Economic policy decisions have prompted side-taking since long before politicization became a word. It certainly was true in Alexander Hamilton’s time when the decision to charter a national bank was debated.
By their very nature economic policies affect us all, and we tend to view them from two different perspectives. In recent times, one perspective sees human problems that should be addressed with government programs and spending. The other perspective sees the same problems as being ineffectively addressed by government, and is rooted in part in “who’s going to pay for this?” Both perspectives claim positive economic effects attached to their view.
There was a time when economics could shed light on an economic policy and, in a sense, inform the arguments presented by both sides. Advances in politicization, however, have included economics itself, a process which has severely reduced its value to the public as a source of light in an increasingly dark world of political debate. Economic policy analysis has instead often become what logicians call “teleological,” which by my finger counting is a six-syllable word that means that the author started with the conclusion and built the research to prove it.
Politicization of economic policy has also meant that to opponents, a proposed economic policy is no longer just unwise misguided or unwise; it has to be evil. The motives behind it must be either depraved or Satanic. This, of course, prompts the advocates of the policy to respond in kind by attributing character flaws and equally base motives and ideologies to the opposition.
The most recent example of a thoroughly politicized economic policy argument is the debate over the effect of corporate tax reductions on wages. The economic policy at the center of the argument is straightforward enough, especially if we remember that the parallels we are drawing in our analyses and arguments are often less than perfect.
As a country, we haven’t had a lot of experience with corporate tax reductions, and certainly not enough solid analysis to yield an absolute “yes” or “no” answer. And since today’s economy is considerably different in structure from the 1920s, 1960s, or 1980’s, by looking for parallels in economic history what we have harvested is a bumper crop of “apples and oranges” comparisons passing for economic analysis.
These comparisons, each of which spawns a list of reasons why corporate tax reductions will or won’t work, are interesting, but generally satisfy only the already committed and leave the public still looking for useful guidance.
There are two elements in the president’s plan for corporate tax reform that directly would, or could, affect wages: lowering the corporate income tax rate; and lowering the tax bite taken out of corporate profits now stashed overseas. (There are possibly more factors buried in the changes proposed regarding so-called “loopholes,” but as these have not yet been disclosed their impact on wages or anything else are outside the current policy debate.)
The operating theory behind the corporate income tax reduction is that it will boost earnings for corporations and this will encourage the increased investment that will spur economic growth. Economic growth means more jobs and that will increase the demand for labor and that will translate into higher wages. Additionally, the increase in earnings will encourage corporations to increase wages in order to obtain a more productive, highly skilled work force.
Behind the repatriation of corporate profits overseas is a similar idea. Increased corporate cash will encourage increased investment, more jobs, and higher wages.
It is not unreasonable to believe that lower corporate taxes will promote economic growth. It tracks with recent experience in the post-recession recovery, where countries with comparatively low corporate tax rates outpaced countries with high rates by a wide margin.
Still, there is a difference in corporate behavior in dealing with a windfall cash boost created by a sudden reduction in tax rates compared with a tax rate that has been in place long enough to support plans for long-range investments. Also in consideration is that corporate America has not suffered from a shortage of capital funds. The shortage from their perspective was in investment opportunities, and our economic growth languished as a result.
There is even a bigger difference between average and individual performance. As the classic disclaimer reads, “individual results may vary.” We should always remember when forecasting business behavior that a tax reduction “encourages” investment, growth, and wage hikes. It all depends on how corporations view the future, how permanent they view the tax rate changes, and how they will react to the cash encouragement.
That is the core economic policy issue without the name-calling. It is less colorful than an argument between Worse-Than-Hitler and Worse-Than-Satan, but it does reveal the underlying economics.
James McCusker is a Bothell economist, educator and consultant.