Economic Outlook: Free lunch, really
25 Sep, 2012
Remember those hucksters who say, “You have nothing to lose,” or “This won’t hurt a bit?”
Don’t internal walls go up whenever the word “free” is tossed around carelessly?
In that case, Robert Frank, a Cornell University economics professor at the Johnson School of Management, sounds every bit the flim-flam man in an opinion piece published Monday in The New York Times. His claim, also his headline, is “Nation’s choices needn’t be painful.” And, sure enough, Frank connects a dots and creates a few logical loops that offer a way out of the country’s ballooning deficit problem and economic morass, all in a few simple, if exceedingly scary steps.
Call it sink-or-swim economics but it is not new to claim the nation’s politicians are out to polarize the issues, economic or otherwise, in order to paint the opposition as extraordinary in their ineptitude. (Meanwhile, if an issue is truly that terrible, it would take a true hero/genius/saint to turn it around — vote for me!)
Then there is the concept of kicking an issue down the road, finding a way to put off a painful solution until after the next election, using some vague combination of generosity and logic to explain why taking our medicine today would be a bad idea.
If you are in a hurry, some painful surgery is necessary. Cut spending on schools, roads, defense, healthcare, social security — you name it.
And do it now.
The deficit is one issue in which politicians create an emergency out of thin air. The concern here is that erasing the $16 trillion deficit in 10 years is extremely arbitrary. Why not 15 years or 20 years or 30 years? Doctors don’t ask patients to lose all their extra weight in some sort of crash diet strategy. Deficit reduction can be far more generous than even that. Someone on a diet might really only have 15 years to live and should start dieting right away. The U.S. economy’s life expectancy is longer than that, so a no-huddle offense is unnecessary.
In effect starting deficit reduction today is an extremely good idea. But forcing the fix into a 10-year span is extremely arbitrary and a very bad idea. As long as progress is being made, 20 years is fine. So is 30.
Here’s Frank’s idea of painless: Don’t cut taxes to provide stimulus to the economy — everyone with a little more jingle in their pockets at the end of the day. Raise taxes with a target date in the near future to stimulate the economy.
Why? If you cut taxes to stimulate the economy, you subtract from government revenue, which means cutting government spending and laying off government workers. If you pass a higher tax and have a start date of two years from now, corporations and consumers will see higher prices coming down the road. Their response will be to start spending now before prices go up. That will increase business activity, generate sales tax and add, not subtract from government revenues. In addition, it will give companies a reason to hire, because companies hire when demand rises or, put another way, when customers show up.
Here’s another simple formula. If the federal government waits before fixing roads, bridges, canals, dams, national monuments or whatever national maintenance needs doing, the cost goes up. Waiting to fix something means more wear and tear and gives inflation a chance to elevate prices.
Anyone who owns a house knows the longer you wait to fix the roof, the more the price goes up and the greater the chance of water damage inside the house.
Using the same logic, don’t let politicians polarize simple issues. Fix the roads now because it means jobs and saves money later. It’s hard to argue with that.
Frank sounds he’s raising children with the premise that the consequences of an action should be tied closely to that action. In other words, don’t react to a child who spills the milk by sending him to his room. React by having the child clean up the milk. Align consequences to behavior.
Frank recommends using tolls on roads to shape national behavior. Taxpayers understand toll booths and take them in stride, more or less. But some drivers will stay off congested roads if tolls are too expensive. They will take the bus to work, or the subway, which means less congested roads and better use of public transportation, which lowers greenhouse gas emissions, as well.
This is where things get dicey. It’s obvious that poorer workers will quit using roads sooner than wealthier folks and soon this kind of economic manipulation begins to sound undemocratic.
And then Frank would kick the can down the road, as well. “None of these taxes should be levied, however, while the economy is still struggling,” he wrote in a column published Monday. So maybe he plans to run for office someday.
Markets around the globe were flat Tuesday. The Nikkei 225 index in Japan rose 0.25 percent, while the Shanghai composite index in China shed 0.19 percent. The Hang Seng index in Hong Kong added 0.02 percent, while the Sensex in India rose 0.11 percent.
The S&P/ASX 200 in Australia lost 0.29 percent.
In midday trading in Europe, the FTSE 100 index in Britain added 0.19 percent, while the DAX 30 in Germany gained 0.06 percent. The CAC 40 in France rose 0.07 percent, while the Stoxx Europe 600 climbed a mere 0.18 percent.
ANTHONY HALL || United Press International