Wednesday, April 23, 2008

Economics as Science or Religion: McCain Must Decide

David Leonhardt paints an insightful picture of the dilemmas faced by politicians who try to use scientific, evidence based economics versus faith based economics:
When Douglas Holtz-Eakin took over in 2003 as the director of the Congressional Budget Office — the nation’s bean counter in chief — he walked right into a firestorm.

For years, Republicans had been pushing the budget office to change the way it estimated the cost of a tax cut. Rather than looking only at the revenue lost, they argued, the office should also consider how tax cuts would change behavior. With lower tax rates, businesses would invest more, workers would work more — and the government would thus get a tax windfall. This, in a nutshell, is supply-side economics.

A bearded academic, Mr. Holtz-Eakin had just finished a stint in the Bush administration and had spoken favorably about dynamic analysis. So his appointment excited Republicans almost as much as it scared Democrats. Senator Kent Conrad went so far as to call it “a mistake.”

But it turns out that both parties underestimated Mr. Holtz-Eakin. He did indeed begin using dynamic analysis, which makes a lot of sense, since tax rates really do alter people’s behavior. Yet he used it as it should be used.

What the budget office found, as study after study has shown, was that any new revenue that tax cuts brought in paled in comparison with their cost. This is why the deficit jumped under the last two tax-cutting presidents (Ronald Reagan and George W. Bush) and fell under the last two tax-raising presidents (George H. W. Bush and Bill Clinton).
Leonhardt goes on:
Today, Mr. Holtz-Eakin again finds himself in a firestorm. He is the top economic adviser to John McCain’s presidential campaign, and some fiscal conservatives have begun wondering what happened to the Douglas Holtz-Eakin who was a teller of unpleasant truths. For that matter, they’re wondering what happened to the John McCain who was a fiscal conservative himself, the man who not only railed against profligate spending but also voted against Mr. Bush’s deficit-creating tax cuts.
Now McCain must decide whether he will use scientific understanding to illuminate the country's economic condition or pander to extremists who value ideology over facts.

Frugal Ben Says: Benjamin Franklin and the other fathers of our country were proponents of science. Duh Uhhh! What do you think these patriots would tell McCain to do?

No comments: