Danny ChaiI demand that you read this essay by Francis Fukuyama. It is excellent, and I agree with virtually all of it. It talks about how the American brand has been badly damaged, and along the way criticizes certain conservative viewpoints as being worthy of blame. I whole-heartedly agree with his criticisms. Don’t mistake him for a knee-jerk liberal. For years, Fukuyama was a major figure in the neoconservative movement and was active in many right-wing think tanks, until 2002 when he (rightly) broke from the movement, critical of how it had developed. (Interestingly, he endorses Obama for President.)
My brother-in-law makes a big deal about how his pediatric office practices evidence-based medicine. Honestly, I find it absurd that anyone would do otherwise, but yeah, I completely agree with the philosophy. That being, in the words of the Centre for Evidence-Based Medicine: “Evidence-based medicine is the conscientious, explicit and judicious use of current best evidence in making decisions about the care of individual patients.”
In fact, I strongly ascribe to this principle in all aspects of life, that when we can, we should look at the best available data to form our conclusions. Evidence-based living. In reality, people frequently do the opposite – their foregone conclusions color how they interpret data. For example, with reading the Bible, I strongly believe we should just read it and reach conclusions based on what it says. Sounds obvious. But I remember once someone arguing that Jesus’ struggle while praying in the garden of Gethsemane was actually marked by peace. That may or may not be true (I’m inclined to say it’s not), but the reasoning was backwards – they believed Christians’ peace can never be disturbed, so they interpreted the passage through that, rather than drawing that conclusion based on what the passage says. It happens all the time. People think a passage means something because they believe that God is this way, rather than believing God is this way because a passage says something.
My criticism of certain conservative (possibly libertarian) principles goes along the same lines. In my opinion, they interpret data in light of their ideology, rather than looking at the data to form their ideology. And in my opinion, their ideology is based more on faith than data.
The principles in question are summed up perfectly by Fukuyama:
Like all transformative movements, the Reagan revolution lost its way because for many followers it became an unimpeachable ideology, not a pragmatic response to the excesses of the welfare state. Two concepts were sacrosanct: first, that tax cuts would be self-financing, and second, that financial markets could be self-regulating.
Prior to the 1980s, conservatives were fiscally conservative — that is, they were unwilling to spend more than they took in in taxes. But Reaganomics introduced the idea that virtually any tax cut would so stimulate growth that the government would end up taking in more revenue in the end (the so-called Laffer curve). In fact, the traditional view was correct: if you cut taxes without cutting spending, you end up with a damaging deficit. Thus the Reagan tax cuts of the 1980s produced a big deficit; the Clinton tax increases of the 1990s produced a surplus; and the Bush tax cuts of the early 21st century produced an even larger deficit. The fact that the American economy grew just as fast in the Clinton years as in the Reagan ones somehow didn’t shake the conservative faith in tax cuts as the surefire key to growth.
More important, globalization masked the flaws in this reasoning for several decades. Foreigners seemed endlessly willing to hold American dollars, which allowed the U.S. government to run deficits while still enjoying high growth, something that no developing country could get away with. That’s why Vice President Dick Cheney reportedly told President Bush early on that the lesson of the 1980s was that “deficits don’t matter.”
The second Reagan-era article of faith—financial deregulation — was pushed by an unholy alliance of true believers and Wall Street firms, and by the 1990s had been accepted as gospel by the Democrats as well. They argued that long-standing regulations like the Depression-era Glass-Steagall Act (which split up commercial and investment banking) were stifling innovation and undermining the competitiveness of U.S. financial institutions. They were right — only, deregulation produced a flood of innovative new products like collateralized debt obligations, which are at the core of the current crisis. Some Republicans still haven’t come to grips with this, as evidenced by their proposed alternative to the bailout bill, which involved yet bigger tax cuts for hedge funds.
The problem is that Wall Street is very different from, say, Silicon Valley, where a light regulatory hand is genuinely beneficial. Financial institutions are based on trust, which can only flourish if governments ensure they are transparent and constrained in the risks they can take with other people’s money. The sector is also different because the collapse of a financial institution harms not just its shareholders and employees, but a host of innocent bystanders as well (what economists soberly call “negative externalities”).
It’s not a perfect analysis, but I think his fundamental ideas are correct: that tax-cuts and deregulation are always good are articles of faith, not based on evidence. He goes on to show other examples that would suggest they aren’t always good. And his basic thesis is that the principles of tax-cuts and deregulation should be placed in a historical context – they arose as a proper response to the welfare state that had been built up after decades of liberal government. They were right for their time; they’re not necessarily right now.
This excellent NYTimes story on Greenspan brings home how much his objection to regulation was based on faith. In one Congressional testimony, he said “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.” (talking about derivatives. Whoops.) The story does a stellar job in showing how Greenspan’s belief in the markets to self-regulate was based on, in a word, faith. That he could make such – in retrospect ridiculous – arguments that economic risks have been largely eliminated shows in large part how his faith was wrong.
In any case, policies should assessed based on the evidence. It’s impossible to talk to some people because they essentially take these things on faith. I have a friend whose mantra is “taxes kill people.” I’d say he’s just over 50% serious when he says that. But it 95% informs his views on tax policy. You can’t talk to him rationally about it, because it’s a position in search of justification, rather than the other way around. For example, he might be against the inheritance tax on grounds of double taxation. I’d say there’s nothing inherently wrong about double taxation. He’d argue he’s against it because of its effect on farms and small businesses. Fine, then make exceptions for farms and small businesses. Then he’d argue it over complicates the tax code. There will always be some reason because it’s beyond doubt that taxes kill people.
Except, that position is absurd. Taken to the extreme, if there were no taxes, there would be no government, and life would be, in the words of Thomas Hobbes “solitary, poor, nasty, brutish, and short.” (I realize there’s a rich philosophical tradition of anarchism; I think it’s idealist and not realistic.) We need some government, and therefore some taxes. The goal is to figure out how much government and taxes we need. It may well be that we need less than we have now. But maybe not. We should look at the data. To hold the viewpoint that less taxes are always good is unhelpful because it prevents you from really looking at the data.
George W. Bush is like this as well. Do you remember the original justification for his tax cuts? It wasn’t to stimulate the economy. It was because the government had a surplus (those were the days), and it doesn’t benefit the economy when the government just holds on to money. Thus, give it back to the people. I actually think that’s reasonable. Then, when the economy went south and we started running deficits, he argued that we need tax cuts to stimulate the economy. So wait, tax cuts are necessary when there are surpluses and necessary when there are deficits? Unless you believe in zero taxes, if you can’t delineate when tax cuts are *not* necessary, that reasoning is logically bankrupt.
Proponents of tax cuts (for example in the Bush administration) frequently claim that when the economy does well, that it’s a result of tax cuts. When it goes sour, they attribute it to other things. And the opposite as well; GDP growth rates have been better under Democrat Presidents than Republican ones over the last 50 years, and they argue that it was caused in spite of tax increases. (Which begs the obvious question – why not focus on those other causes of growth instead of solely looking at tax cuts?) They may be right; but the way they reason about it is backwards, assuming tax cuts are always good and trying to figure out how to explain data in the light of that.
So my thing is, let’s look at the data and reach conclusions from that. It may be the case that, right now, we need less taxes. It might not. But let’s base our conclusions on the data, rather than assuming that tax cuts are always good. Same with regulation.
What do the data say? I’m not an expert. But the Economist (a pretty fair publication) recently did a survey of economists in the National Bureau of Economic Research (that, according to Steve Levitt, “would include just about every top economist in the United States.” The results are striking. Only 10% of them identify themselves as Republicans, which is itself something to think about. And they give higher marks to Obama virtually across the board on economic issues: his grasp of the economy, the team he would assemble, and his policies, including his tax policy. Even the majority of self-identified Republicans give Obama higher marks.
As the article states, “there is an apparent contradiction between most economists’ support for free trade, low taxes and less intervention in the market and the low marks many give to Mr McCain, who is generally more supportive of those things than Mr Obama.” My guess is, while these principles are generally good, economists realize that, in certain areas, it’s gone too far. They should be principles backed by data, not ideology.
To sum up: data should drive conclusions, not the other way around. Specifically with tax policy and market regulation, I agree with Fukuyama that they were a proper response to over-reaching liberal policies when Reagan came into office, but are not necessarily now. In my opinion, the data call for more market regulation, and it’s unclear to me if tax cuts would necessarily be beneficial. More importantly, in the opinion of the clear majority of the country’s best economists, Obama’s tax policies would be better for the economy than McCain’s, which heavily emphasizes tax cuts and deregulation.