Politics & Policy

Cringe-Onomics

Did any of the Democratic presidential contenders take Economics 101?

You can learn a lot about economics by watching Howard Dean and his rivals tussle over the Democratic presidential nomination. If you pay close attention, take copious notes, and ignore nearly everything the Democratic contenders say, you will learn a lot. Dean, Clark, Edwards, and Kerry have each offered campaign proposals that would make any self-respecting economist cringe.

While some of their proposals may be characterized as merely ineffective or misleading, others are downright harmful. Some of their more egregious proposals include:

‐ To “help families live and thrive off their wages,” Howard Dean says he “will press Congress to move toward increasing the minimum wage to $7.00 per hour.” Despite the populist appeal of such a move, increasing the minimum wage will only harm the least-skilled and least-educated members of the labor force. Even Dean’s economic advisers have cautioned against raising the minimum wage.

As Joseph Stiglitz, former chairman of President Clinton’s Council of Economic Advisors and an occasional Dean advisor, wrote in his textbook, “a higher minimum wage does not seem a particularly useful way to help the poor.” Why? According to Alan Blinder, another former Clinton economist known to be advising Dean, “The primary consequence of the minimum wage law is not an increase in the incomes of the least skilled workers but a restriction of their employment opportunities.”

‐ To spur economic growth and job creation, Dean would create “a White House Office of Economic Growth” (OEG). As the old saying goes, for every perceived problem there is an acronym in Washington waiting to be created. This reflects the notion that creating a new office and a new layer of bureaucrats is the same as finding a solution. Presumably Dean would add the OEG alongside the two currently existing offices in the White House that deal solely with economic matters — the National Economic Council (NEC) and the Council of Economic Advisors (CEA).

‐ John Edwards has called for a slew of new federal spending programs and (paradoxically) a return to fiscal discipline. Among other things, Edwards wants to lavish $50 billion on state governments and provide massive federal subsidies for education and health care. The cumulative price tag for his proposals could amount to nearly $1 trillion. Yet, Edwards insists he is an advocate of “fiscal discipline.”

Unfortunately, in Washington, the common-sense notion of fiscal discipline — being frugal and watching what you spend — has been hijacked and redefined to mean “a willingness to raise taxes.” In truth, raising taxes is akin to buying larger pants in lieu of exercise and a low-calorie diet. True fiscal discipline entails keeping government spending under control to minimize the drain of resources from the private sector to the public sector.

‐ Likewise, Wesley Clark has yet to grasp the true meaning of fiscal discipline. Although Clark proposes to “save $2.35 trillion over ten years,” tax increases account for more than half ($1.2 trillion) of the total. Reduced debt-service costs generate another $600 billion in savings. Actual spending cuts account for less than one-fourth of the total. And the vast majority of those spending cuts are unspecified and concealed under sweeping generalities such as “streamline government.” But more importantly, Clark’s spending cuts — his “tough steps” — equal less than two percent of what the federal government is expected to spend over the next ten years.

‐ John Kerry routinely preaches that corporations should pay their “fair share” of the nation’s tax burden.” That sounds like a no-brainer. But it isn’t. As most college freshmen learn in Economics 101, corporations do not pay taxes, people do. The burden of corporate taxation is ultimately borne by customers (through higher prices), stockholders (smaller dividends and capital gains), and employees (lower wages). As one introductory economics textbook warns, “Suffice it to say that you should be cautious when you advocate increasing corporate income taxes. You may be the one who ultimately ends up paying the increase.”

The contenders for the Democratic nomination have much in common. They want to raise taxes. They want to spend more taxpayer dollars on a range of politically popular causes. And, unfortunately, they often demonstrate a poor understanding of basic economics. So sharpen your pencils and get ready to ignore almost everything you hear on the campaign trail. You can learn a lot.

– J. Edward Carter is an economist in Washington, D.C., and the chairman of Economists for Bush. PLEASE SEE EDITOR’S NOTE

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