Tags: policy | preschool | growth | tax

Creating Better Policies Won't Fix All Our Ills

By    |   Thursday, 05 March 2015 09:22 AM

I was on a panel this weekend hosted by the Adam Smith Society about the big ideas coming down the pike for conservatism. My argument, and one echoed at various points by Josh Barro and others, was that it's hard to see big ideas for either political party.

As Barro noted, the big global challenges right now — notably, the loss of worker power, the productivity slowdown and the aging of all the industrialized nations — are not neatly amenable to policy solutions the way that, say, overregulation was (I'd add the atomization of society and the breakdown of marriage among the less educated to the list of "major problems for which policy offers few solutions"). So there's a tendency among politicians on both sides to project more benefits from the policies we have available than the evidence for what those policies will really support.

Take early-childhood education, which seems to be shaping up as the major Democratic Party policy plank of the 2016 campaign. This is a boon to working mothers, and it may well produce benefits in the form of less crime and better employment prospects. But the programs that have shown the most promising results are incredibly expensive. The mass program we have, Head Start, hasn't delivered much in the way of measurable outcomes. One sort of suspects that the reason everyone is suddenly so gung-ho for universal preschool is that we haven't tried it yet, so it's at least plausible to claim that it will work.

Republicans, meanwhile, are still talking about marginal tax cuts as if they could improve everything that is wrong with the economy when they demonstrably did not under President George W. Bush.

The great thing about early-childhood education is that it takes so long to demonstrate economic results that everyone proposing it will probably be dead, or nearly dead, before we definitively know whether today's programs work. But politically, this is a problem. Maybe universal preschool will make us all richer in 40 years. But even if you factor in payroll taxes on the women whom it enables to return to the labor force, it's probably not going to pay for itself within the budget forecast window. Instead, it will be a fiscal drain at a time when Social Security and Medicare are already going to be hoovering up any excess tax dollars we happen to find lying around.

This is also the problem with supply-side tax cuts. What you might call the "strong" version of supply-siderism — that marginal tax cuts can almost immediately pay for themselves — has been fairly definitely falsified, at least at the current marginal tax rates. The Laffer curve is not wrong; there is some level of taxation at which you start losing money from further rate increases, because people work less or they start working off the books. But we can be pretty sure, from our experience during the Reagan administration, that that rate is much higher than the current top marginal tax rate in the U.S.

There's a weaker version of supply-side tax policy that is more plausible: that tax cuts cause people to work harder, which raises the rate of growth somewhat and, through the miracle of compound interest, gives you higher tax revenues in the future than you otherwise would have had. But adding 1 percent to U.S. gross domestic product growth by cutting taxes by 20 percent will take quite a while to balance the books. And adding 1 percent to GDP growth is an enormous change, more than I'd expect from even a substantial tax cut.

As I noted earlier, global economic forces are far more powerful than the policy levers governments have available. That's as true in the U.S. as it is in Venezuela.

You can screw things up with truly awful economic policy. But our policy is not truly awful, and making it marginally better is not suddenly going to double the underlying growth rate of the economy. That growth rate fundamentally depends on people discovering newer and better ways of doing things, not whether our tax policy or occupational licensing regime could be 10 percent better.

That doesn't mean that we shouldn't make our policy better. What it does mean is that making our policy better won't necessarily fix the serious problems in the labor market or the growing sense of malaise that has left people feeling perpetually scared. Since that's the primary thing that people want from today's politicians, they — and the policy wonks on the panels — will be left disappointed.

Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy.

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I was on a panel this weekend hosted by the Adam Smith Society about the big ideas coming down the pike for conservatism. My argument, and one echoed at various points by Josh Barro and others, was that it's hard to see big ideas for either political party.
policy, preschool, growth, tax
Thursday, 05 March 2015 09:22 AM
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