This came up on twitter yesterday. Various economists were linking to this post from NPR, which presents:
the common-sense, no-nonsense Planet Money economic plan — backed by economists of all stripes, but probably toxic to any candidate that might endorse it.
The first two policies are US based. The rest are:
- Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.
- Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.
- Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.
- Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.
And there were various comments to the effect that these were obvious, very sensible things to do, but politicians were too stupid, afraid, venal etc to do them. Eric Crampton insisted that there should be an Economist Party in every country, and I, snide jerk that I am, replied:
Economist Party motto: ‘We provide the flawless theories; you provide the horrible consequences.’
To which Eric replied:
So, you oppose specific policies on that list then, Danyl? Marijuana legalization? Carbon tax? Please advise.
So here’s my answer. Like many economists – and all who would endorse that list – I’m a liberal. I’m ideologically in favor of things like marijuana legislation, especially since the status quo on prohibition is such a disaster.
But when it comes to public policy I’m pretty conservative. This isn’t an ideology so much as just a gut feeling that you shouldn’t make radical changes to highly complex systems that will effect millions of people unless you know what you’re doing and can be confident things are going to work out.
Take marijuana reform. Matthew Yglesias had an interesting piece on this just yesterday, in which he pointed out that if growing marijuana was legal, economies of scale and industrial farming techniques would transform the market for this commodity:
One potential data point is Canada’s industrial hemp industry, where production costs are about $500 per acre. If the kind of mid-grade commercial weed that accounts for about 80 percent of the U.S. market could be grown that cheaply, it implies costs of about 20 cents per pound of smokable material: Enough pot to fill more than 800 modest-sized half-gram joints for less than a quarter!
So cafes could afford to give away joints the same way they give away packets of sugar. The implications of this are staggering. What would the social and economic consequences of nearly-free marijuana look like? What’s the impact on the healthcare system? Safe to say that economists recommending this policy have no idea whatsoever, because no country has ever implemented it – they’re not making this recommendation based on any empirical evidence, but on ideological grounds. Which is fine – people with strong political ideologies should agitate for their beliefs – but economists don’t see themselves as ideological activists, and they certainly don’t portray themselves in that light; on the contrary they present themselves as very serious scientists proposing ‘common-sense, no-nonsense plans.’
(Which is not to say I don’t think we should stick with prohibition, just that the change needs to be gradual and incremental.)
Let’s take two more of them items on the ‘Economist Party’ list. Eliminate all corporate and income taxes and replace them with a consumption tax. The theory behind this is that taxing something disincentivises people, but work is a good thing so we don’t want to tax it. If you tax consumption (like we do with GST) then this encourages saving and reinvestment, which is good for the economy.
So I get the theory. But the big downside of such a policy is that it might not raise as much revenue as you think, which means that the government would have to cut spending. And what if these policies weren’t actually that great for the economy, and didn’t lead to growth?
Impossible, right? These are ‘common-sense, no-nonsense plans’ that all economists agree will work! The reason I raise such an impossible outcome is that when National reduced corporate and income taxes and increased consumption taxes back in 2010, it led to reduced revenue, which led to spending cuts, and didn’t actually lead to economic growth.
So the very serious, very sensible Economist Party would look at that policy failure and think, ‘Huh! Well, let’s just assume that a much more extreme version of that policy would work perfectly.’ That’s why I wouldn’t vote for any Economist Party policies.