudoconservatives’ presidential candidate is wont to reverse positions when expedient. Such behavior is usually taken to reveal either a tendency to embrace ill-considered positions, or a strategy of offering declarations that the speaker does not believe or expect to fulfill. Upon hearing grand claims—such as the arithmetic howler of a 20% tax cut that is deficit-neutral, benefits all brackets by the same proportion, and does not slash social programs, or the notion that 12 million new jobs will appear, mechanism unspecified—one may expect another reversal.
The “starve the beast” scheme, and evident determination to shield the wealthy from tax increases, reveal keen aspirations undergirding the Republic stance on fiscal policy. What does not undergird that stance is plausible economic reasoning for the conclusion that their policies will work to achieve recovery.
The Conservative–Liberal Alternative
A compelling moral foundation obtains for devoting tax revenues to social welfare programs and for a progressive system of taxation in which the wealthy pay more. The foundation originates in philosophical liberalism (a philosophical theory distinct from whatever travels under the banner of “liberal” in the political arena). The foundation employs two major principles, first, that all individuals are free and equal persons, and second, that the rational choice of representatives who deliberate impartially, as if ignorant of their respective genetic and economic blessings, would consist in a society that assures equal rights, liberties, and opportunities to all, and that facilitates the flow of income and wealth according to talent and effort so long as the least advantaged benefit. This implies a collective duty to assure for all citizens some minimal level of provision sufficient to avoid physical suffering. This duty to provide a safety net is fulfilled through the system of taxation and those other laws and institutions of a just society that affect the distribution of income and wealth.
Every government that levies taxes and spends money redistributes income and wealth. The question concerning redistribution is not whether, but which.
We are each entitled to only entitlements of kinds and extents explicitly or tacitly agreed in constituting a society. But agreements on terms of entitlement are not frozen. We revisit the terms of entitlement every time we consider tax policy. Or social welfare programs. As the gap has widened between rich and poor, the distribution of income and wealth has failed the test that institutionalized arrangements (e.g., property ownership) from which inequalities result must, in order to be just, result in some benefit to the least advantaged. We may collectively decide at any time to condition the benefits of citizenship on the obligation to pay taxes that are redistributed through our democratic processes. Since most of us pay vastly more in taxes than we contribute to charity, we have good reason to arrange that our tax payments are applied to the provision of a safety net. This we do by electing representatives so disposed.
The foregoing reasoning may be merged with a conservative disposition to proceed cautiously while drawing on wisdom and expertise reposed within esteemed institutions and the government, and while seeking incremental improvement preserving the established constitutional order. The conservative and the modern liberal both understand a further truth. The combination of authority and legally-imposed impartiality endows government with unique leverage to accomplish good. We may call the product of the foregoing merger the “conservative–liberal alternative.” This alternative states a philosophical foundation for social welfare programs and progressive taxation. Voters will find that the same Democratic candidates who support the above-described mainstream economic policies also endorse policies of distributive justice supported by the conservative–liberal alternative.
Opponents of the safety net, John Kenneth Galbraith once said, are “engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.” The pseudoconservatives venture that private philanthropy suffices to provide for the poor. That claim is an arithmetic falsehood. The amount of money needed to provide for the poor and suffering in the U.S. greatly exceeds the aggregate available philanthropic funds. Pseudoconservatives also advert to an “ownership society” in which we all bear “individual responsibility.” The conservative–liberal alternative respects the workings of free enterprise and individual entitlements that devolve from talents and efforts in accordance with whatever are the agreed terms of entitlement. But the pseudoconservatives fail to recognize that terms of entitlement may be changed.
Pseudoconservatives are also prone to brand as “socialism” the social programs that they oppose. But like conservatism, socialism is a concept that they have not plumbed. Socialism consists in collective ownership of the means of production. No serious political contender urges it.
Navigating to Recovery
One hopes that citizens vote to advance the common weal. But insofar as citizens are thinking of their own pocketbooks, whether rich or poor, they will see from both recent and distant history, and from the pseudoconservative slant on policy, that they would best elect Democrats. Since early in the twentieth century, the Republican Party has cast itself as the party of prosperity while the Democratic Party has striven to be the party of peace. But Democratic administrations have presided over two world wars, and Republican administrations have produced our worst economic times, including the most recent. The wealthy might note that they would be better off with higher after-tax incomes under the economic policies of Democratic administrations even if taxes were higher and government bigger. They would know that it is net income that matters, not gross.
The economy as a whole, and the least fortunate among us in particular, would be ill-served by another dose of ineffective and starvationist economics. The pseudoconservatives’ proposals would endanger the fragile economy, to say nothing of their proponents’ brinkmanship in trying to impose their preferences. The circumstances demand caution and economic expertise for the analysis and fine tuning that effective policymaking requires. Reelecting pseudoconservatives would be like assigning the task of charting a homeward course to the mate who guided the ship onto the shoals.
Louis M. Guenin is Lecturer on Ethics in Science, Harvard Medical School. His research concerns moral philosophy, metaphysics, and the philosophy of science. His writings include The Morality of Embryo Use (Cambridge University Press), honored as Choice Outstanding Academic Title for 2009, and “Intellectual Honesty,” an account of the duty of truthfulness in scholarship and public discourse.