Tuesday, January 13, 2015

Lying to People For Their Own Good

-- Posted by Neil H. Buchanan

Last Thursday, in my Dorf on Law post, I offered some thoughts on the new Republican Congress's vote to require "dynamic scoring" of tax cuts.  This seemingly-innocuous change in the technical rules for generating federal revenue forecasts would make it significantly easier for Republicans to sell tax cuts to pundits and the public, because it would make the revenue loss from any tax cuts look smaller (or, depending upon how shameless the revenue estimator is willing to be, even disappear).  As soon as they hire a sympathetic head of the Congressional Budget Office, their to-the-bone belief in the magic of tax cuts will have an official outlet.  Here, I want to explore two further thoughts flowing from Thursday's post, one considering some points about the possible benefits of tax cuts that were raised by two commenters, and the second concerning the public relations of policy proposals.

The central idea of "supply-side economics" is that private actors in the economy are encouraged (I refuse to butcher the English language by using the non-word "incentivized") to increase their productive activities when their taxes are reduced.  If they do so, then the revenue effects of a tax cut work in both directions: the cut itself reduces revenues, but the increased activity (if it is taxable) increases revenues.  The snake-oil version of this idea is the so-called Laffer Curve, which posits that the positive effect is at least as big as the negative effect -- that is, that "tax cuts pay for themselves."  This has always been nonsense, but it will not go away on the Right.

The supposedly reasonable version of this notion is that tax cuts do not entirely pay for themselves, but that the offsetting increase in economic activity is at least important enough to take into account when estimating revenues.  If a "static" estimate of a tax cut is that revenues would go down by $800 billion, and the dynamic estimate is that it would indirectly bring in $200 billion in extra revenues, why not score the tax cut as losing $600 billion, not $800 billion?  As I explained in last week's post, however, the reality is that we are not sure that any given tax cut will increase economic activity at all, and thus it is possible that the second effect is not even positive for revenues.  Certainly, the state of the economic art is that such estimates are all over the map, and even predicting the direction of the change is guesswork.

I summarized my point by stating that "the best evidence shows that the effect of tax cuts on the economy is, in fact, tiny to nonexistent, and that it is possible that the effect could be negative."  This is where the commenters asked for some clarification. Was I overstating the case?  Is it not true that there could be some tax cuts that have beneficial effects?  Both of which are fair questions, which require two further points of clarification: First, the bill applies only to "any bill expected to cost at least 0.25 percent of the gross domestic product, or about $42 billion using figures from 2013."  In other words, while it might be possible to think of targeted tax cuts that could nurture a small and promising industry, or something like that, the Republicans have adopted dynamic scoring specifically to grease the skids for their larger plans.  (A one-quarter-percent tax cut, when scored in standard rules over a ten-year period, is a half-trillion-dollar proposal.)

Second, I could have been clearer in saying that my assertion was directed not at every possible type of tax cut, but at the type of tax cuts that the Republicans dearly love.  One of the commenters on my post noted that surely tax cuts during a recession have a multiplier effect (even though the size of the tax multiplier is smaller than the spending multiplier), so surely I -- as a good Keynesian -- cannot seriously be saying that there are never macroeconomic effects of tax cuts!

True enough, but that is not what the Republicans are talking about.  Their "contribution" to the stimulus bill in 2009 was to insist that the bill include as many tax cuts as possible (instead of spending increases), and that those tax cuts would be as regressive as possible, in particular tax cuts aimed at businesses.  Since businesses simply pocket tax cuts when the economy is weak (why expand your business when you don't have enough customers to buy your current output?), it is unsurprising that the stimulus was much less effective than it could have been, especially at the too-small scale that Republicans and conservative Democrats insisted upon.

I am certainly not saying that Republicans would not hypocritically become situational Keynesians when it comes to tax cuts.  (They are certainly situational Keynesians when it comes to the Keystone XL pipeline, and for military spending.)  I am simply arguing that there is no honest reason to take that claim seriously.  Yes, they will appoint someone to head CBO who will score any tax cut proposal in a way that Republicans find congenial, which is exactly why the adoption of dynamic scoring is a bad idea.

More to the point, Republican orthodoxy insists that tax cuts are not merely good for fighting recessions, but they are the essential means to increase long-term growth.  Republicans hated being forced by accounting standards (interacting with the so-called Byrd Rule) to phase out the 2001 Bush Tax Cuts (which led to the misnamed "fiscal cliff" a decade later), and their goal is to find someone who will squander CBO's nonpartisan reputation to say that the next multi-trillion tax cut will be a boon to the economy.  In a Verdict column a couple of years ago, I noted that honest economic research had never supported the idea that large-scale tax cuts of the sort that Republicans desire would increase long-term growth.

The fact is that we really have only the most minimal knowledge of what can change the economy's growth path, and what we do know suggests that spending on public investment (especially education at all levels, and support for young children) is the best -- and maybe the only -- way to make the economy grow faster over time.  And as I noted in last Thursday's post, the Republicans' new rules specifically prohibit dynamic scoring of spending bills.

In short, while it would be foolish to believe that there are literally no tax cuts that could ever have positive effects on the growth rate of the economy, the relevant policy universe in which this discussion is taking place is focused on a known menu of tax proposals that would have, as I wrote, "tiny to nonexistent" effects on the overall economy.  Such tax cuts, if scored honestly, would end up having the same revenue cost under either dynamic or static scoring.  But the whole idea on the Republican side is not to score them honestly.

Finally, I want to revisit the public relations aspect of last Thursday's post.  There, I took some liberals to task for adopting the "cautious" position that we dare not tell people that the deficit situation is well under control (and certainly not run-screaming-into-the-night scary, as so many people claim), a position that they base on the theory that telling people this truth will reduce our overall vigilance against profligacy.  I then specifically noted a NYT op-ed that claimed, against the evidence, that the federal deficit is "spiraling" and that the overall long-term debt position of the country is "unsustainable."

That second version of the argument was especially revealing, because it was not merely a claim that we supposedly need to maintain a permanent, long-term atmosphere of low-level debt panic.  Instead, the argument was deeply alluring as a matter of partisan politics: Republicans are going to use dynamic scoring to pass tax cuts, but then those tax cuts will worsen the deficit, and we cannot afford to do that because the debt situation is already unsustainable.  The Republicans are dishonest, and they will make horrible deficits worse!!  If Democrats admit that the debt situation is not so bad, then do they not lose an important argument against tax cuts?

I argued, in essence, that it is generally a bad idea to say things that one knows not to be true.  Ultimately, the public will learn that they are being lied to, and the people who are lying to them will be exposed as liars.  As soon as I published that post, I suddenly thought of the best current example to support my argument: Jonathan Gruber.  Many readers surely know that Professor Gruber, an economist at MIT, was a key architect of the Affordable Care Act who became infamous last Fall when videos emerged showing him talking about the "stupidity of the American voter," and how the Obama people exploited that stupidity to pass a bill that never could have passed otherwise.  Right-wingers have been having a field day ever since, even though they completely misunderstand what Gruber was doing.

The point here is that Gruber was merely saying out loud what a lot of economists and policy makers (across the ideological spectrum) believe, which is that the average voter needs to be fooled into supporting good policies.  And to be honest, there is plenty of evidence for this proposition.  That one of our political parties relies on no-new-taxes pledges to get their candidates elected, and has done so for decades, is a pretty serious indictment of people's ability to think with any clarity about economic issues.  This is especially clear when one considers the political response by both Democrats and Republicans to anti-tax fervor: disguising spending increases as tax cuts by characterizing, for example, what are really subsidies to buy houses as "first-time home buyer tax credits."  We now have over one trillion dollars per year in such "tax expenditures," and although there is nothing inherently wrong with enacting spending policies through the tax code, these provisions are certainly a lasting testament to the faith that politicians have in people's willingness to be fooled.

So I might be wrong that liberals and Democrats will pay a price for misleading the American people about the state of the deficit and debt.  I doubt it, however, specifically because the deception is being used to argue against ever-popular calls for tax cuts.  Opposing Republicans' tax cuts is important, but doing so in a way that is demonstrably wrong (or at least highly debatable) only makes Democrats look like dishonest spoilsports.


Unknown said...

Thank You, Professor. What You says makes simple and good mathematical sense. Incidentally, can You provide some citations for the point "spending on public investment (especially education at all levels, and support for young children) is the best -- and maybe the only -- way to make the economy grow faster over time" for the Rest of Us to share? Thanks, again.

James Longfellow said...

"Opposing Republicans' tax cuts is important, but doing so in a way that is demonstrably wrong (or at least highly debatable) only makes Democrats look like dishonest spoilsports."

The counterargument is that liberals can't afford to care.

Imagine that a person is standing on a ledge and threatening to jump off as a suicide. Down below there is a Republican who is urging him on, telling the suicidal that if he jumps why surely he will go to heaven with the big rock candy mountain. Next to the Republican is a Democrat. What's the Democrat to do? He could channel Lennon and yell at the man, "don't jump there is no heaven" but the problem is that the man believes in a heaven so such a plea is likely ineffectual. Therefore, even though the Democrat is an atheist, he might be better off shouting to the man, "Don't jump you're going to hell!" That makes the Democrat a "dishonest spoilsport" but in the end the man is scared into backing off the ledge.

Now, it is possible to argue that the stakes are not quite so high here, which perhaps weighs more in favor of honesty. Nevertheless, I think the hypothetical is enough to illustrate that is not self-evident that looking like dishonest spoilsports is the worst possible thing.

Joe said...

The Democrat can tell the person that it is worth it to live & even if there is a heaven, God would want the person to live.

The example is amusing to the degree the average Republican is much less likely than the Democrat to support any sort of "suicide" (other than I guess war related) even if some might label it euthanasia.

David Ricardo said...

Excellent addition to the original post and great clarification. Mr. Buchanan is absolutely correct on the business side. Cutting business taxes does not stimulate investment because business invests in response to demand, not because tax rates are low. At best a lower tax rate might attract investment that would have gone elsewhere, but only for the short run and only until other nations cut their rates to match the cut in America.

As for individual taxes again Mr. Buchanan is right on with respect to the type of tax cuts Republicans propose. Cutting Mitt Romney’s taxes will not lead to higher demand and higher growth, it will only lead to more idle wealth for Mr. Romney and his ilk.

Neil H. Buchanan said...

Thanks to all for the interesting comments. In response to Unknown, thank you for giving me an idea for a future Verdict column and Dorf on Law post. Until I write that column (which will contain the citations that you desire, here is a teaser along similar lines:

Yesterday, Paul Krugman wrote a post on his blog that cited to a recent NYT article about the long-term payoff from Medicaid payments on the health of children, who then grow up and become more productive members of society, pay higher taxes, and so on. The links are below. More to come in the next few weeks. Thanks again.



lucas landry said...

Very awesome post , i am really impressed with it a lot

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