The 5 worst economic ideas of 2011 (and 12 great ones for 2012)
AEIdeas
The longer the Great Stagnation/Long Recession/New Normal continues, the greater the risk that some profoundly terrible ideas—spawned by economic desperation and political opportunism—will pop up, gain a foothold, and start to spread. Indeed, the past twelve months are evidence that the risk of a devastating policy error by Washington is escalating.
Here are the worst economic ideas of 2011, in reverse order:
5. The “People’s Budget” from House Democrats. This proposal from congressional “progressives” claims to balance the budget by 2021. It does this by … wait for it … imposing massive tax hikes (on income, corporate profits, and investments) and by cutting defense spending by $2.3 trillion over a decade—and then shifting most of those savings into government “investments” that would supposedly supercharge the economy.
Please. Macroeconomic Advisers, one of the White House’s favorite economics consultants, examined the plan and even they concluded the following: “We find this estimated impact on long-term growth to be implausibly high. … Nor does it even mention the potential deleterious supply-side effects of raising marginal tax rates.” In other words, the Dems assume all those tax hikes don’t hurt growth a smidgen. Plus, the plan does nothing about the real debt drivers—entitlements.
4. The Brandeis inequality tax. Two liberal law professors cooked up this one (which they named after jurist and progressive hero Louis Brandeis): Legally cap income inequality. Here’s how it would work: “… we propose an automatic extra tax on the income of the top 1 percent of earners—a tax that would limit the after-tax incomes of this club to 36 times the median household income.”
Please. Forget, for a moment, the tax-planning mess this would create. And forget that Yale’s Ian Ayres and Berkeley’s Aaron Smith would explicitly enshrine an ideology of class envy and wealth distribution into the U.S. tax code. What problem would they be solving, exactly? To the extent income inequality has risen—and it is much less than wealth inequality, a better measure—you should “blame” technology (for increasing rewards to education), globalization (for creating a worldwide market for CEOs, athletes, and rock stars), teachers unions (for dragging down the once world-class U.S. education system), Hollywood (for contributing to harmful cultural pathologies), and Big Government (for backstopping favored industries such as Wall Street). Which of those does the Brandeis tax begin to fix? None.
3. Doubling U.S. income tax rates. It’s now the liberal economic consensus that tax rates need to be returned to where they were before the Reagan tax cuts—and possibly before the JFK tax cuts, as well. As one liberal economist told the New York Times, “The inequality problem is not going away and won’t until drastic policy changes are made (as happened during the New Deal).” The economist, Emmanuel Saez, has published research arguing the top U.S. income tax rate should more than double to 80 percent. Saez has also done research with Peter Diamond, a failed Obama nominee to the Federal Reserve, that suggests the top income tax rate should go at least to 70 percent. Other advocates include influential liberal economists Paul Krugman and Brad DeLong.
Please. We are in an extended period of economic stagnation, and these guys want to return tax rates—punishing wealth and job creators in the process—to the level they were at during the last extended period of economic stagnation, the 1970s? The only thing such a policy blunder would create would be a hiring boom for tax attorneys. Oh, and even more economic misery for America. Instead, the United States needs to be lowering rates and removing economic distortions to boost growth. Doing that might improve annual U.S. GDP growth half a percentage point or more.
2. The Osawatomie Speech (President Obama’s call to reject the past 30 years of economic policy). During his recent speech in Osawatomie, Kansas, Obama repeatedly pointed out how the U.S. economy had gone off track over the “last few decades.” In other words, America’s 30-year economic experiment in enhanced economic freedom—lower tax rates, less regulation, freer trade—has been a failure. Indeed, Obama says that although the “theory fits well on a bumper sticker … it has never worked.”
Please. (First a fact check: The U.S. economy grew at an average pace of 3.3 percent from 1983-2007, inflation—the scourge of the 1970s—was defeated, and the stock market rose by 1,400 percent. Median middle-class incomes rose by roughly 50 percent.) What policies would Obama prefer? Well, the liberal economic consensus wants a) higher taxes, b) more income equality, c) more inflation to reduce debt, and d) higher energy prices to reduce dependence on fossil fuels. Clearly, Obama wants to return to some Golden Age that had all those attributes—high taxes, high inflation, high energy prices and high income equality. Again, hello 1970s.
1. The Occupy movement. An obsession over income inequality runs through this entire list. And Occupy Wherever—so praised and embraced by Elizabeth Warren, Obama, and the MSM—is a big reason why. But what would the rabble—a mix of communists, union pros, the mentally deranged, and a few truly heartbreaking stories—have us do? Time travel so as to prevent the microchip revolution and reinstate command-and-control economies in Asia? Sadly—and tellingly—the protesters haven’t uttered a peep about teachers unions or Hollywood. Just the banks.
Please. What we should be focusing on is a) the level of income mobility in society, and b) the absolute income gains of the broad middle. Income inequality zoomed in the late 1990s but since incomes were rising broadly, no one much cared if the rich got richer even faster. Everybody was winning. There was no Occupy Silicon Valley back then, despite the fantastic northern California weather.
Occupy and its fellow travelers have no apparent interest in advocating policies that would boost innovation and growth and incomes. But I do. So here are 12 ideas for 2012, some of which I gleaned from two of this year’s best economic policy books, Race Against the Machines and Launching the Innovation Renaissance:
1. Pay teachers more but get rid of tenure so the bottom five percent of teachers can be replaced by even average ones.
2. Encourage more high-skilled immigration.
3. Reduce regulatory barriers to new business creation.
4. Replace payroll taxes with more economically efficient ones.
5. Phase out and eliminate pricey and market-distorting subsidies like the mortgage interest deduction.
6. End Too Big To Fail.
7. Eliminate the tax code’s bias against investment.
8. Move toward market-friendly entitlement reform like Wyden-Ryan.
9. Create a patent system with the length of legal protection depending on the cost of innovation and imitation.
10. Establish more innovation prizes.
11. Have fewer kids in college getting liberal arts degrees, more in business-run worker training programs.
12. More investment in basic research, not in crony-capitalist, industrial policy schemes like Solyndra.
These would be great policies for Washington to implement in 2012. Please!
Excellent.
The 5 worst ideas worry me though. We (shamefully) live in a time when the best speech-giver with the best emotive slogans who can fill am invitation only room with fainting fan(atics) can have just about anyone behind the scenes plotting and planning just about any economic or policy obscenity.. and win.
I fear that words even combined with technical analysis are insufficient to discredit these (and other) worst ideas. There has to be a way using technology to not only properly dismiss the bad, but also to help first find, then communicate, educate and persuade folks about the good.
Would AEI like to be the exclusive source of such a thing?
@DanFarfan
The twelve great ideas are indeed great. If the financial services industry played a more supportive role facilitating the twelve great ideas mentioned and working with regulators to punish crony capitalism, there probably wouldn’t be an OWS movement.
Why should the Federal (or State) income tax rate be any higher than zero? There are more just, more practical ways to finance government.
Just as a couple of quick examples: (1) if you want a military, impose a military tax. Pay for what you get and get what you pay for – without hidden costs; (2) if you want courts, impose a court tax.
In short, pay an explicit tax for legitimate (i.e. Constitutional) Federal functions; phase out the rest.
Why does anyone think this is hard? True enough, you won’t convince Progressives, or those influenced by their dogma. So what? That will never happen. The people to convince are the people who pay the bills and they are quite likely to be willing to effectively repeal the 16th Amendment.
“Why should the Federal (or State) income tax rate be any higher than zero? There are more just, more practical ways to finance government.”
How?
How what? How to finance the Federal government? I gave two examples. It would not be difficult to expand them. (A tax for harbor patrol, paid by those who use it, for example.)
The basic idea is to pay explicitly for what is Constitutionally permitted to the Federal government, and nothing else. Keep the taxes targeted, and limited to those who use the services to be paid for.
I agree with all except #2. With record highly educated, highly skilled unemployed, why do we want to be shopping for labor outside of our borders. Allow – yes, encourage? – why?
I would ad a constitutional amendment banning any future TARP and private sector bailouts. The Federal government should have no authority to interfere directly in “selected” private companies, be they banks, insurance companies, auto companies, energy companies, etc. If they go bankrupt, then better run banks, car companies, etc will quickly take their place and our citizens and their grand children won’t get stuck with the bill!
Here’s a thought. You don’t pay federal income tax, you don’t vote in federal elections.
Seems “fair” to me.
I love it.
Here is another idea – If you are on Welfare, you don’t vote either. This takes politics out of the welfare system, and focuses on helping those that truely need assistance.
All our woes originate in the primordial emotion of ENVY.
Everyone is susceptible to their ENVY being flamed by a skilled rhetorician especially the less well educated.
A large following of believers can be acheived with the flimsiest and most illogical of plans due to the pervasiveness and guttural strength of ENVY.
Let us stop tip-toeing around these facts and shine intense light on political use of ENVY.
You completely forgot repeal the AMT, or at least roll it back and index it to inflation.
Your 12 ideas are interesting, but they seem to be weighted heavily toward big business, not the small ones. In my case, I am an engineer that would love to go independent (as in a small business) but I cannot afford to because of heath care costs (over 1800 a month)… where the big corps can provide it at a much lower cost because of biased insurance regulations. I just ‘feel’ that giving the big guys more power limits the choices of the little guys. Maybe you can think of some other policies that would help us little guys… maybe like getting rid of EPA regulations that are killing us with higher energy costs.
The patent system is a joke anyway, it is just used by large corps as an idea lottery preventing the little guys from being able create just about anything. If a little guy has success, the big guys just dig through their database of patents, then sic their hounds (corporate lawyers) after them. Again, why not adjust the patent system to be real inventions, not just ideas. Give the little guy a break.
Funny thing here is that all5 of the worst ideas are from Progressive Liberals and the Obama administration. Coincidence ?? Not hardly, they want to do what had previously failed since no lessons were learned from history by most liberals.
I think eliminating the mortgage interest deduction will greatly reduce the incentive for home ownership and sink an already crushed housing market.
I agree. Plus 40% of all property in owned by investors. Sort of contradicts item #7
Back to the Constitution:
-Shut down EPA, Depts. of Agriculture, Education, Homeland Security & H&HS -these are functions of the states according to the 10th Amendment
-No more student loans
-No more housing loans
-No more loans from the federal government – period
-No hand-outs to the states
-Return all land & property of National Parks & other national cultural and recreational entities to the states which they are located per the 10th Amendment
-End immigration of unskilled workers and their families
-Limit immigration to skilled Europeans and Asias only (all others should stay home and build their own country)
-Limit immigration of relatives to immediate family (spouse & children under 21)
-Deport all illegals who are currently in jail
-Deport all illegals who are known to be illegal
-No replacement of government vehicles or computer equipment that is less than 3 years old
That should trim some fat in the government spending
Exactly.
Your points are as laughable as they are ridiculous. Restrict immigration to Europeans and Asians? This racism and bigotry is the reason the right has become such a big joke. The days of small government and free markets are gone, the republican party is obsessed with jesus and mexicans. Bunch of clowns. Btw, immigration of relatives is already only applicable to nuclear families (maybe do some fucking research, eh?).
Open the borders and let competition work its wonders. If you ever go to Europe you will see the price of lack of competition. Food is exorbitantly expensive. In NYC of all places I can squeak by on $5 of food a day. $15 and I can have something decent and dessert at home. The reason that is so is partly because the cost of labor is so cheap. Your suggestions are ridiculous and will drive the price of goods tremendously high, causing major deflation and economic instability.
No hand-out to the states just means State Taxes will increase.
Eliminate the Dept of Education and no more Student loans? Education is everything in life and the best investment a country can make. You want to fix problems? Education. Instead of eliminating it, we should fix the thing
OK, I can see an argument for points 4 and 5 on the worst list. Then it goes off the rails.
3) Saez didn’t say that rates “should” double. He did an economic analysis estimating the rate required to discourage wealthy people from continuing to produce. That is a big number, because (to simplify) a high marginal tax rate on high incomes still leaves the earner with a lot of money (incentive). It is information as part of a larger discussion. As such, objections should be aimed at his methodology, not at the political consequence of following it to some perceived logical conclusion.
4) Looking at economic growth from 1983-2007 ignores the biggest economic event in most of our lifetimes… I think it was a great recession or something. Do you really disagree that the economic policy over the preceding years had nothing to do with it?
5) The occupy movement was not a response to growth in the 1990s, but the stagnation of the 2000s. I realize that we’d all like to forget that decade, but you really can’t if you want to evaluate ideas.
As for the suggestions, they are mostly good, except 7. Bias against investment? Are you aware that capital gains taxes are lower than income taxes? It’s a bias against production.
We will only start solving problems if we stop trying to make lists to score political points, and start honestly evaluating a range of ideas.
“I think it was a great recession or something. Do you really disagree that the economic policy over the preceding years had nothing to do with it?”
Yes, I do. It was social engineering disguised as economic policy that engendered the great recession, not lowering marginal tax rates or lessening onerous regulation. Post hoc ergo prompter hoc fallacies can get you in a lot of trouble.
Eliminate the Commerce Dept. Usless waste of money. Name one thing this idiotic department has done for comerce other than waste money?
“Encourage more high-skilled immigration”?
Rather that encouraging more engineers and scientists to come to America, increasing supply and thereby LOWERING the salaries of American engineers and scientists, why don’t we import more “public intellectuals” and economists and editorial writers, thereby LOWERING the salaries of American public intellectuals, economists, and editorial writers instead?
Obviously, as an engineer, I’m sick and tired of opinion pieces that offer the economic panacea of mass migration to lower mine and my colleagues’ incomes.
American kids flee from engineering and science education for a number of reasons, but surely they see concerted efforts to make these fields the equivalent of agricultural migrant labor. Make technical fields more immune from foreign labor competition and American kids might see tech as a good career choice.
It is astonishing that people continue to make the argument that a nation of over 300 million people cannot generate sufficient technical and managerial talent to run itself. Kids flee engineering for the reason you cite. I think they also see the preference given to foreigners in terms of admission and scholarships. We overload our best schools with foreigners and then wonder why we don’t have an adequate supply of engineers.
See Mary Shubert’s excellent comment at the WSJ on how we drive out Americans with cheap immigrant labor and flood the nation not only with nearly 3 million legal migrants each year but also with some 11 million illegals to date. All while large numbers of citizens are unemployed.
Since the government says 11 million I figure that’s a massive lie, so let’s say 25-30 million illegals.
We need a complete halt to immigration for 20 years.
Now, I like the idea of reducing the pay of “public intellectuals” by drastically increasing their numbers, but if we import too many, and they end up on the dole, we will be paying for them. Maybe the dole shouldn’t be so generous. Just enough for food, clothing, shelter, and a pad of paper and pencil for tic-tac-toe.
There is a lesson to learn from Canada – the provinces have a program called the nominee program in which employers have determined that there are no qualified individuals for open skilled positions (verified by the federal government through a labour market opinion). In most cases the individuals being recruited are highly skilled trades people (custom/oil field welding, die makers, etc.) This allows employers to search for qualified individuals anywhere in the world, offer them a real job and the individual is nominated for immigration by the province to the federal government. The federal government does the security/health check for final approval. It allows employers to recruit to meet their demand for skilled labour.
Of course employers would not have to be looking for skilled labour if the K-12 and post secondary education system was actually producing graduates with strong skills in the maths and sciences. But unfortunately we spend billions of dollars every year to graduate students from high school who have a poor grasp of math and minimal understanding of any of the sciences.
Agree completely.
The whole H1-B program is a huge scam. I have seen it in action. It is used by managers to get cheaper labor. All the safeguards that have been built into the program can easily be defeated. I saw a requirement for an H1-B programmer that was publicly posted within the company, as the law requires — in the sales office break room, where no one would care about it or know how far under market the salary was.
Whatever happened to supply and demand? If firms can’t get engineering and technology talent at the wages they want to pay, doesn’t that mean that they should be paying more for it?
Why should anyone get a STEM degree, which is a lot of work, to come out into the working world and get undercut by foreign labor? Better to learn financial engineering, so we can all fleece each other. You get what you pay for.
“2. Encourage more high-skilled immigration.”
You mean like more economists?
Great idea #13: Repeal affirmative action. Return to merit-based performance everywhere in society. Period.
I have a two point plan for government:
1. Eliminate public unions
2. Eliminate public employee pensions, replacing them with 401k style plans, with employer matching up to x%, just like the private sector. All current participants get converted with a lump sum payout of some portion of what they would normally receive but not 100%.
Birch,
I had a personal HDHP for my family that cost $350/mo with a $5k deductible. Sure, it didn’t cover as much as I’d like but if you are relatively healthy, you can get a HDHP and a HSA as an individual and pay significantly less than $1800/mo.
More supply side foolishness. Even with the economy in the tank, author still totally ok with business doing whatever it wants. business doesn’t have ANY motive but profit. Businesses are at best indifferent to the good of the public welfare, and at worst destructive, look at the BP spill in the gulf..but they flourish in this country because taxpayers pay for good roads, police, and other sections of the common, plus they get tax breaks to go overseas to produce. and if big enough, bailouts if they get too piggy and corrupt, as we experienced in 2008 . We need regulations to control businesses, because they wont control themselves. taxing both business and individuals with high incomes supports the social system we have in this country.
Another Babana Republican thinks he is entitled to tell the President and American people what to do! He is banabas! If US can not bring taxes on top incomes to their historic levels, which is about 75%, then how can US balance the budget? Cutting entitlemens, such as pensions to retirees and unemployment benefits to unemployed. Outrageous! He is a really bad nut. Why would we care at this point about supply side, when drmand is really a problem? And why does he think entitlements is the issue, when if all problems started when taxes were cut to historically low levels? Well, let his Christmas wishes come true! Let all entitlements be cut, abd regulations eliminated, government dismantled, taxes abolished and his properties taken over by some desperate tramps with no income.