It bothers me how economics gets politicized. More specifically, how economic theories and ideas can be seen as either left or right wing. Maybe I am seeing the world and the economics profession through rose-coloured glasses, but my perception of economics was always that it was the study of how to best allocate our scarce resources in an efficient way, and not to support a political view. We economists are all trying to work out the best way to set policy or other rules, so that as society we would be better off. An economic theory or idea should therefore not have a political leaning.
However, as much as I wish that politics were not involved in how we think about economics, I know very well in reality economics and politics are heavily intertwined. One fellow economist said to me, in a very rational economist-like way, that there are different opinions in what was the best way to allocate resources. Of course, economists are famous for disagreeing. So different opinions would support one political leaning or another.
I think what has happened is that it is the politics of the day picks and chooses the economic theory which supports their view, rather than assessing the economics in an objective way to determine the best outcome.
The Laffer curve is a prime example. The idea behind the theory is that there is an optimal rate of tax that maximises revenue. If the tax rate increased above a certain point, then tax revenues would start to decline as the disincentive to work increases. There are plenty of pitfalls behind the Laffer curve, in that it ignores distributional effects of taxes. However, the Laffer curve has been a key argument in supporting tax cuts, particularly for the rich. The point I am trying to make is that regardless of the merits of an economic theory, a branch of politics is championing that economic thought because it supports their political agenda.
Today, there are signs that mainstream economic thought has shifted.
Notably, inequality is becoming a growing issue as bigger parts of the population become dissatisfied with the level of fairness in society. The global financial crisis and now the global pandemic have further exacerbated the skew of income and wealth gains towards the wealthy. Economists like Joseph Stiglitz has been highlighting the economic problems due to inequality for the last decade or so. More and more so, central banks and news outlets are releasing pieces on how income inequality and wealth inequality was negatively impacting on economies. The premise of the argument in addressing inequality is that it is detrimental to economic growth. This is because those more wealthy are less inclined to spend and put that money back into the economy.
The shift in addressing inequality has been notable in the US, where income inequality has grown significantly over the past few decades. Specifically, the proposal by US President Biden to increase the corporate tax rate and to expand benefits to the unemployed, providing free preschooling, and spending on education all have the aim of reducing inequality and improving lives for the less fortunate.
However, the idea that inequality was bad for economic growth is not a new concept. In my early days in university, inequality was raised as an issue impacting on economic growth negatively over the long-term. That being said, the issue of inequality did take a backseat to concepts of boosting efficiency and productivity at that time and was seen as mutually exclusive. That is, the idea that you can’t have efficiency and inequality at the same time.
Another notable shift that has occurred today has been how economists view government debt. With interest rates now at super low levels, the goal posts have shifted in determining what is a sustainable level of debt. Servicing a big load of debt is much cheaper than it used to be. It also signals that there is no problem finding lenders. At the end of the day, it’s up to investors and when they decide enough is enough. Clearly, the market doesn’t seem to be worried about rising debt levels. Economists now see that a sustainable level of debt is as long as the interest rate is below the rate of growth in the economy. The idea of having a balanced budget over the course of an economic cycle which was a previous ideal seems to have been left aside, perhaps sensibly until a more entrenched recovery from the pandemic.
These ideas of redistribution of incomes and using debt to fund investment in the economy are very notably inconsistent with traditional conservative values of keeping taxes low, less government spending and small government.
It is encouraging to see that the long running economic issue of inequality is being taken into account into policy in the US, and perhaps it could signal a shift towards further progressive policies not just in the US, but in other advanced economies. Unfortunately, it has taken a change in the political tide for this to occur rather than a sensible economic debate first.
