The Magic Lever
By DAVID BROOKS
Published: July 11, 2011
The world economy is a complex, unknowable organism. Most of us try to diversify our investments and balance risk and security to protect against the unexpected.
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But a few years ago a group of bankers thought they had the magic tool to help them master financial trends and predict the future. Sophisticated risk assessment models would enable them to rewrite the rules and make more money.
Their arrogance was soon exposed. Along came the financial crisis.
In the middle of the crisis another group emerged, believing it had the magic lever to alter the economy’s trajectory. Democrats argued that through gigantic deficit spending, they could bring unemployment rates down sharply and produce a “summer of recovery.”
The spending they began must have done some good to cushion the recession, but either through a failure of theory or a failure of implementation, their lever was not as powerful as they promised. Federal spending rose from 19.38 to 24.91 percent of gross domestic product, but the economy refused to rebound and the world is awash in oceans of debt.
Now a third group has emerged, also claiming that it has the magic lever to control the economy. Staunch Republicans argue that taxes are central to determining economic growth. Tax cuts, they argue, have huge positive benefits and tax increases have disastrous negative effects.
In the middle of the current budget negotiations, these Republicans argue that the tax increases the Democrats are proposing — ending some deductions for the affluent, hitting oil and gas companies — would be terrible for the economy. These unacceptable increases would be worse than the threat of national default, worse than a decade of gigantic deficits.
Not many Americans have this expansive view on the power of tax policy. According to the Gallup Organization, only 20 percent of Americans believe the budget deal should consist of spending cuts only. Even among Republicans, a plurality believes there should be a mixture of tax increases and spending cuts.
Yet the G.O.P. is now oriented around this 20 percent. It is willing to alienate 80 percent of voters and commit political suicide because of its faith in the power of tax policy.
These three groups — bankers, Democratic Keynesians and staunch Republicans — have one thing in common: They all believe they have identified the magic lever. They believe they can control their economic fate.
Some of us do not believe there is a magic lever. Deficit spending stimulates growth, but not by that much. Tax increases are bad, but they are not disastrous. We believe that there are a thousand factors that go into economic growth, and no single one is dispositive.
We look at the tax cuts of 2001 and do not see tremendous gains. We look at the tax increase of 1982 and do not see a ruinous disaster. We look at high deficit eras and low deficit eras and do not see an easy correlation between deficit spending and growth. On the contrary, if you look around the world there’s a slight negative correlation between government size and prosperity.
We believe that if you rest everything on a single lever (Increase deficits! Cut taxes!), you give people a permission slip to be self-indulgent. They will spend or cut to their hearts’ content and soon you’ll be facing national bankruptcy. We believe that even if you are theoretically right, your policies will be distorted by human frailties and special interests.
The people in my group (you might call us conservatives) are more likely to embrace a low and steady approach to fiscal policy. Control debt. Control entitlements. Keep tax levels reasonable and the tax code simple. Work on the economic fundamentals: human capital, productivity, labor market flexibility, open trade, saving and investment. Don’t believe you can use magic levers to manipulate growth month to month.
People in my camp form a silent majority. But we have been astonishingly passive during these budget negotiations. The tax cut brigades and the Medicare/Spending brigades are well organized. The people who believe in balance and the fundamentals sit piously on the sidelines.
The tragedy is that in Barack Obama and John Boehner we have leaders who would like to do something big. They seem to know that you need bipartisan cover if you want to really cut spending. They seem to know circumstances for deficit reduction will only get worse in the years ahead.
But they are bracketed on all sides — by the tax cut and Medicare brigades, by the wonks hatching budget gimmicks that erode trust, by political hacks who don’t want to lose their precious campaign issues: tax cuts forever, Medicare spending without limit.
Mostly, they are buffeted by the proud, by those who think they have a magic lever to control human destiny and who will not compromise it away. This is the oldest story known to man.
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