Why Do Two Wrongs Have to Make a Political Compromise?

I’ve been reading about how the economic stimulus plans are shaping up, trying to learn about all the new tax cuts that are suddenly back into the picture despite the skepticism expressed over the past few months about how effective another round of tax cuts would be in boosting consumption–given the already-mediocre marks many economists gave them the last time around, and the current state of American consumers, who are now less than enthusiastic about even being labeled ”consumers.”

The Wall Street Journal’s story says my friend Bill Gale was also surprised to see the $300 billion in tax cuts:

William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.

“On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side,” Mr. Gale said. His biggest question about the latest proposal concerns the credits for hiring new workers or refraining from layoffs. Much of that money would likely go to companies that would have hired more people anyway, he said, adding that it is impossible to know what firms would have done without such a credit…

Bill may be onto something. There is a lot of deficit-spending that policymakers want to do, and while everyone seems to suspect that direct government spending may have more merit relative to tax cuts this time around, there’s still not quite enough faith that we could do that much intelligent spending that fast (even among those of us who have a good deal of faith in government more generally). Even if there might be some “dumb” tax cuts being proposed (in terms of how effective they are as stimulus), maybe they’re not any ”dumber” than some of the spending that’s being proposed.

And then the same WSJ story goes on to offer this explanation of the new-found tax-cut components of the stimulus/recovery package:

Republicans are already criticizing parts of the stimulus package. Sen. McConnell, speaking Sunday on ABC’s “This Week,” questioned one of the biggest items, which would send as much as $200 billion to states largely to expand the federal share of Medicaid, the health program for the poor. He suggested structuring that aid as a loan, saying it would encourage states to “spend it more wisely.”

An array of business tax cuts could help overcome such GOP opposition, enabling the Democrats to present their plan as a balanced mix of tax cuts and spending. It also would likely encourage business interests to lobby hard for its enactment.

Mr. Obama’s team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two…

But the so-called “balanced” mix of tax cuts and spending, designed for political “compromise,” still tips the scales on the positive costs side. It’s more of the same kind of thinking that has led to such fiscal irresponsibility in so-called “bipartisan” (instead really, inherently “partisan”) negotiations over the past eight years. It’s the “you only get yours if I get mine” attitude–in contrast to the alternative “I’ll give up some of mine if you give up some of yours” one. The “balanced” shares of the packages going to tax cuts versus spending may be similar in both cases, but the level of deficit-spending is very different.

In the context of the massive stimulus package we seem to be publicly committing to (maybe $800 billion or more over two years), I worry that the policymakers are effectively saying to each other: ”you only get to have your dumb spending, if I get to have my (dumb) tax cuts.” And the economists, who are the ones usually most likely to worry and speak up about the dumbness in policies, might in this case be inclined to project a “dumb is better than nothing” attitude. Even with the large stimulus I do believe we need, I would still like to say that dumb is not better than nothing, because even today, dumb policies have a price.

I’m still hoping that political compromise and bipartisanship (or “post-partisanship”) will lead us to come up with more thoughtful, not less thoughtful, policies–i.e., the discovery of more “two rights” situations, rather than the lapsing into our old, “two wrongs” habits.

Comments

[baldguy:]

I believe that as long as the "stimulas packages" , wither they are tax cuts or spending, are geared to proping up the consumer so they can spend-spend-spend-with $ they do not really have, we are doomed to a very long and painful time. The cure will be the return to making "stuff" right here in the good old USA and not in some other country. The "stimulas packages"
must be designed to this end or they are not going to work in the long haul.

Jan 05 04:38 PM

[John Lounsbury:]

Some one needs to do a study of how tax revenue changes after tax cuts, after no tax cuts and after tax increases. The study should also determine how GDP changed following all three occurences. Since the three conditions cover all years, we could see what has happened for all three situations for 62 years, starting in 1946. Diane, could you tackle this?

The ideal experiment would have a control group for every tax cut: the economic performance for no tax cut. But, of course, this is not science and a control is impossible, at least directly.

Jan 06 12:16 AM

[Moon Kil Woong:]

Spending increases and tax cuts are not a very good way to reward all those who are lending to the Federal government. Maybe they are thinking, screw the foreigners that hold treasuries, however, they should realize most treasuries are held by the very banks and citizens they are trying to help.

The key to any stimulus plan is stability and a stable treasury market at preferably low rates. You risk ruining that with every unbalanced budget that takes more of GDP and puts it into some bureaucratic morass. That is unless it actually goes to doing something of clear value using economies of scale (post office). So far, that has not happened since the conception of the Corps of Engineers (the post office and armed forces was written into the constitution).

I am for a streamlined medical system. Whether it be socialized or private companies operating under a unified body of rules is debatable. But the US clearly has a bureaucratic inefficient morass of a health care system now and it should be reformed. It is adverse to the public's interest to the point of actually harming the patients it serves.

I wish Obama luck on this one. So far many people have tried. Tried and failed.

Jan 06 02:30 AM