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Tuesday, January 29, 2008

The Myth of the Rational Politician?

Robert Reich is not a big fan of using accelerated depreciation as a means of stimulating a lagging economy. Who wants to invest in more plants and equipment when the economic slowdown means you aren't even using all the plants and equipment you have now? Suppose that, due to an economic downturn, a trucking company that usually runs 100 trucks now has 15 sitting in the yard idle with the drivers at home waiting for the phone to ring. Will a cut in interest rates or a change in the depreciation rate allowed on taxes cause the firm to run out and buy more trucks? I can imagine reasons why you might want to jump on a great deal in such a situation and store up for the future, but generally you'd expect the response to be fairly small:

The Real Recession Problem: Consumers Are at the End of Their Ropes, by Robert Reich: Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy.

But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.

This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000... And home values are dropping... Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington. ...

The "political tax" on the stimulus bill, i.e. the things in the bill that make it less than fully effective but are necessary to ensure its passage, appears to be high due to the need to produce legislation quickly. I hope the less than optimal bill that has been produced does not come from politicians holding the stimulus package hostage and knowingly reducing its impact in order to pursue ideological goals. It could be that, but if it's not, then what is it?

Maybe it's "the myth of the rational politician", i.e. politicians who are so uninformed about economics that they truly believe the policies they are insisting be part of the stimulus package will help put people back to work. I know I care about this more than most, but that's why it's necessary to talk about things other than haircuts and laughs, why it's necessary to listen when a politician keeps insisting that tax cuts can pay for themselves, or spouts other such nonsense along the campaign trail or after they are in office.

There are times when it actually matters if politicians understand the basics of economics, and now could well be one of them. Yet most of what passes for information on this topic amounts to reporters asking questions, then nodding their heads at whatever answer the candidate gives - whether it makes sense or not - before moving on to the next question on the list. Sometimes I wonder if the reporters are even listening to the answer, and if they are, if they know enough themselves to follow up effectively.

We can reduce the "political tax" on fiscal policy, but it will require, for one, that the media let the public know when political games or ignorance of basic economics is causing the government to under perform and produce legislation that is less than fully effective. We've had enough government under performance in recent years, failures to serve people in need, but it hasn't always been like that, and it doesn't have to continue.

    Posted by on Tuesday, January 29, 2008 at 12:57 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (28)

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