The 15 worst economic ideas of 2012
In the interest of cobbling together random listicles to drive traffic to our website continuing our efforts to educate everyone about the good and bad of economic policy and analysis, here’s our list of some of the silliest economic ideas of 2012. There is a strong fiscal theme to these, which is predictable, as the “fiscal cliff” is one of the most written-about, yet least well-understood, economic policy issues in recent memory.
First, all the bad ideas about the so-called “fiscal cliff”:
- The problem posed by the “fiscal cliff” is one of too much debt
- The “cliff” is a big monolith that we either go over or we don’t
- The “cliff” is mostly about the upper-income Bush tax cuts
- The economy goes over the “cliff” on Jan. 1
- The debt ceiling is one of the issues that must be resolved in debates about the “cliff”
- Resolving the “cliff” requires a deal on long-term debt reduction
- Financial markets will punish us for not striking a grand bargain to defuse the “cliff”
Ideas not directly about the “cliff,” but still bad and still related to fiscal policy:
- You can’t tax the rich enough to make a dent in the deficit
- Raising the Medicare eligibility age is a good idea for deficit reduction
- Switching to a “chained” consumer price index to calculate the Social Security cost-of-living-adjustment (COLA) is a technical improvement
- Contractionary fiscal policy might actually not be contractionary
- Only defense spending and tax cuts provide a boost to the economy
- We’ll “turn into Greece” if we don’t reduce deficits
And just because even non-fiscal issues can lead to bad economic ideas, we introduce two hardy perennials of non-fiscal related economic myths:
- The economy’s real problem is a skills gap
- The Federal Reserve is risking inflation in its efforts to help the U.S. economy
The problem posed by the “fiscal cliff” is one of too much debt
Most casual observers of the budget debate (i.e., most Americans) know that self-appointed experts in the Beltway think budget deficits must be “brought under control” and that the nation is headed towards a “fiscal cliff.” So they’d be forgiven for thinking the problem posed by the fiscal cliff is one of too much debt. But, they’re wrong – the problem posed by the “fiscal cliff” is that public debt will begin rising too slowly, and the rise in taxes and (especially) cutbacks in spending will lead to purchasing power leaking out of the economy and slowing our already-insufficient economic recovery. Want to solve the actually-pressing problem posed by the cliff? Spend more.
The “cliff” is a big monolith that we either go over or we don’t
The “fiscal cliff” is, as we’ve noted, a terrible metaphor. Primarily because it implies that the problem at hand is a monolith that is either slid down or not. But the “fiscal cliff” (or as we call it, the “fiscal obstacle course,” or even “à la carte austerity”) is actually just a bundle of separable tax increases and spending cuts that are scheduled to be triggered on the first of the year. And they don’t need to be turned “off” or “on” as a group, Congress could allow the least-damaging components of the à la carte austerity to take effect as scheduled while deferring the more damaging components.
The “cliff” is mostly about the upper-income Bush tax cuts
The fate of the upper-income Bush-era tax cuts (for married couples with income more than $250,000 and single filers with income more than $200,000) is undoubtedly politically contentious and has gotten the most press attention. But in terms of slowing or boosting economic recovery in coming years, the fate of the upper-income Bush tax cuts (along with recent estate tax cuts) will have the smallest effect of any component of the coming “à la carte austerity.” In fact, the scheduled expiration of extended unemployment insurance benefits would have more than four times the economic impact that reversing the upper-income tax cuts would have, while costing about half as much.
The economy goes over the “cliff” on Jan. 1
The second reason the “cliff” metaphor is so bad is that it implies that the scheduled tax increases and spending cuts will, if left unaddressed by Jan. 1, instantly plunge the economy into recession. This is not true. If nothing is done for the first half of 2013 to counteract these contractionary measures, then the economy would indeed re-enter recession. But, with the clear exception of the unemployment insurance expirations, the impact of this fiscal restraint will be a mild (if cumulating) drag on economic growth. To be clear, the economy needs no such drag – but people should not panic into accepting bad long-term changes in policy in exchange for alleviating the danger of the cliff in coming weeks because they think Jan. 1 (or 2, or 15…) is a firm deadline.
The debt ceiling is one of the issues that must be resolved in debates about the “cliff”
The debt ceiling isn’t a component of the “fiscal cliff” per se, but is often treated as just one more plank of fiscal policymaking that needs negotiated over. But just the existence of a statutory debt limit is terrible economic policy and the debt ceiling should be abolished, as it has become nothing but a tool for a party (in this case, the GOP) to extract policy concessions by threatening economic collapse. This policy is perhaps most similar to the Doomsday Device in Dr. Strangelove, in which a device which would trigger nuclear holocaust was created to, ironically, promote peace and stability. The logic of the debt ceiling is equally suspect. Its flaws are numerous: it threatens the economy with collapse, weakens democratic accountability, increases the deficit, is likely unconstitutional, is completely unnecessary, and doesn’t even measure the right debt. It serves no purpose other than to scare policymakers into making desperate decisions to avoid the coming catastrophe, a situation that inevitably leads to rushed and poorly thought-out policy. In this sense, the debt ceiling is unique on this list for not only being bad policy itself but also perpetuating bad policymaking. It should be eliminated—or at least defanged—using any means necessary.
Resolving the “cliff” requires a deal on long-term debt reduction
Most policymakers realize that the immediate, concrete fiscal policy danger is that deficits will fall too quickly in the next couple of years, dragging on economic recovery. But for some reason, they remain determined to not solve this problem without also solving a theoretical, non-imminent problem of projected budget deficits far in the future (when the economy has returned to full-employment) being too large. “Stimulus now and deficit reduction later” is the mantra for this approach, which seeks a “grand bargain” to resolve the “fiscal cliff.” It’s important to realize that we’ve already locked-in substantial amounts of “deficit reduction later” in the form of the Affordable Care Act (ACA, or health reform), the largest long-run deficit reduction legislation in history. Going forward, resolving the problem of contractionary fiscal policy just requires making it less contractionary, and this is pretty simple.
Financial markets will punish us for not striking a grand bargain to defuse the “cliff”
Every now and then, those interested in maximizing the hype of the “cliff” in order to push their favored fiscal policies will try to push back on the “not a cliff” evidence-mongering. They like to claim that while the fiscal contraction is not “cliff-like” in its primary Keynesian effect of putting a slow leak in the economy’s spending power as taxes rise and public spending falls, it will be made “cliff-like” because of (cue ominous music) the “response of financial markets.” They’re not entirely wrong – but it’s not bond markets that will punish us for failing to rein in future budget deficits. Remember, the entire problem of the “fiscal cliff” is that budget deficits are going to be reined in too quickly. Instead, the problem will be stock markets falling as market participants correctly fear that an economic slowdown will occur if these deficits are reined in too quickly. It’s really important to know just what financial markets really are and aren’t “telling us” in coming weeks.
You can’t tax the rich enough to make a dent in the deficit
One myth perpetuated particularly inside the Beltway by the crowd of “very serious people” is that taxing the rich just does not produce enough revenue to make a real dent in future deficits. This is just wrong: The share of total income claimed by the very rich is now large enough and the average federal tax rate they pay is now low enough (relative to historic benchmarks) that just returning top rates to previous levels would raise significant amounts of revenue. Further, raising rates is not the only progressive revenue option. Trust us, we have done the math on this, and, progressive revenue raising can get you wherever you need to be to close long-run budget gaps, especially if you’re willing to be smart in containing health costs as well.
Raising the Medicare eligibility age is a good idea for deficit reduction
This idea, proffered in talks over the “fiscal cliff,” is bad in many, many ways. The simplest thing to note, however, is that it is simply a cost-shift, not a cost-reducer. That is, the federal government will pay a bit less for health care if this is implemented, but this just means that state and local governments, businesses, or households will pay more. This may be clever budget accounting, but it’s stupid economics. Worse, we know that Medicare does a better job of managing costs than the private sector, so this particular cost-shift will also cause these same costs to grow. The fact that it’s considered serious economic policy to worsen the problem of health care cost growth just to move which balance sheet these future costs show up on is the clearest signal we can get that our budget debate is unhinged from reasonable economics.
Switching to a “chained” consumer price index to calculate the Social Security cost-of-living-adjustment (COLA) is a technical improvement
This idea, also proffered in talks over the “fiscal cliff,” claims that using an arguably-better method (“chain-weighting”) for constructing the overall consumer price index for urban consumers (the CPI-U) would, if it replaced the current Social Security COLA, be a better representation of actual changes in the cost-of-living of the Social Security population. This is not true, and the reason why is simple: The basket of goods consumed by older households is different than that used to construct the “chained” CPI-U, so we have no idea at all if this chained index is actually capturing changes in their cost-of-living or not. A serious effort to improve the Social Security COLA would be to actually measure changes in the cost of the consumption basket purchased by older households and apply “chain-weighting” to this. But because this cannot be guaranteed ex-ante to result in cuts to Social Security beneficiaries, it’s not thought to be a useful thing to suggest in budget debates.
Contractionary fiscal policy might actually not be contractionary
Oh, wait. This was more from 2011. And it was wrong then. In 2012, we all agreed that Keynesians are right, that the economy needs more spending, and that having budget deficits wind down too quickly would be a bad thing, right?
Only defense spending and tax cuts provide a boost to the economy
GOP members of Congress have generally come around to the view that Keynesian measures to boost demand are necessary in weak economies like today. However, they somehow seem to think that only tax cuts and defense spending provide such Keynesian boosts to growth. Yet research shows that tax cuts are among the weakest forms of fiscal support. And, ongoing cuts in useful non-defense public investments —like clean technology spending—will have sucked as much fiscal support out of the economy by the end of 2013 as the scheduled defense “sequesters” in that year will, if they came to pass.
We’ll “turn into Greece” if we don’t reduce deficits
The real lessons from the Eurozone crisis are pretty simple. First, countries without control over their own currency can be forced by financial markets into crises, even if their underlying fundamentals were fine. Countries with their own currencies cannot be. Second, when you have a choice, do not choose austerity. And the U.S. certainly has the option to not choose austerity.
The economy’s real problem is a skills gap
We often hear the claim that one of the reasons unemployment remains so high in this recovery is that though employers have job openings, they can’t find workers with the education and skills they need. This is wrong—the reason unemployment is high right now is because demand for workers is depressed. The unemployed currently outnumber job openings by more than 3-to-1. Further, if employers’ inability to find suitable workers were a significant part of today’s unemployment problem, you would expect to find labor shortages in some sectors. But unemployed workers dramatically outnumber job openings in every sector. Further, unemployment is significantly elevated in all major occupations relative to before the recession started. Even further, unemployment is not just elevated for worker in all major industries and occupations, it is also elevated for workers in all education groups. It is true that workers with high levels of education have much lower unemployment rates than other workers, but there has been a dramatic drop in demand for workers with even the highest levels of education. Workers with a college degree or more still have unemployment rates that are roughly twice as high as they were before the recession began. The low demand for workers across industries, occupations and education levels underscores the fact that it is not the right workers we are lacking, it is simply enough demand for work that is lagging.
The Federal Reserve is risking inflation in its efforts to help the U.S. economy
In the second half of 2012, the Federal Reserve announced its third round of “quantitative easing” – purchases of long-term assets in an effort to lower interest rates, to allow refinancing to free up disposable income for households, and to increase inflationary expectations. Much as happened after the first two rounds of easing, critics argued that the Fed was risking a breakout of runaway inflation by too-aggressively looking to boost the economy. This is wrong; all the risks in the economy right now are in the other direction—disinflation and too-slow growth rather than inflation and economic overheating. Further, given the overhang of private debt that is the legacy of the burst housing bubble, an increase in inflation would actually boost the economy and help households “de-leverage” more quickly. In short, arguing that the Fed is risking excessive inflationwith its current policies is arguing that you think unemployment should be higher. Period.