Economics professor Alan S. Blinder offers some exquisite analysis of the making of US economic policy in the 21st century: political illogic versus economic logic. Unfortunately, the prognosis is a reflection of today's chaos. This is the (fair & balanced) question of public policy in 2018: will we muddle through?
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Most Illogical
By Alan S. Blinder
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In December [2017], Donald Trump and congressional Republicans passed large tax cuts, without bothering to pay for them. Less than two months later, they reached a budget deal with Democrats that increased government spending by hundreds of billions of dollars. With the U.S. economy at approximately full employment, was stimulus of this scope sound fiscal policy? Any Economics 101 student knows the answer is no.
It would be easy to dismiss this as just another case in which Trump rejected expert opinion—whether legal, scientific, or economic. But it actually runs deeper. It’s a classic example of what I call the Lamppost Theory: Politicians use economics the way a drunk uses a lamppost—for support, not illumination. Trump just made it worse.
It is widely but falsely believed that economists have enormous influence over economic policy. Economists control the Federal Reserve, right? Actually, that’s no longer the case. Unlike his four predecessors, Jerome Powell, who became the new chair of the Fed in February, is a former investment banker, not an economist. But doesn’t the Council of Economic Advisers [CEA] still sit in the White House, with direct access to the president? Well, yes, it does, but presidents often ignore it, and Trump didn’t appoint a CEA chair for months.
The truth is that politicians were leaning on lampposts long before Donald Trump. The problem is long-standing and systemic, and it crosses party lines. It’s as if economists and politicians come from different civilizations that don’t understand one another. The late Arthur Okun, who was LBJ’s chief economic adviser, observed almost 50 years ago that, “On a number of issues, a bipartisan majority of the [economics] profession would unite on the opposite side from a bipartisan majority of Congress.” Apart from the fact that there are no longer any bipartisan majorities in Congress, those words ring true today.
Politicians, for better or worse, decide their positions on political criteria and then sometimes seek economists to bless those positions. (Trump often omits that last step.) Of course, the fact that decisions are made politically in a democracy is hardly shocking. Neither is it wrong. The real problem is that good economics often makes bad politics, and good politics of-ten makes bad economics. Since politics rules, economic policy often goes astray.
Examples abound. Just about every economist will tell you that a carbon tax is by far the best way to fight global climate change. Yet it’s hard to find a single politician who will advocate such a tax. An effort to implement cap-and-trade, its first cousin, crashed and burned in the Senate in 2009. Economists align almost as strongly behind using congestion tolls to ease traffic burdens on crowded bridges, tunnels, and city streets. Yet almost all politicians shun them. (New York’s Mayor Michael Bloomberg recommended such fees in 2007, but the idea died in the state legislature. Maybe it will get new life this year under Governor Andrew Cuomo.) Likewise, almost all economists will tell you that trade among nations is not about either creating or destroying jobs but rather boosting standards of living by making the economy more productive. Yet Donald Trump keeps telling us that NAFTA is killing jobs, while Bill Clinton said the opposite almost 25 years ago.
These contradictions are an unending source of frustration to economists. But they are also worrisome on a far broader scale. Everyone suffers when the clash between economics and politics leads the nation into policy blunders.
Why can’t politicians and economists live more symbiotically? Start with the fact that the two groups employ different underlying forms of logic. Economists rely on the syllogistic (or mathematical) logic that is taught in high schools and colleges around the world. Like many economists, I used to think there was no logic in politics at all. But there is; it’s just political logic. Skilled politicians master this weird form of logic, but most economists find it baffling. And of course, it’s political logic, not economic logic, that rules the policy roost.
Trump’s misguided fiscal policy is a good example. The economic logic said unequivocally that an economy at full employment does not need fiscal stimulus. But that intellectually tidy view neglected an important element of political logic: People love to see their taxes cut. No surprise which logic won the day.
The clash between economic and political civilizations extends even to basic arithmetic. Show a bunch of economists a policy proposal that costs ten million people $1 each (thereby costing society $10 million) in order to provide benefits of $1 million each for eight well-placed people (gaining society $8 million), and they will scoff. It’s a net $2 million drag on the economy. But show that same proposition to politicians, and they will see eight grateful and highly motivated potential donors arrayed against ten million people paying no attention. Who, after all, is motivated to political action by $1?
This example may sound contrived, but the idea underpins every tax bill and every trade agreement. They all include special provisions, often added in the dead of night, that are bereft of economic rationales but loaded with powerful political ones. Why else do you think last December’s tax “reform” preserved—indeed, codified—the notorious carried interest loophole that showers gigantic benefits on a handful of private equity moguls? Candidate Trump excoriated this loophole during his campaign yet somehow came to accept it after just eleven months in office.
Economists not employed by special interest groups generally support policies they deem to be in the national interest—say, a carbon tax, or a trade agreement like the ill-fated Trans-Pacific Partnership. They realize that virtually every policy change creates some losers, but they instinctively favor the ones likely to yield the most benefits for the most people.
Politicians have a rather different, and well-known, objective: getting elected and reelected. The search for votes may sometimes—by coincidence—lead politicians to the same policy positions as economists. The 1986 tax reform under Ronald Reagan was a marvelous example. Although it was far from bipartisan, so, too, was the 2009 stimulus bill championed by Barack Obama. More commonly, however, politicians will cater to special interest groups that can raise a ruckus, or piles of cash, or increase voter turnout. The fossil fuel, steel, and private equity industries are three prominent current examples, but they are far from the only ones. The Founders thought they had devised a system of government by majority rule (subject to checks and balances). Instead, America now has a system in which determined minorities routinely defeat somnolent majorities.
There’s another reason why political and economic civilizations differ. It’s their time horizons. An age-old cliché holds that politicians look ahead only to the next election. But today’s media-savvy politicians often look ahead only to the evening newscasts or, lately, to the next tweet. Economists don’t share this failing. But they often succumb to the opposite malady: time horizons that are too long.
Here’s a not entirely hypothetical example. Suppose an opening to increased trade with China costs a 55-year-old steelworker his job. It’s a near certainty that he will never work in a steel mill again. In fact, he may never find a job that pays as well as the one that went overseas. Economists, concentrating on the big picture, tend to brush this job loss aside, calling it a “transition cost,” part of the price the economy pays for long-run prosperity. All will be well in the end, they assure us. But that doesn’t provide much comfort to the unemployed steelworker, whose “transition” may last for the rest of his working life. Politicians understand that. Too many economists don’t.
So what’s the solution? Sadly, there is none. There are, however, palliatives. One idea is for economists to concentrate more on policy options that offer gains up front and defer the pain for later. For example, enact today a carbon tax that starts tiny but grows larger over time. Another promising approach might be to earmark more specific sources of revenue to specific expenditure programs so voters see the link. The most spectacularly successful example took place in 1935, with FDR’s clever tying of the payroll tax to Social Security benefits. But Eisenhower leaned on this tactic, too, by financing the interstate highway system mainly with gasoline taxes. Trump could replicate Eisenhower’s success today with a pivot to infrastructure financed by raising the gas tax.
More radically, maybe politicians could hand over some economic policy decisions—certainly not most—to nonpolitical technocrats. A crazy idea? Well, that’s how monetary policy has worked for decades. Technocrats at the Federal Reserve operate independently of politics, under authority delegated by Congress.
And think about this. Despite the alleged tax “reform” that Congress enacted last year, our tax code remains a complicated, unfair, and inefficient mess—arguably worse than before the “reform.” What are the odds that a group of nonpolitical technocrats could do a better job of reforming the tax code? Roughly 100 percent. What are the odds that Congress will let that happen? Roughly zero. Doesn’t that suggest there is something wrong with the way we do economic policy in the United States? # # #
[Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs in the Economics Department and vice chairman of The Observatory Group at Princeton University. He has written (with Graham Vick) — most recently — After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (2013). See other books by Alan Blinder here. Blinder received an AB summa cum laude (economics) from Princeton University, an MSc from the London School of Economics, and a PhD (economics) from the Massachusetts Institute of Technology.]
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