The economy keeps chugging along. But beneath the surface economic policy makers are digging tunnels that could cave in.
By 2020, higher spending and tax cuts will push the federal budget deficit above 6% of gross domestic product—higher than it ever was in the Reagan years. Even deficit doves like me think that’s far too high absent a recession. President Trump may be taking the U.S. into a multifront trade war, against the advice of almost all economists. And America’s political leaders refuse to enact a carbon tax, the remedy for climate change that almost every economist favors.
Cases like these, in which the political system chooses virtually the opposite of what most economists recommend, are neither random nor rare. They exemplify what I call the Lamppost Theory of Economic Policy: Politicians use economics the way a drunk uses a lamppost—for support, not illumination. The Lamppost Theory is a source of unending frustration to economists, but its real harm comes when it leads the nation into terrible economy policies.
The roots of the Lamppost Theory run deep. Economists and politicians hold such divergent worldviews that they can be said to hail from two clashing civilizations. In fairness, this clash of civilizations didn’t start with
But he’s made it much worse.
While the Lamppost Theory won’t be disproved, some palliatives could make a bad situation somewhat better.
Start with time horizons. Political time horizons are notoriously short, perhaps extending only to the next election—or the next tweet. In contrast, economists’ time horizons can be agonizingly long—far too long for politics. Still, there are some cases in which politicians’ short time horizons can be exploited to get the economics right.
Remember back to 1983, if you can. The Social Security trust fund was running out of money, and Congress needed to raise more revenue or reduce benefits. Both routes were seen as political suicide. Then along came the Greenspan Commission, led by
The panel recommended several unpopular policy fixes. But its suggestions came with an important twist: Most of the proposed tax hikes and benefit cuts would not kick in for years. Amazingly, the proposals sailed through Congress. The trick? The remedies came soon enough to solve the economic problem but were far enough in the future that politicians could ignore the pain.
There is an entire class of economic problems of this nature—wherein the necessary, if painful, remedies can be enacted now to take effect only in the future. The most obvious example is Social Security, whose finances need fixing again. But Medicare is in a similar state. Indeed, most of the federal budget deficit problem lies in the future.
A second strategy for beating the time-horizon problem is a bit trickier, since it requires re-educating political pros to do what’s actually in their best interest. Ludicrously short time horizons often make politicians and their advisers act as if there’s an election every Tuesday. But there isn’t. The big elections occur only once every four years, making that a natural time horizon for politics.
But doesn’t that four-year time horizon start to shrink as soon as the U.S. elects a new president? True, but the bizarre political calendar saves the day. Though the Constitution grants each newly elected president a four-year term, he actually has 12 to 18 months to get his major economic policies through Congress. After that, the silly season begins, with every politician focusing on the midterm elections. And once that’s over, it’s all presidential politics all the time. The effective window for major policy initiatives shuts with nearly three years remaining until the next presidential election. That’s a long enough time horizon for most economic policies.
My third palliative is earmarking particular sources of revenue to particular items of government spending. As pure economics, earmarking is foolish. For example, why should we think the gasoline tax will bring in exactly what’s needed to repair highways and build new ones? But if citizens feel less burdened when their tax payments are attached directly to some benefit, earmarking may make excellent political sense.
Franklin D. Roosevelt
understood this in 1935, when he earmarked payroll tax receipts for Social Security benefits.
I have one final suggestion, though its scope is limited: Suppose we took some—certainly not most—economic decisions out of the hands of politicians, and put them in the hands of nonpolitical technocrats instead.
Impossible, you say? Well, no. Monetary policy is made that way. Congress sets the broad parameters for the Federal Reserve—such as its goals, powers and governance. Then Fed officials, operating under laws Congress wrote, make specific policy decisions with virtually no political interference. Monetary policy is certainly not flawless. But it’s clearly been among the government’s success stories over the decades. Just a coincidence? I doubt it.
Mr. Blinder is a professor of economics and public affairs at Princeton. This article is based on his book, “Advice and Dissent: Why America Suffers When Economics and Politics Collide,” just out from Basic Books.