Monday, January 3, 2011

How Obama Can Work Together With Republicans On The Economy

Mark Thoma responds to former Bush Economic Advisor Greg Mankiw's article about how Obama can work together with Republicans. Mankiw argues that it is not the role of the government to fix unequal income distribution, while Thoma says that there is a role for the government to take corrective action when people get things they did not earn due to market imperfections. See the following post from Economist's View.

Greg Mankiw gives the president advice on "How to Break Bread with Republicans." It's not clear to me that Obama needs such advice, he's not far from Republicans on many issues as it is, but in any case the advice appears to be -- surprise surprise -- to accept Republican ideas and do the things that the GOP wants to get done:
I am here to help. As a sometime adviser to Republicans, I’d like to offer a few guidelines to understanding their approach to economic policy. Follow these rules of thumb and your job will be a lot easier.
His first piece of advice is to
FOCUS ON THE LONG RUN ...starting with the stimulus package in early 2009, your economic policy has focused on the short-run problem of promoting recovery from the financial crisis and economic downturn.

But now it is time to pivot and address the long-term fiscal problem.
I'm surprised he would even suggest cutting the deficit before the economy is ready for it. He doesn't say whether this should be a plan that is developed now, but not put into place until the economy is healthy again, or whether it should be immediate cuts (though it seems to suggest "now is the time:"). But, apparently, "focus on the long-run" means we should ignore the chance that cutting the deficit might impede the recovery or even make things worse in the short-run. I think the millions of people who are still unemployed might disagree with that approach.

His second piece of advice is really just a hidden plea to extend tax cuts to the wealthy. You see, it's not fair when only the lower and middle classes get tax breaks:
THINK AT THE MARGIN Republicans worry about the adverse incentive effects of high marginal tax rates. A marginal tax rate is the additional tax that a person pays on an extra dollar of income.

From this perspective, many of the tax cuts you have championed look more like tax increases. For example, the so-called Making Work Pay Tax Credit is phased out for individuals making more than $75,000 a year. That is, because many Americans lose some of the credit as they earn more, the credit reduces their incentive to work. In effect, it is an increase in their marginal tax rate. From the standpoint of incentives, a tax cut is worthy of its name only if it increases the reward for earning additional income.
A tax cut/credit that is phased out as income rises is the same as a tax increase? If I cut taxes for those making less than $75,000, but not for those above this amount, that's the same as a tax increase on the wealthy? I get what he's saying from an incentive point of view, though as I explained here there's little evidence that the incentive effects are very strong for the wealthy, but by this reasoning all progressive taxes should be abolished (because, in effect, taxes go up as income rises).

Here's what the GOP seems to believe. If you give lower income households a tax cut, it will cause them to be lazy and stop working, but if you give the wealthy a tax cut, they will work harder. At it's core, this is mostly just hidden moralizing.

Next, Mankiw is once again worried that someone might reach into his pocket, take his hard-earned, well deserved money and give it to someone who didn't earn it like he did:
STOP TRYING TO SPREAD THE WEALTH Ever since your famous exchange with Joe the Plumber, it has been clear that you believe that the redistribution of income is a crucial function of government. A long philosophical tradition supports your view. ...

Many Republicans, however, reject this view of the state. From their perspective, it is not the proper role of government to fix the income distribution in an attempt to achieve some utopian vision of fairness. They believe, instead, that in a free society, people make money when they produce goods and services that others value, and that, as a result, what they earn is rightfully theirs. ...
In a world where markets are competitive, political power is shared equally, nobody gets an advantage from wealthy bequests, etc., etc. the playing field might be level and such an approach might be justified. But that's not the world we live in. So long as imperfections in the market system and the political system result in mal-distributions of income -- people getting things they did not earn due to the imperfections -- there will be a role for government to take corrective action.

Next, Mankiw sort of agrees with the argument that was just made, i.e. that we need to make sure everyone has equal opportunity. But as just noted, even though such change is needed, he sees no need to correct the problems that lack of opportunity has caused :
SPREAD OPPORTUNITY INSTEAD Despite their rejection of spreading the wealth, Republicans recognize that times are hard for the less fortunate. Their solution is not to adjust the slices of the economic pie, as if they had been doled out by careless cutting, but to expand the pie by providing greater opportunity for all.

Since the mid-1970s, the gap between rich and poor has grown considerably. One of best analyses of this long-term trend is by ... Claudia Goldin and Lawrence Katz in their book, “The Race Between Education and Technology.” The authors conclude that widening inequality is largely a symptom of the educational system’s failure to provide enough skilled workers to keep up with the ever increasing demand.

Educational reform, therefore, should be a high priority. To be sure, this is easier said than done. But research suggests that one key is getting rid of bad teachers. In a recent study, the economist Eric Hanushek says that “replacing the bottom 5 to 8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings.”
No disagreement on the need to provide better education. But to suggest that we can somehow fix education and solve the problem -- something we've been trying to do without success for decades now -- is wishful thinking. And even if we could somehow fix the education problem, it will be decades before it brings results, it does nothing to resolve existing problems that have built up over time due to our failure to provide a level playing field (which extends well beyond just education). For those who are worried about losing their "hard-earned cash," this is a convenient argument for forestalling redistributive policies that might correct for past inequities. But practically we shouldn't expect that somehow we are going to magically transform education and solve these problems. We need much more than that, and it will require those who have benefited so much from our economic system in the past several decades to help those who have seen their incomes stagnate.

DON’T MAKE THE OPPOSITION YOUR ENEMY Last month, when you struck your tax deal with Republican leaders, you said you were negotiating with “hostage takers.” In the future, please choose your metaphors more carefully.

Republicans are not terrorists. They are not the enemy. Like you, they love their country, and they want what is best for the American people. They just have a different judgment about what that is.

Let me propose a New Year’s resolution for you: Have a beer with a Republican at least once a week. The two of you won’t necessarily agree, but you might end up with a bit more respect for each other’s differences.
I guess the advice here is don't act like Republicans. Let the GOP say whatever they want, twist the facts, lie, whatever, but don't dare return fire -- it might undermine the effectiveness of the Republican media machine (or hurt the feelings of a business leader). And if you do hold your tongue for a couple of years while the other side trashes you only to finally respond, you should expect to be blamed for the lack of partisanship. Nevermind that some in the GOP have sworn to do everything they can to ensure Obama's failure. It is, of course, all Obama's fault for making the opposition the enemy.

This post has been republished from Mark Thoma's blog, Economist's View.
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