A closer look at candidates' plans for the economy
Well, Super Tuesday has come and gone, and the likely presidential candidates for each party look even more likely. No matter who wins the nominations, we need to start thinking about how to evaluate the candidates' economic strategies.
Well, Super Tuesday has come and gone, and the likely presidential candidates for each party look even more likely. No matter who wins the nominations, we need to start thinking about how to evaluate the candidates' economic strategies.
Right now, those policies consist of not being a lightweight and not being a socialist. But eventually, policy will be discussed, and judging the validity of the ideas is not as easy as our political "leaders" imply. What seems logical may be nothing more than faulty thinking. And what seems crazy may be the only rational approach.
We need a base from which to judge the ideas, so I am proposing a simple one: Instead of looking at just the costs or the benefits of the proposals, which is the way our politicians want us to think, consider both the costs and the benefits.
I was reminded of the difficulty in evaluating policy by an email I received recently. An economist I respect greatly discussed the problems created by a certain social policy. Here is an edited version:
Consider poverty in the U.S. and the plight of a poor, single parent earning just under $5,000. The person, though, has agency after agency to apply to for financial aid. If chosen wisely and applied broadly, the parent's income, including these entitlements, can rise to just over $22,000. And those entitlements are tax-free. In comparison, someone actually working and earning $22,000 would be entitled to government support payments that would bring the take-home pay to about $24,000.
The problem here is that the person earning $22,000 is taking home only $2,000 more than the single parent on full entitlement benefits. So what is the incentive to work full time? We are sending very real, very economic signals to the poor that they are better off, or nearly better off, doing nothing rather than working, and it is illogical to expect them to do otherwise.
This is a presentation some politicians would love. It sets out the problem that social programs create disincentives. But it fails to provide an alternative approach to the poverty of a single parent or even show that society is worse off with the social programs.
Is it?
What are the alternatives to the social safety net? Should we raise wages? To earn $24,000, the single parent would need to be paid $11.50 an hour. There are still taxes to be paid, including Social Security, Medicare, state and local taxes, real estate taxes, excise taxes, and sales taxes. There are also costs associated with working, including clothes, transportation, and child care. Even if the minimum wage were increased to $11.50, the after-tax/after-costs income might not raise the single parent of just one child out of poverty. Meanwhile, business costs would rise.
Don't want to increase the minimum wage? Then we have to cut subsidies. What do we cut? Food stamps? Housing assistance? Medicaid? School lunches? Child care? Those are some of the options.
These choices remind us that society provides these programs because people thought they were worthy of being provided. Would we, as a society, be better off if the food-stamp program were to be cut back or ended? Would the impact on childhood malnutrition, health-care costs, and school performance be acceptable, given the cost savings? Would society be better off cutting Medicaid spending? Health care would deteriorate, but we would save money. Should housing or child-care assistance be terminated? Which would you choose, and why?
Before we change the programs, we need to determine whether the value to society of those programs exceeds the costs, including the negative work incentives. If they do, keep them. If they don't, come up with ways of assisting a single parent who has limited financial resources.
Making public policy always requires making economic trade-offs, not just in social policy but in everything the government does. The clearest example of that is the tax code.
Taxing income from different sources differently is the classic example of creating strange and often negative incentives. Doesn't taxing capital gains differently than dividends misallocate capital between growth companies and dividend-paying companies? Why should dividend, capital gains and interest income tax rates differ from normal income rates? Isn't income, income - or is it?
Politicians like to complain that their opponents' policies are bad. They sometimes even propose alternative solutions. But they don't like to show how the benefits of their proposals actually exceed the costs - and they always come with costs.
We need to demand our political leaders show that their proposals pass the cost/benefit test.