Magical Thinking in Kansas
There are two big ideas that don’t make sense but sometimes work in the world of macro-economics: cut taxes to increase revenue and spend money you don’t have to increase growth.
The second is a staple of Keynesian thinking, and the U.S. government employed it in its stimulus package of 2008 to get us out of the Great Recession. The basic idea is to prime the pump, using water to get the well to start producing more.
The first is a staple of conservative policy, and it includes the notion that smaller taxes will force the government to cut back, always a good thing for conservatives who tend to view government as the problem. But, then, so the theory goes, businesses and individuals will have more money to spend and that will grow the economy.
Being somewhat paradoxical, these ideas need to be applied carefully. Spending money you don’t have can lead to inflation and burdensome debt. Cutting taxes can reduce the government’s ability to pay its own employees and provide essential services, further injuring the economy.
So it was something of a shock when the governor of Kansas pushed for dramatic tax cuts in 2012 with absolute faith in the counter-intuitive idea that cutting taxes would increase revenue: “Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.”
But as The New York Times pointed out in a sharply worded editorial this week: “the growth didn’t show up.” In fact, in the last six months when unemployment declined throughout the country, Kansas was “one of only five states to lose employment . . . . It has been below the national average in job gains for the three and half years Mr. Brownback has been in office. Average earnings in the state are down since 2012, and so is net growth in the number of registered businesses.”
I suspect The Times enjoyed the opportunity to demonstrate the falsity of that conservative cliché, what it called the governor’s “magical ideology,” while the “evidence of failure is piling up” and his “re-election campaign is faltering because of his mistake.”
But the point is that no one understands the economy well enough to speak with arrogant certainty about how it works. Economics is not a religion, without evidence of its efficacy. Besides, there are competing interests and warring sectors, that make it impossible to prescribe one definitive solution to all our needs. Rich and poor do not want or need the same things.
Sometimes the media paper over our differences and our conflicts by talking about “The Economy” as if we all participated equally in its triumphs and failures. The jobless figures do introduce discordant notes, but even there it ignores the critical differences between the chronic, long-term unemployed, the unemployable, and the part-time employees who have settled for the jobs they can get and given up on the jobs for which they are qualified.
I can appreciate that given the complexity of our problems, our divisions and conflicts, we might want to settle for the appearance of certainty – even when unwarranted. And others may be impressed by the convictions of politicians, even though they may not understand the issues they appear to address.
But we need more.