Economic Nonsense

September 22, 2008 | by | Topic: The Path to FreedomPrint Print

It saddens me when I see a member of my profession go over to “the dark side,” that is, to politics. Politics replaces voluntary action with compulsion, private contract with coercion. Government intervention imposes distortions, inefficiencies, and extra costs on society. In essence, politics is “anti-economics,” a nullification of economics, so for an economist to argue for more government control over private economic decisions and transactions, is anomalous, pathetic, and an abandonment of economic truth.

We see frequent examples of economists mutilating economic principles during an election year. The latest example is an article, “The Great Debate,” by Alan Blinder, Princeton professor, former vice chairman of the Federal Reserve System, and adviser to Democratic politicians. In his article, Blinder uses misleading terminology, meaningless statistics, and common economic fallacies to hype Barack Obama’s campaign for the presidency.

Blinder wastes no time in misleading his readers. In his opening paragraph, he writes, “McCain wants more tax cuts for the rich; Obama wants tax cuts for the poor …” Fact: McCain wants to retain the Bush tax rate cuts, not enlarge them. Like Democratic President John Kennedy and Republican President Ronald Reagan, McCain favors non-punitive marginal tax rates because they enhance economic growth and job creation. Fact: even with the Bush reductions in marginal tax rates, the tax rate on the rich is significantly higher than on the non-rich, and the rich’s share of total income tax payments has increased. Fact: Obama can’t give tax cuts to the poor, because the poor already pay zero federal income tax; what Obama proposes are tax credits, i.e., a negative income tax whereby the Treasury would mail checks to low-income Americans.

Blinder proceeds to assert that “the United States economy has grown faster, on average, under Democratic presidents than under Republicans” since 1948, then cites figures—data which I do not dispute—to “prove” his point. In doing so, he commits a historicist fallacy that my first-year economics students can see through. Just because two facts exist concurrently doesn’t mean that there is a cause/effect relation between them. For example, ever since Alaska and Hawaii joined the Union in 1959 and 1960, respectively, the federal budget has rarely been balanced and national debt has exploded, but that surely doesn’t mean that the solution for our country’s fiscal woes is to expel those two states from the Union.

Policies, not parties, determine differences in economic performance. Kennedy’s tax cuts gave a boost to the economy. That stimulus was blunted by Johnson’s unsustainable “guns and butter” policies, which spawned an inflationary period that hobbled economic performance under Nixon, Ford, and Carter. Only when Reagan cut taxes and defended the dollar was prosperity established as a long-term trend again.

Blinder concedes that “presidents have limited leverage over the nation’s economy.” Indeed, economic conditions under a president are often largely predetermined by events that happen before a president is even elected. [See my “Ranking (and Timing) the Presidents” article.] Blinder also concedes that Federal Reserve policy often has more impact on economic growth than do presidents. I would add that Congress, which has the constitutional power of the purse, has more control over fiscal policy than presidents do, and during many years when Republicans were in the White House, Democrats controlled Congress, which further erodes Blinder’s partisan thesis.

Blinder’s other main argument is that “when Democrats were in the White House, lower-income families experience slightly faster income growth than higher-income families—which means that incomes were equalizing,” and that the opposite happens under Republican presidents. Again, no clear explanation of economic cause-and-effect ensues. Are presidential policies the cause of these statistics?

The two primary causes of poverty in America are: not finishing high school and teenage girls becoming unwed mothers. How do presidents control those variables? Another nonpolitical factor in statistical income disparity is that the last few decades have seen marvelous technological breakthroughs and unprecedented growth in new businesses. The result? Huge numbers of new millionaires and more than a few billionaires. Average incomes inevitably are skewed toward the rich in such an era, regardless of which party holds the White House. And the good news is, if we look at absolute rather than relative levels of income, all quintiles are experiencing rising incomes.

It is Prof. Blinder’s right to shill for Obama if he so desires, but a more candid, economically credible pro-Obama argument would be: my candidate wants to redistribute wealth from rich to poor to reduce income inequality; he wants to increase all sorts of federal spending. If Congress enacts his program, the short-term effect will likely be a boost to economic growth. In the long run, though, such booms generally wear off, and overall growth will slow as it has wherever and whenever government has absorbed a larger share of a country’s economic activity.

It is sad to see economic principles abused in such a tortured subservience to political expediency. In this election season, when an economist speaks, caveat lector—let the reader beware.

Mark W. Hendrickson

Mark W. Hendrickson

Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.

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