Choosing remedies without knowing the side effects

As we head into the final gymnastics of a budget resolution, the talk tilts toward political strategy instead of fiscal analysis. Did the DFL err in putting forward too many, too-complex proposals that emphasized more revenue? Is the governor, in holding to his no new taxes position, positioning for another term or simply creating a little room to get out of Dodge before the fiscal consequences hit home?

We hear speculation about the consequences of budget decisions — for schools, nursing homes, rural communities, the working poor, job loss or job creation.

If you're a political junkie, this phase is all good fun. But if you're hopeful of steering public decision making toward more rational and empirical processes, you may sigh and start planning for next year.

At Growth & Justice, we've tried to make contributions to the discussion that add facts and analysis, most recently with our study on the potential economic impact of a new fourth-tier income tax proposal. 

Economist Marsha Blumenthal conducted the study [Download PDF], which I helped frame, to better understand how a tax increase on high earners might affect Minnesota small businesses in particular and the state economy in general. In an op-ed for the Pioneer Press summarizing our findings, Marsha and I concluded that there would be some negative impact from the tax increase, but that "no resolution — whether it relies more on revenue increases or spending cuts — will be without some net negative economic impact" and that the downside of budget cuts may be even greater.

But how can policy makers have an informed discussion about these outcomes unless they have real evidence and and use available analytical tools to weigh the economic costs?

What struck me, as a non-academic business person, was how little reliable, current data we — and legislators — had available to help us reach our conclusions. We received great cooperation from House Research and the Department of Revenue; we drew from research literature, Census data and IRS reports. But still, we had to rely on pre-recession revenue and jobs numbers, simulations and extrapolations, studies of studies and experiments that didn't precisely apply to our question. And then other factors, such as changing economic conditions, new federal policies and legislation in other states, could come along tomorrow and nudge our analysis off balance.

We ask a lot from the policy makers expected to balance the budget by choosing the right mix of taxes, spending cuts, budgetary shifts and borrowing, while analyzing competing program needs across a vast range of policy areas. They can't know exactly the economic side effects of these various remedies — let alone how they interact.

No wonder, then, in these final hours the budget battles come down to ideology and political — not economic — calculations.

— Charlie Quimby

Comments

[Craig Westover]

Charlie --

I agree with your headline, but little else.

G&I's tax philosophy is based on a moral concept of "fairness," not economic principle. You consistently ignore the unseen consequences of that position. You demean the economic reality that government doesn't create wealth and government can't spend anything until it first pulls money out of the market economy.

The study you refer to was precisely and honestly done, but it measured only one aspect of the market distortion of your proposal. And you did find negative consequences -- just not as negative as the alternative. As you note --

"Marsha and I concluded that there would be some negative impact from the tax increase, but that "no resolution — whether it relies more on revenue increases or spending cuts — will be without some net negative economic impact" and that the downside of budget cuts may be even greater."

Getting less for more is not economically sound policy in any circumstances.

What you don't do is step outside the more taxes/less spending box and look at real tax reform -- eliminate inefficient taxes (high rate, narrow base) and replace with efficient taxes (low rate, broad base), because the latter, more regressive taxation, runs counter to your moral premise. To be fair, Republicans rejected the same reform because they made the incorrect assumption it would have imposed new taxes.

We can all do a better job looking at the unseen consequences of policy.

[Charlie Quimby]

The kettle is always happy to hear from the pot.

The particular study was narrow so as to be as precise as possible, not because we don't see the big picture or are trapped in a tax and spending view of the world.

Sorry you object to including moral concepts in a discussion about the goals and outcomes of human activity. But they are a big reason we have the political system we do. Worshiping "economic principle," which conveniently recognizes only the antitax gospels, strikes me as a moral position, too. Or at least a veil for a position that prefers to ignore the moral implications of choices we make as a society.

If you read our entire work, you would know that G&J (please check your keyboard, since you consistently mistype it) has indeed proposed lowering the rate and broadening the base on sales taxes as part of an overhauled tax system. We have proposed systematic ideas for tax reforms (including reducing or eliminating business taxes), workforce development and education reforms, to name a few examples.