Convergences

Morning Joe: Paying for Tax Cuts.

On Morning Joe 11/30 there was a lively discussion of possible budget compromises between Republicans and Democrats going forward. One issue is whether the Republicans would be willing to support extension of unemployment benefits if the administration would support an extension of tax cuts in return. Some Republicans have said that unemployment benefits should only be extended if the additional spending is "paid for," observers more generally note that the Republicans seem willing to support an extension of tax cuts, even if those are not "paid for." The implication of some latter observers is that the Republican position is not consistent. 

From a Republican standpoint, however, this point does not seem especially difficult to answer (though turning it into a sound bite might be difficult). First, few voters seem to think that the deficit is at bottom a problem caused by too little taxation; far more would point to spending as the root of the problem. (Some might disagree, but it would be hard to find anyone who thinks that either taxes or spending can be increased endlessly). Thus an approach that treats spending increases differently from tax cuts makes a sort of common sense if one is looking for an approach likely to resonate with voters.

Second, deeper analysis does not support the assumption that tax cuts and spending increases are the same economic phenomena. From a bookkeeping standpoint, of course, spending cuts and tax increases are the same--both are a net positive to the government's bottom line; spending increases and tax cuts are likewise both a net negative to the government bottom line. But in the long run, these things are unlikely to be similar, particularly if one takes a citizen's point of view, not the government's. Of course, it is *possible* that individuals' view of their economic prospects would be the same, whether they are allowed to keep more of their current earnings or given greater benefits essentially controlled by a central authority. But this seems doubtful. An expansion of unemployment benefits may prevent individuals from despairing, but it is not likely to inspire anyone to say "hey, time to get a new car!;" for that, one needs a paycheck with a substantial amount left on it after taxes.  

To put it another way, imagine two identical countries, both with a deficit problem. One decides to address it by increasing taxes, the other, by cutting spending. It is certainly possible, five or ten years down the road, that these two countries would still look pretty much the same. But, again, it seems doubtful, and one could not fairly *assume* that this would be the case. One can argue about which approach is best, or if the two approaches can be coherently combined... indeed such an argument has been difficult to avoid; but this merely underscores my point that tax cuts and spending increases are unlikely to have exactly the same impact in the long run.

Third, more simply, the Republicans could make this whole consistency issue go away, by making a cheerful commitment to making sure that the tax cuts are paid for by further spending cuts. I would not be willing to bet a large sum on the probability of their doing so, but they might--or perhaps, admit it is a thorny issue at present, and leave it to the next Congress.

 

 

 

 

 

On Voting, Markets and Accountability

I voted for some politicians yesterday. I won't get another opportunity to get them to sit up an pay attention for another year or more. But I also "voted" with my dollar for organic produce at the supermarket, a couple books at Barnes & Nobles, and gas at the gas station--and these opportunities to let others know of my preferences are ongoing all the time.So are these processes different or essentially the same?

One key difference between expressing preferences through political process and through markets is the comparative position of losers in each process. The voter who casts his vote for the losing choice in an election has expended his vote and must accept the choice of others. But the buyer in a market who does not find exactly what he is looking for can keep his dollar and may spend it on a second-best good of his own choosing or save it for later.

One of my favorite passages from Bruno Leoni talks about these differences and others, in describing scholarly works of Duncan Black and James Buchanan comparing politics and markets:

... the popular saying, "one dollar, one vote," is only partially appropriate. In the market choice the invididual is the choosing entity as well as the entity for which the choices are being made; whereas in voting . . . while the individual is the acting or choosing entity, the collectivity of all the other individuals is the entity for which the choices are made. Moreover, the act of choosing in the market and the consequences of choosing stand in one-to-one correspondence. On the other hand, the voter can never predict with certainty which of the alternatives present will be chosen.

Buchanan indicated other fundamental differences between the two processes. . . 'since voting implies collective choice, the responsibility for making any social or collective action is necessarily divided, and there is no tangible benefit or cost directly imputable to the chooser in the polling place in connection with his personal choice.' The result is probably a less precise and less objective consideration of alternative costs than takes place in the minds of individuals choosing in the market. A further and more important distinction... is that group choices, so far as the individuals belonging to the group are concerned, tend to be ... 'of the all or none variety.' . . . The voter who loses initially makes one choice but eventually has to accept another that he has previously rejected.

From Freedom and the Law.