Thursday, October 27, 2022

Conservatives' Economic Talking Points Are Invariably False All-or-Nothing Choices

by Neil H. Buchanan

We have all become accustomed to Republicans’ increasing willingness simply to lie about the world.  Claiming that Critical Race Theory is taught in the schools (which they supplement with the absurd sub-lie that kids are being indoctrinated to "hate" themselves for being White) and that abortions are performed as late as the moment of birth are only two of the most commonly repeated lies.  And of course, literally hundreds of Republican candidates for office this year refuse to admit that the 2020 election was free and fair and that their side lost.

Even so, it is worth remembering that some of the more common deceptions in the Republican playbook are not direct factual misstatements but instead rely on a completely nuance-free insinuation that everything is an all-or-nothing choice.  Either you are in favor of the Iraq War or you "hate America."  Either you want to throw every brown-skinned person out of the country or you favor "open borders."  Either you want to turn every police department into a mini-Navy SEALS team, or you "don't back the blue."  Either you want the government to execute people in your name or you "want to let murderers loose."

Those examples are all transparently false, but others are less so.  Here, I will look at three of American conservatives' favorite talking points about economic issues -- Fed-bashing, the Laffer Curve, and the Confidence Fairy -- and show that each of these endlessly repeated articles of faith boils down to a false all-or-nothing choice.  Once viewed in this way, it is in some ways tempting to see the Republican worldview as an impressive edifice.  Completely dishonest, sure.  But impressive.

First, Fed-bashing.  In yesterday's Dorf on Law column, "Am I Going Too Easy on the Fed?" I sympathetically explained why Federal Reserve chair Jerome Powell is now overreacting to inflation.  I admire his deft handling of monetary policy for the past four years, especially his ability to make the economic side of the pandemic run more smoothly than we ever could have hoped.  Even so, he and his colleagues are in fact now overreacting, at best harming the economy and people's livelihoods and at worst pushing the economy into an unnecessary recession.

As fate would have it, the most pompously uninformed pundit in Punditland -- The Washington Post's George F. Will -- published a piece today attacking Powell.  I could only stomach a bit of it, but Fwill is currently in high dudgeon (his default mode, to be sure) because he found out that the Fed has assigned some of its researchers to study the financial impact of climate change.  Or, in his inimitably smug phrasing: "The Fed’s newest self-proclaimed purpose is to identify — through guesswork dignified as 'scenario analysis' — and mitigate the threat that climate change supposedly poses to the 'financial system.'"  I am no stranger to the use of scare-quotes, but "financial system"?  Huh?

But it is much worse than Fwill's habit of sneering at people who try to do things that he deems unimportant.  His rather outrageous accusation is that the Fed has failed to stop inflation and is thus trying to change the subject by studying something else -- something that he claims will be "unfalsifiable."  That is all ridiculous and would not in fact merit comment, but I feel compelled to point out as a threshold matter that Fwill is simply wrong about what the Fed is supposed to do.  He confidently asserts: "The Fed’s primary purpose is to preserve the currency as a store of value: to prevent inflation."

That is simply not true.  He might want it to be true, but it is not true.  Since the passage of the Employment Act of 1946 (modified by the Humphrey-Hawkins Act of 1978), the Fed has had a mandate to reduce both unemployment and inflation while maximizing sustainable economic growth.  Indeed, the link in Fwill's own piece takes us to a FAQ page on the Fed's website, "What Is the Purpose of the Federal Reserve System?" which says in unmistakable terms that preventing inflation is not the Fed's primary purpose.

There is, mind you, very little information on that FAQ page to digest.  It begins with a thumbnail history, stating that the Fed "was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system."  (I guess the Fed is unaware that "financial system" is now ironic.)  At best, inflation-fighting is implied there, but the page then offers four bullet points to explain the Fed's duties under law.

The first of those responsibilities reads as follows: "Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices."  So even in its first appearance, the reference to inflation is listed after pursuing full employment.  Moreover, "stable prices" is hardly a self-defining term.

And if one thinks about it for even a moment, it could not possibly make sense for the Fed to take as its primary purpose to prevent inflation, where "primary" apparently means "absolutely necessary, and the standard by which the Fed will be deemed to have succeeded or failed."  The Fed could in fact push inflation down to zero in short order, and it could even create deflation (which is not "stable prices" either, but I doubt that Fwill would complain).  Doing so, however, would require the Fed to engineer a deep and painful recession.

On a more amusing note, the third bullet point says that the Fed also has the following responsibility: "Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets."  There is that pesky “financial system” again.  Seems like climate change might be an important — even a legally required — thing to study!  And do not forget that I am quoting from the source that Fwill himself cited in support of his BS assertion that the Fed’s primary purpose is to prevent inflation.

This is all in part merely a bad imitation of Democratic Senator William Proxmire's silly "Golden Fleece Awards" from the 1970's (which I explain at the end of this column), where uninformed critics take anti-intellectual potshots at government research activities that rankle them.  More to the point of my argument today, however, this is also a version of the common Republican complaint that the Fed should only do one thing, and if it does anything else, it is illegitimate.

Good monetary policy has to involve a balancing act between varying goals.  There is no "primary responsiblity," at least in terms of a specific economic measure like inflation or unemployment.  Even so, Fwill has plenty of company among Republicans in saying that the Fed has an all-or-nothing job: do whatever is necessary to make inflation zero (or negative, maybe), or be deemed to have failed.  Damn the consequences.

With all of that in mind, it will take much less effort to explain the all-or-nothing scare tactics behind the Laffer Curve and the Confidence Fairy.

Consider the supposed logic underlying the Laffer Curve.  If the tax rate were set at 100 percent, Republicans point out, there would be no tax revenue.  There is a curve, of course, because there would be zero tax revenue at a 0-percent rate as well, meaning that there are going to be ranges in between in which tax revenues rise and others in which revenues decline when tax rates rise.  Somehow, however, Republicans always act as if we are on the wrong side of that curve, thus justifying more tax cuts for the rich.  Why?  "Well, if taxes are 100 percent, then you'd get nothing."

This is not even "lather, rinse, repeat."  It is just repeat.  "You're in favor of higher taxes than I want, so where does it stop?  You're obviously in favor of 100 percent tax rates, which wouldn't even collect any revenues!"

Finally, consider the Confidence Fairy.  In a new Verdict column today, I confronted what might look like a contradiction in my writing about the "bond market vigilantes" that supposedly will punish the US government for its fiscal sins.  One one hand, I have always ridiculed the idea that the financial markets were going to bring the US government to heel.  On the other hand, however, I have long presumed that a debt ceiling crisis would be disastrous precisely because the bond and other financial markets would go absolutely bonkers if the US ever defaulted on its obligations.

This, however, is not a contradiction at all, because it is the equivalent of acknowledging that a 100 percent tax rate would kill all (reported) economic activity.  In other words, no one could ever deny that the financial markets could react very badly to a government policy and that an extreme enough reaction could destroy the economy.  A Republican-led debt ceiling default would do that, because it would be completely unprecedented and undermine the most important fundamental assumptions on which everyone in the economy -- even the most savvy investors -- rely.

But when Republicans say that the Confidence Fairy will be devastatingly unhappy because of garden-variety fiscal policy changes, or even because of unusual but justified fiscal actions (like Covid relief, or the Obama stimulus in the face of the Great Recession), they confuse the fact that financial markets could cause an economic meltdown with the belief that this will happen every time a Democrat does something that financiers hate.

To summarize:

-- Inflation: "The Fed is supposed to end inflation, and it didn't, so it's a failure."

-- Taxes: "A 100 percent tax rate would be disastrous, so tax increases are disastrous."

-- Debt: "A debt crisis could tank the economy, so any increase in debt (under a Democratic president) is going to tank the economy.  But if we actually go 100 percent crazy and default on the debt, no problem!”

George W. Bush reportedly once said: "I don't do nuance."  His fellow partisans have followed his lead.