Archive for the ‘Political Economy’ Category

A Taxing New Year

Another new year, and I fear it may be quite taxing.

Our nation started the year by temporarily avoiding the fiscal cliff, but we can expect a year of constant arguments over the fisc. We will become a nation of cliff dwellers. Those who hope for something else don’t understand how politics works.

The big change this year is higher taxes on “the rich”. It is almost always true that when “the rich” are taxed more, everyone else suffers. Economists can explain why. Think of it as trickle down austerity. Even the designation of “the rich” is misleading: our new higher taxes reach much farther down the income scale than is apparent. To see why, search for “PEP” and “Pease”. These back door tax increases will probably snag the unwary. Numerous other changes, often overlooked in the popular press, will ensure that most everyone feels some pain.

No one likes taxes, but lots of economists are especially concerned these days. Why? Because they know that if too much is taken by government, society suffers a decline in relative standard of living. They don’t know exactly where that threshold is, but there is troubling evidence that the US has reached or even breached that level. While much of the federal tax increase has been avoided, we still have relentless tax increases at the state level, the world’s highest corporate tax (which is built into most everything you buy), and the national debt which, to economists, is simply deferred taxes and interest. Taxes are a very big factor in determining everyone’s standard of living and the news isn’t good.

Of course, the impact of taxes could be totally eclipsed by stronger forces in the economy. No one really knows the direction our economy will take. But higher taxes have historically been bad news and too many of us are deluded in believing that “someone else” pays. For better or worse, we’re all going to take the hit. We’ll also see some benefits from government spending – the question is, as always, are the benefits worth the cost?

Tax

Tax (Photo credit: 401(K) 2013)

 

The Public Has Spoken – Sort Of

Once you understand public choice theory, watching politics unfold becomes less of a frustration and more a source of amusement.

I just heard President Obama lay out his near term agenda. He was elected by a decent majority and will fight for the issues for which he campaigned. The people have spoken, and the people want a Democratic agenda implemented.

But the House of Representatives was also just elected. It is firmly Republican. The people have spoken, and the people want a Republican agenda implemented.

Same voters. Two conflicting agendas.

Some pundits say that voters want compromise. I don’t understand how you compromise between raising taxes and lowering taxes, for example.

I can only conclude that what voters actually favor is gridlock. This restrains both Democrats and Republicans and preserves the status quo. The last several presidents, when given a compliant Congress, have moved the country in unhappy directions. Gridlock forces politicians to take a “timeout” and allows only actions which are broadly acceptable to voters.

voting day in a small town

voting day in a small town (Photo credit: Muffet)

Don’t expect a lot to happen in a gridlocked political system – the public has spoken and inaction seems to be our preference as a nation.

Stupid Politicians May Be Smart

Disturbed by political distortions (which some would call lying), some earnest commentators make some wonkish proposals. I haven’t reviewed them, but I can almost guarantee that they are DOA. Yes, yes – politicians do some stupid things and stretch the truth like Silly Putty. You might want to read Why Politicians Lie. But more fundamentally, all you need to know is that politicians lie and do other stupid things because such activities win elections. Are voters really that stupid? Yes and no. Modern behavioral psychology explains a lot: most voters are simply neither terribly engaged nor well informed because that would be an inefficient use of their mental energy – they have other things, like families and jobs, to worry about. Politics and policy only gets whatever mental cycles are left over after higher priority needs are serviced. Thus, for politicians, a winning strategy is to portray a simple message which is sympathetic and easy to digest. It’s hard to see democracy working any other way – and it’s hard to see a better system than democracy.

English: Library of Congress summary: "Ca...

English: Library of Congress summary: “Caricature showing politicians and people representing different professions revolving around head of Richard “Boss” Croker as the Sun.” (Photo credit: Wikipedia)

I write this not to express cynicism. Instead, I find it helpful to remember that whenever a see some politician as stupid and venal, it’s just the way it has to be. Lighten up! This ought not to discourage us from thinking about issues and policy – instead, we should manage our expectations and focus where we can make a difference, not where we can’t.

Health Care in Wonderland

Wow. The surprising Supreme Court decision has caused an avalanche of commentary. The sequence of events and the underlying logic is bizarre. The bottom line is that the mandate (“not a tax”) would be unconstitutional if it were a mandate, but it is constitutional because it really is a tax (not a mandate). You can’t make up stuff this funny!

So, we have the biggest tax increase in history falling almost entirely on the middle class, sponsored by the folks who say there should be no tax increases for the middle class. You can’t make this stuff up!

Despite the Alice in Wonderland nature of the law and politics involved, the reform is chugging on – at least mostly. Big chunks have already been thrown overboard because the administration said they were unworkable. It remains to be seen how much more will collapse under it’s own weight. And, outside government, insurance rates are skyrocketing in anticipation of Reform and employers everywhere are deciding whether they can any longer afford to provide insurance for their employees. The fun has just begun!

Meanwhile, lots of economists have described what needs to be done to fix this mess. Their plot makes sense to me, but a real solution would not sound attractive to the poorly educated voters who decide elections. Democrats won’t touch the good ideas and even the boldest Republicans offer only faint echoes.

So, where are we headed? My guess is that health care will soon get a lot more expensive and a lot more people will do without or without enough. At some point we might hit rock bottom and entertain real reform, but only after the current cast of characters in government are only an unpleasant memory. I hope I’m wrong.

Washington DC: United States Supreme Court

Washington DC: United States Supreme Court (Photo credit: wallyg)

French Logic

I’ve blogged a lot about the minimum wage (try searching), so I won’t go into it again. The situation is well understood, at least by economists. The American public, however, almost always supports an increase in the minimum wage in the apparent belief that it will make things better. Politicians are inclined to follow the public’s lead, even when they know better. The French seem to feel the same way, with their new head honcho declaring a boost in the minimum wage, claiming it will boost consumption. Economists everywhere are beating their heads against whatever wall they can find. The only good thing that I can see in this is that it proves that French politicians are no better than American politicians. Shed a tear for France.

Divorce & The Housing Crisis

Beside being an interesting discussion of economics, this postpresents a novel idea: a surge in divorce rates caused all the household based statistics to go bonkers, causing an incorrect policy response that pushed us unto the housing crisis. It certainly fits with the data and the sequence of events, so it’s hard to believe that divorce rated didn’t at least contribute to the housing mess. This illustrates a general problem in macroeconomics: there can be implicit assumptions buried deep in the models that, in changing circumstances, make the model’s output misleading. This is less than comforting and another reason to be skeptical of macroeconomic forecasts.

Divorce

Divorce (Photo credit: Wikipedia)

Tying It All Together

This is my first semi-automatic cross posting from my blog  to social networks Facebook, Twitter, and Google+. However, I have been blogging for many years. Long term readers know that while I started blogging mostly about economics, I wandered into political science. That’s easy to understand, since politics has a lot of influence on economic reality and economics, in the form of public choice theory, has a lot to teach about politics. But lately I’ve been nibbling around the edges of virtue ethics, which readers may have found puzzling. Frankly, I found it puzzling too, although I knew there was some kind of intellectual connection.

I am not the first person to follow this path. Economist Kenneth Boulding was here long before me. The awesome economist Robert Higgs does a great job of explaining the connections in Social Science 101: Three Ways to Relate to Others. It’s well worth the read.