By allowing ads to appear on this site, you support the local businesses who, in turn, support great journalism.
Waelti: Economic illogic of politics explained
John Waelti

Economists lament that political decisions often do not make economic sense. One of the nation’s leading economists, Princeton’s Alan S. Blinder, in the April 2018 issue of “The New Republic,” explains why this occurs. As an academic economist with past experience as a vice chair of the Fed’s Board of Governors, and member of President Bill Clinton’s Council of Economic Advisors, Blinder clearly knows of what he speaks.

Blinder opens his article with the example of the recent Republican tax bill, along with the budget deal that increases government spending by hundreds of billions of dollars. He asks, “With the nation at full-employment, is this stimulus sound fiscal policy?” He follows by observing that an economics student in a beginning macroeconomics class would answer with a resounding no.

It doesn’t take a Ph.D. in economics to understand that hyper-stimulating a fully employed economy is a terrible idea. So, why do politicians do the opposite of what even a college sophomore economics student would recommend?

Blinder begins his explanation by countering the fiction that economists have enormous influence over economic policy. They don’t. Although the members of the CEA are appointed by the president and have direct access to him, the CEA’s advice is often ignored. President Donald Trump didn’t even appoint a CEA Chair for months.

The Federal Reserve’s Board of Governors is among the few public bodies in which economists make policy decisions, as opposed to merely outlining policy options or recommending policies. But even the board’s current chair, Jerome Powell, is not an economist, but a former investment banker. Even though economists and investment bankers deal with economic matters, they view the world through vastly different lenses.

Blinder continues by citing two basic reasons economists and politicians can’t “live more symbiotically.” The first is that the two groups employ different forms of logic. Economists rely on syllogistic or mathematical logic as taught in high schools and colleges around the world. That is entirely different from political logic that is based on the next election.

Economic logic says unequivocally that a fully employed economy does not need additional stimulus. Indeed, it is likely to be harmful, risking inflation and, through driving up the national debt, deprive the nation of a key weapon to counter the next recession.

The political logic is that people like to see their taxes cut — even if only a little bit. Therefore, it’s no contest. Political logic of pleasing constituents with tax cuts wins over the economic logic of fiscal restraint.

Even if a majority of voters benefit from a policy change, political logic may win out if a few clearly identifiable stakeholders vigorously oppose the measure. The carried interest loophole, conferring no social benefits, confers enormous financial benefits to a few high-flying fund managers. 

If this loophole were eliminated, all taxpayers would benefit, but each in such small amount as to not be noticeable. However, the elimination of the loophole would dearly cost the small number of lawmakers who opposed it. A small number of politically connected voters often hold sway, choosing to prohibit public policy issues that would benefit the majority.

During the campaign, Trump opposed the carried interest loophole — it would be the socially responsible thing to do. But after election, political logic took over. Highly motivated beneficiaries of the loophole carried the day. 

When politicians and economists agree, it is often by coincidence, as with the 2009 stimulus bill under President Barack Obama. During the Great Recession, economic logic augured for stimulus spending. Although opposed by some Republicans whose objective was to have Obama fail, enough politicians saw the political imperative of getting out of the recession, and welcomed government spending, that they went along with it. This was a rare occasion when political and economic logic coincided.

Blinder’s second reason for different logic of economists and politicians is their different time horizons. Economists tend to look toward a longer time horizon. Politicians not only look toward the next election, but to the next evening newscast.

The economist looks toward the long-run effect of either fiscal restraint or stimulus that might be called for. Looking to the forthcoming election, depending on the situation, the politician will either blast the “reckless spending” of needed stimulus, or, if restraint is needed, blast his opponent’s opposition to tax cuts that that would work against needed restraint.

Blinder doesn’t let economists entirely off the hook. He reminds us that taking the long-run view sometimes enables economists to discount important short-run problems. For example, international trade benefits economies through more efficient allocation of resources, ultimately benefitting consumers through lower prices. However, economists too often dismiss the problem of, for example, an unemployed steel worker, by asserting that everybody will be better off in the long run with trade.

The fact that the majority of consumers are better off through trade is of no solace to those who are unemployed as a result. American capitalism has done a poor job of ensuring that at least a portion of the benefits of trade are used to compensate the losers. The solution to this problem is a challenge for both politicians and economists.

Blinder suggests a partial solution to disparity between economic and political logic. Tying specific sources of revenue to specific expenditure programs so that voters can see the link is sometimes possible. He cites FDR’s tying the payroll tax to Social Security benefits. Under Eisenhower, gasoline taxes were put toward financing the interstate highway system. 

He suggests Trump could replicate this by raising gas taxes to pay toward infrastructure improvement. 

More radically, he suggests politicians could hand some economic policy decisions over to non-political technocrats. That’s how monetary policy has worked for decades.

He concludes with asserting there are nearly 100 percent odds that a group of non-political technocrats could do a better job than politicians of reforming the tax code. But the odds that this will ever happen are 0 percent.

— John Waelti of Monroe, a retired professor of economics, can be reached at 

His column appears Fridays in the Monroe Times.