"Cui bono"

Confusion Masquerading as Science? Taxes and Spending

May 29, 2011

by Mario Rizzo

I am always amazed that when many economists give policy advice the sophistication and logical rigor that the discipline so values gets completely lost.
There are many ways to interpret this. One is that the level of precision appropriate to theory and to applied economics is not appropriate to the “art” of economic policy. Of course, I would suggest that maybe this teaches us something about the ultimate value of sophistication in the theoretical product. Do the precise concepts of theory and applied economics have referents in the “real world”? Or is most of the precision lost when we try to understand the world and recommend policies? This is an important question.
However, here I am interested in the sloppiness of the policy-relevant discussions that even very good and respectable economists produce. One interesting example is a recent “Economix” piece in The New York Times by the Princeton economist Uwe Reinhardt.
I have two points: first, the confusing mix of science and value judgments; and second, the naïve analysis of the political process.
Let’s examine one of Reinhardt’s conclusions:

“Looking at the Congressional Budget Office’s chart, I came away convinced that Mr. Greenspan had it right: given what we, the people, expect the federal government to deliver – including, once again these days, a social insurance program called “federal disaster relief” — the only way to avoid a looming fiscal disaster would be to return to the higher taxes across the board that prevailed during the Clinton administration. (An alternative would be to bite the bullet and adopt a value-added tax, as other nations have done.)”

The previous charts that Reinhardt discusses portray that absent the wars in Iraq and Afghanistan, the Bush tax cuts, recovery measures (aka “stimulus”), TARP, Fannie and Freddie May, and the economic downturn, the current deficit would be very small. In the foreseeable future the roles of the recovery measures and TARP/Fannie/Freddie shrink. So we are left with primarily with the Bush tax cuts and the lingering effects of the economic downturn. The latter is the permanent reduction in national income and hence in tax revenue caused by the recession.

The last is a counterfactual estimate – the comparison is with a hypothetical sustained-growth of the boom which, by general consensus, was unsustainable. Another way to look at this, of course, is that spending had been based, to a substantial degree, on wealth that was illusory.
In any event, the recession happened and we are where we are. So we are left with the Bush tax cuts as the chief “correctable” cause of the large deficit, given the level of spending.
Why should we say “given the level of spending”? Because Reinhardt says that Americans want this level of spending. Well, not exactly.
The problem is that the level of spending is simply what the political process churns out. This is the result of log-rolling, special interests, misinformation and rational ignorance on the part of voters. To say this is “what we, the people, expect our government to deliver” is a metaphor or a mental construction of enormous naïveté. But more than that: It is obfuscating and dangerous. It evades the critical matter that we are not dealing with a single will which has certain objectives. There is no common hierarchy of values; “we” do not all want or expect the same things from government.
So why is it acceptable to privilege or take as “given” the current level and projected rate of increase in government spending? Why not take as given the current structure of income tax rates? Now it is true that “we, the people” are not all in agreement that these tax rates should be maintained. There is, once again, no common hierarchy of values. Some of us actually believe that government, at all levels, takes too much of people’s income.
Here is where Reinhardt compares the total “take” in the US with that of other countries. “We” are much lower than some other western countries. First, so what? As all economists should know, just because something is the case doesn’t tell us what should be the case. Second, the aggregate includes the great numbers of low income Americans who pay no income tax whatsoever. Among those who shoulder the major burden of spending the picture is less rosy.
It seems clear to me that the “given” of the analysis (that is, what “we, the people” want) is a value judgment by Reinhardt. This is acceptable — if it were simply admitted and taken for what it is. Some may be forgiven for thinking that, with all the charts and graphs, we might be doing economics.
It does, however, raise the important point of whether Reinhardt’s implicit political-process and ethical analyses have any significant degree of sophistication? Unfortunately, I do not see it.
As things stand, the article is a confused mix of untutored value-judgments, simplistic analysis of the political process, and statistics.
John Neville Keynes (the father of J.M. Keynes) said that the area known as “political economy” (today, simply “economics”) consists of three parts: the science, the ethics, and the art (policy).Good economists need to know all three but they must keep the parts separate or, at least, clearly identify them. 
Not to do so sows confusion of thought.