An annoying economist trick

So Jack Snow, Secretary of the Treasury, stopped by for lunch. We had lunch in the press room, which made it feel like a press conference with salad.

Secretary Snow has been around: he was a professor of Economics for a while, head of a business coalition, stuff. Not a dumb guy. He was also smart enough to acknowledge that many of the people in the room knew more facts and/or were better economists than he.

So one of the primary points of interest among these economist people was around Bush's proposed tax cuts. Consensus among the economists was that they're a dumb idea, which will blow up the budget defecit to immense proportions. The logic being: if the government cuts taxes, it gets less money. See how that works?

Now, economists are enamored of something which some call `The law of unintended consequences', the gist of which is that everything is interrelated, so when you change one variable, you need to take into account everything else in the system too. The usual application is as follows:

1.Advocate of policy P makes a claim that it will change variable X for the better.
2. Opponent of policy P then invokes the law of unintended consequences, by expanding the framework to include variable Y. If the effect on variable Y is detrimental, then opponent satisfactorily proclaims that policy P is dumb and should not be implemented.

This has the rhetorical benefits that it makes the opponent look like a more subtle thinker, and allows him/her to keep pointing out variable Y every time anybody says anything about policy P. It has three rhetorical problems: it leaves open the question that maybe we could open up the framework a little further to include variable Z, where policy P is the best thing to happen to variable Z since frigging sliced bread; it fails to take into account the (often extremely difficult) question of whether the benefit to variable X outweights the detriment to variable Y; and after the third or fourth time opponent points out variable Y, it gets really annoying and frustrating.

So Secretary Snow points out that cutting taxes will help to make the economy more efficient. A more efficient economy means a larger tax base, and therefore more tax revenue.

We can apply the above critiques in sequence: it doesn't take into account other possible expansions of the framework, like how not taxing dividends breaks the corporation-as-person metaphor, and allows for shifty dealing between the CEO's personal accounts and those of the corporation. Don't tax dividends, and suddenly every corporation is going to be paying huge dividends instead of paying salaries or keeping that money in the corporation.

Next, it doesn't take into account the relative weight of two effects: we've cut tax rates but raised the tax base. Determining which effect will prevail is a hard question, which we should defer to the economists who put out the effort to analyze this question in detail. Their verdict: there is no fucking way that the expanded tax base will make up for the cut in rates. The cuts will absolutely, positively, balloon the budget deficit. This is using any model you want, including the super-optimistic model of the Congressional Budget Office, which reports to Secretary Snow.

The sad part comes from that third critique of the law of unintended consequences: confronted with a room full of really smart economists (and me) who were unanimously in agreement that making these tax cuts permanent is a supremely bad idea, he had no recourse but to annoyingly keep repeating that the tax base will grow. He did this in a number of ways, affably joking about how those silly people in the business press don't know the difference between debt capital and equity capital (like it matters here), talking about how we need to encourage innovation, and the other usual neoconservative chestnusts.

Though the lunch was `off the record', I don't really feel that I'm betraying anything here: somewhere between most and all sane economists agree that Bush's tax cuts will expand the deficit---at a time when Baby Boomers are about to start claiming social security and the USA needs to rebuild Iraq, since it's broken; and Secretary Snow stands by his boss in supporting these cuts. The big question I'm left wondering is whether Secretary Snow believed what he was saying. He's married to this position, either by his own beliefs or those of President Bush; how many experts does it take to get a person to divorce himself from a bad belief?