Tuesday, October 12, 2004

Fever Swamps

I made the mistake of going to the once excellent Brad DeLong site to learn more about this year's Nobel Prize in Economics (I don't know much about real business cycles). What a fever swamp it has become.

But there was this good post on economists ranking Bush v Kerry on the economic policy front. The Economist ran a poll, and Kerry did better than Bush (although Brad and I prob differ on the reasons why).

Despite their diverse assessments of today's economy, the professors are overwhelmingly critical of the central plank of Mr Bush's economic policy—tax cuts. More than seven out of ten respondents say the Bush administration's tax cuts were either a bad or a very bad idea, and a similar proportion disapproves of Mr Bush's plans to make his tax cuts permanent. By contrast, Mr Kerry's plan to roll back the tax cuts for people with incomes over $200,000 wins the support of seven in ten of them. (This poll was taken before October 4th, when Mr Bush signed into law his fourth tax cut, which extended several popular components of earlier tax cuts that were due to expire at the end of this year, including the child tax credit.)

The broad condemnation of tax cuts seems to be linked to the professors' worries about America's fiscal health and the looming retirement of the baby-boom generation. Although Americans overall seem relatively unconcerned about the budget deficit, a large majority of the economists rate it as a serious problem for the economy, with almost one in five describing it as a crisis. And they back Mr Kerry by a large margin (79% to 18%) to do more to promote fiscal discipline than Mr Bush.

Health care also seems to be an issue that pushed our economists towards Mr Kerry. More than 70% of the academics reckoned health-care costs were a serious problem for the economy—and they preferred Mr Kerry's plans to control those costs by a margin of 59% to 25% (with the rest ducking the question).

I just don't get it.

Firstly, Bush's tax cuts have primarily focused on reducing taxation on capital. Taxing capital is extremely inefficient and costly, and will get more inefficient and costly as capital markets become larger and more flexible. If you don't beleive me, ask the tax loving, business hating Europeans. Europe in general has much higher consumption taxes than the US because their higher government spending requires more efficient taxation to support it. The only reason the US can have the inefficient tax policy it has is because it doesn't tax that much. As entitlement spending grows (which it will, dramatically), taxes will have to go up, and efficiency will start to matter. So, why not start taxing consumption now. (Yes, I know consumption taxes are regressive. I also support means tested transfers to counter that effect).

Secondly, while the economists are right to point to boomer driven entitlement spending becoming a huge problem, I'm not sure why they see Kerry as being better than Bush about it. As far as I know, his main criticism of Bush's (large) Medicare bill was that it was too small, even though Medicare will far outstrip Social Security in cost. Perhaps they (rightly) beleive that a split Executive and House will be unable to pass bills and so can do less damage. I agree with that argument, but that's not Kerry Policy Good position, that's a Split House Does Less Bad position.

Thirdly, the only thing I've seen people propose to control health-care costs is to reduce new drugs coming onto the market by taking profit out of coming up with new drugs. I understand how this sounds like a good idea to old people, but it sucks for young people who can no longer expect the improvement in healthcare that people born in, say, the 40s enjoy. Yet another transfer from young to old may be politically popular but has no clear merit (to me) beyond that.

On a related but tangential point, today's corporate tax-cut bill is exactly the pork-fest one expects out of such people even outside of an election year. But hey, I don't think corporations should pay taxes at all (think about it--corporate taxes are paid for by capital via shareholders, labor via employees, and consumers via higher retail prices. Capital is an inefficient source of taxes, income tax reduces the incentive to work, and consumption taxes are the most efficient of the bunch. Yes, I know consumption taxes are regressive, but let's help folks in need through transfers, not tax loopholes).


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