Apples v. Oranges, Policy Purity, and Looming Economic Doom

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Imagine a country cursed with two dysfunctional political parties, each of which is completely wedded to an idea that while valid within some range of historical experience cannot be taken to its eventual extreme without destroying the country. We shall call the two parties the Apple Party and the Orange Party.

The Apple Party and the Orange Party share power in our imaginary country, each controlling some facets of government. This power sharing arrangement has been ongoing and was just continued with a recent election returning each party with virtually the same representation and offices it had before the election.

Surprisingly, in a country suffering from a weak economy, an enormous government deficit, and what virtually everybody agrees is a dysfunctional government, the people reelected the same people who have been in charge.

Every Apple Party candidate for president in this recent election rejected a hypothetical budget deal with $10 in spending cuts for every $1 in tax increases. This shows how committed Apple Party politicians are in their opposition to raise tax rates. Tax reform might be okay, as long as revenue to the government measured as a percent of GDP does not rise. That is, new tax revenue should only occur as a result of economic growth; government revenue as a share of the economy should never increase, only stay steady or decrease.

Orange Party politicians are as committed to increasing government spending as the Apples are to cutting taxes. Almost every Orange Party politician has decried budget deals that so much as slow the rate of increase in federal government spending. The government has important things to do and many wrongs to right. Any revision to future spending plans that lowers these projected rates of increase is immediately deemed a "budget cut" by Orange Party politicians and fiercely resisted. Actual cuts (meaning spending less this year than last year) are virtually unheard of, and are generally referred to by all Oranges as attempts by Apples to starve children and pollute the earth to extinction. Orange Party politicians think that deficit reduction should only occur through tax increases, and if anyone worries that those tax increases could hurt economic growth then we can accompany the tax increases with new stimulus spending to offset any harm from the tax increase.

When recessions occur, Apples call for tax cuts to help the economy. Some economists agree that this can help spur a recovery.

When recessions occur, Oranges call for spending increases to offset reduced consumer spending and help the economy. Other economists agree that this can help spur a recovery.

Let's assume that at least one group of economists is correct (not a sure bet), but we are not sure group that is. So we cut taxes and increase spending and the economy recovers. Once the economy is back to normal, do the politicians raise taxes and cut spending back to normal levels?

Of course not. Instead, each party digs in its heels and resists any reversal from its treasured goal.

Obviously, this is not workable in the long-run. Taxes that are lowered in recessions but never raised in good economic times lead to a government deprived of the revenue to finance even the most basic government operations (such as the Apple Party's second most important goal: a strong national defense). Government spending that is increased in recessions, but never cut in good economic times, steadily consumes an ever greater share of GDP and soon swamps the private sector which is both a vital source of economic innovation and of tax revenue for the growing government.

Simply put, both parties need to face the reality that one cannot have a central policy that pushes either taxes or spending in the same direction during both recessions and expansions. The Apple Party needs to understand that while their revered philosopher was correct that cutting tax rates would increase government revenue when the top marginal tax rate was over 70 percent, this is not a global truism. If you never allow tax rates to be anything but lowered, you will surely reach a point at which further tax rate cuts produce less revenue for the government. The Orange Party took to heart the central message of their revered philosopher that government spending should be increased in order to run a deficit during recessions. However, they missed the part of his message about balancing that deficit spending with surpluses during economic expansions.

Over time, the two parties have become more and more attached to their philosophies. As their more extreme elements (called "the base") imposed philosophical purity on almost all politicians in each party, the ability to reach compromise and see reason were lost.

Our imaginary country suffered a recession a few years ago. Such is the intensity of the political beliefs held by the Apples and Oranges that the combination of tax cuts and spending increases passed to combat the recession was greater (even in inflation adjusted terms) than the responses to all past recessions in the imaginary country's history combined. This has caused the national debt of a country that has existed for almost 250 years to increase by 75 percent in only five years. In less than two more years, half the nation's debt will have been incurred since the beginning of this recent recession. Yet, even given that context, neither party wants to retreat toward normal policy settings as the economy recovers.

Sadly, unless sanity breaks out soon, I fear that our imaginary country is doomed.

Jeffrey Dorfman is a professor of economics at the University of Georgia, and the author of the e-book, Ending the Era of the Free Lunch

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