Government vs. Politics and Economics as a Pawn in the Perpetual Game

  Reading recently that approval rates for President Bush and the democratically controlled Congress are both at all-time lows, I am somewhat pleased to note that the voting public seems to be catching-on. 

Government is indeed BIG business, which is why I think we suffer as a nation from persistent budget deficits, why government panders to business and fails to protect consumers, why special interest groups proliferate, and why bureaucracies continue notwithstanding presidential promises to cut them.

As I’ve written here before, I often remind my students that one cannot separate economics from government.  I say this despite the fact that many more-learned, working economists would say otherwise.  They like to characterize themselves as being merely advisors to business and government decision-makers.  In this way, they are able to keep their skirts clean and dodge responsi- bility when economic policies go awry.  But advocates of Public Choice economic theory are not fooled.  These economists say that politicians, regardless of party affiliation, use and sometimes distort economic theory to gain advantage over their opponents. 

Before I go on, let’s define some terms.  Government, according to Webster, is a system of rule or power over society’s affairs, where- as politics is the science or “tactics” of government.  So, govern- ment is the what while politics is the how, and nothing, save for perhaps the threat of invasion or terrorist attacks, grabs voters’ attention more than the economy. 

The Public Choice school of economic theory was first advanced by James M. Buchanan, 1986 winner of the Nobel Prize in economics.  While most economists say that they view politics as a barrier to sound economic policy, Buchanan and other Public Choice econo- mists say that politics can only be fully understood by employing economic tools of analysis.  They know, as most Americans are finally beginning to suspect, that economic policy is often used not so much for the collective good of society as it is for a means to gain political support.  Take the Bush/Cheney tax cuts for example.

The first of these tax cuts was the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001.  The second was the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003.  The names imply lofty social goals:  to reduce Americans’ tax burdens while, at the same time, spur economic growth and create jobs.  However, the combined effect of these acts bears scant resemblance to their names.  They have done little else but to skim wealth from the masses and move it to those who are already rich, households that are less likely to spend the additional discretionary income on consumption.  The graph below illustrates this redistribution, which, according to The Economic Policy Institute, has been recently estimated by William Gale and Peter Orszag of the Brookings Institution.

Bush Tax Cuts

The impact of the Bush tax cuts is clearly seen to be uneven across the income scale.  In fact, the results are even more uneven within the top quintile (the fifth bar from the left), seen broken down in the two right-most bars between the top one percent and the rest of wealthiest one-fifth of Americans.  As you can see, the gains of the top one percent are well above the rest of us.

When the Bush Administration claims that it has improved the progressivity of taxes, it points to the percentage changes in shares of income taxes paid as evidence.  But, as the chart shows, reaping large percentage cuts in taxes for those who pay little to begin with does little to boost the after-tax income of those at the bottom of the scale.  In other words, what matters most is not the change in what you pay in taxes, but the change in what you have left after you pay.  In reality, the distribution of the after-tax gains was stacked heavily in favor of the highest-income taxpayers.  And these people don’t spend everything they make like you and I do, they don’t need to.  They sock it away in off-shore accounts and other investments like U.S. treasuries and municiple bonds so as to make more off the taxes paid by the masses in tax-free interest.

Growth in consumer spending, according to the expenditures approach to calculating Gross Domestic Product (GDP) has experienced a slowing trend during the Bush/Cheney years, as has gross investment spending by business.  The trade deficit has been accelerating, but this has been largely offset by increased govern- ment spending owing to the wars in Iraq and Afghanistan — spending over there rather than over here, which has been financed largely with borrowed money (see the numbers for yourself at the government’s Bureau of Economic Analysis).  So, the administration’s economists haven’t had to lie when they have said that the economy has been expanding.  They have exag- gerated greatly though whenever they have said that this expan- sion has been healthy and that the economy is strong… for an economy that expands on borrowed money is like a house being built on a foundation of sand.  When the tide comes in, the house will fall.

Alan GreenspanAlan Greenspan, the former Federal Reserve Chief, has been a life-long Republican.  Nevertheless, he was appointed to successive four-year terms by four different presidents including Bill Clinton.  He long argued that persistent budget deficits pose a danger to the economy over the long run.  “Mr Bush,” he wrote in his recent book, The Age of Turbulence: Adventures in a New Land, “was never willing to contain spending or veto bills that drove the country into deeper and deeper deficits, as Congress abandoned rules that required that the cost of tax cuts be offset by savings elsewhere.”  I don’t wonder that the man resigned mid-way through his last term.

“My biggest frustration remained the president’s unwillingness to wield his veto against out-of-control spending,” Greenspan wrote. “Not exercising the veto power became a hallmark of the Bush presidency. . . . To my mind, Bush’s collaborate-don’t-confront approach was a major mistake.”

Though Mr. Greenspan does not admit in his book that he made a mistake, he does express remorse about how Republicans in Congress jumped on his endorsement of the 2001 tax cuts to push through unconditional cuts without any safeguards against surprises. He recounts how Mr. Rubin and Senator Kent Conrad, Democrat of North Dakota, begged him to hold off on an endorse- ment because of how it would be perceived.

“It turned out that Conrad and Rubin were right,” he acknowl- edges, and says in his book that Republican leaders in Congress made a grievous error in spending whatever it took to ensure a permanent Republican majority.  He also says that the Republicans deserved to lose control of Congress in the last mid-term elections as a consequence of their lack of fiscal restraint.

While the rich get richer and the poor wait their turn by way of supply-side economists’ “trickle-down” effect, America grows more and more ready for real change.  Despite all this, the administration’s economists at OMB, the BEA and the BLS (Office of Management and Budget) have found ways in the past to manipulate favorable reports and forecasts, which have consis- tently been overly optimistic.  So, at the end of the day, what have the Bush/Cheney tax cuts accomplished?  Well… they got ‘em elected – twice.  Which serves only to prove what Mr. Wasden, my sixth grade teacher, said was true, “Americans vote their own pocketbooks,” and give scant consideration for the consequences to the country as a whole.

I am convinced that, so long as the voting public remains econom- ically ignorant, trusting in politicians and brokerage firm talking heads for information and advice about the economy of the nation, economics will forever be a pawn in the perpetual game of politics.

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Published in: on November 22, 2007 at 9:03 pm  Comments (3)  

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3 CommentsLeave a comment

  1. I agree w/you and your premise, Kent, on the content of this latest posting.

    However, having helped edit for people on Master’s theses, text books, and nursing papers, I could not resist in asking that in the future, when you use a graph (ie, “Bush tax cut boost to after tax income”, above) that the graph be more self -explanatory. the title at the bottom of the graph was unclear…..”quintile” is not a term that I can comprehend on face value and the numbers at the top of each bar on the graph do not explain what they represent and the titles for the quintiles do not express what numbers they represent to me…..and I have a Master’s Degree and had to study statistics and read articles that have graphs in them “a lot”….and am not bragging, I just have to ….

    so, please, in the future,I recommend and request that you would make graphs easier to read and understand. or before you insert the graph, explain what the x and y axes represent, what your source is for the graph and/or what the axes are based on…… also, if there is any statistical analysis applied to the data to show that it is “statistically significant”… that way I could quote you when I state the facts represented in the blog.

    I love talking to you about all this and reading your blogs….

    Keep up the good work, my friend,
    Nancy

  2. I was just pondering about what you said in this article. You are so on it concerning this economy pin ball game. My personal solution is to just about ignore what they say and spend as little as possible, making do with what is already owned. I do have a concern that the U.S. is in for a rough ride in the near future economically that is. My big thought for the day is: “The Old World and the Third World countries have seen us as always being a mother and father in a providing way and with conditional “love” that, oh yes, they don’t mind the loans and aid, but it is so controlling that there is that underlying resentment. They will cheer when we spiral downward economically because they will see us as suffering as they have, paying high prices for fuel, food and other necessities. They will see workers not working and remind us how they had the same occurrences and misfortunes of having little to nothing in money. Their cheering will not last for long as they will then see how it affects them as well. We will be so mired in our economic mess that we will not be able to assist or aid our distant and nearby neighborhood countries. I pray none of this happens, but my eyes are opened and my ears in tune. What we can do as brothers and sisters is to be ready to help one another when that day comes of great difficulties. Thanks for your articles.

  3. Part of the greater problem, not mentioned in my last posting, is the spectre of international trade. With trade restrictions to China pretty much a thing of the past now, their rapid growth means our rapid decline — the cost of labor affording them a competitive advantage in all things having to do with manufacturing. We build virtually nothing in the U.S. anymore, and our technological innovations are quickly reverse engineered; China has no respect for intellectual property. So, our economies are like huge tanks of water that are connected by trade routes. With the sluice gates lifted, the water is seeking a common level — and rapidly.


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