The Profession of Economics and Its Enemies >>>>> (Part 3 of 3) — The Political Sphere

Abstract

     The art of politics marginalizes economic policy. The economist is beholden to the  

     political. The economic sphere must seek autonomy from the political.

The following is the third of a three-part series considering why the profession of economics has not been able to shed the label of ‘the dismal science’. Part One advanced that this label results from a failure on the part of the discipline to properly conceptualize the nature of an economy. Part Two suggested teaching economics from the business college further mischaracterizes the profession. This Part Three advances the admittedly fanciful notion of removing the economic sphere from the political sphere, where many good ideas go to die.


                                                       The Stage

The U. S. economy experienced its best performance in the decades following World War II. The large war debt was paid down, unemployment was low, and inflation was under control. It’s generally recognized that pent-up demand for goods and services led the way to this good fortune. The 10 or so millions of men and women who came back from the war were ready to resume their lives and take on personal debt, if necessary.  While it wasn’t recognized at the time and is still not fully acknowledged, this phenomenon of increased spending validated the Keynesian principle of effective demand. While pent-up demand may not have been the spark Keynes sought regarding economic performance, it nonetheless spurred the economy for a generation.

The existence of an effective demand, however, was not enough to sustain this newfound prosperity. Inflation surfaced in the late 1960s and early 1970s, and a failsafe mechanism to deal with its potential to do harm was unavailable. While it was recognized that the economy was overheated due to the cost of the Vietnam War and ongoing social issues,  the prospect of inflation went unanswered. Neither President Johnson nor President Nixon was ready to pull back on the reins of a booming economy. Good economic policy was beholden to the political.

As the economy continued to deteriorate, this lack of action provided the perfect opportunity for neoliberals of various stripes to claim that Keynesian economics does not work and that there was no alternative but to return to the self-serving, neoclassical doctrine of austerity. Cuts to social programs and high interest rates slowed the economy and eventually reduced inflation but left labor wanting. Fast forward through 40 years of low and vastly unequal growth, and we now have no alternative but to change course.

                                                      The Proposal

As was shown, the problem with the U. S. economy in the late 1960s and early 1970s was not with an inability to provide for the needs of society. An effective demand and the tenacity of the business community  accomplished that brilliantly. The problem was the systemic inability to protect against accelerating inflation in the face of political pressures.

Neoclassical economists solved the problem of inflation in the 1980s by creating a permanently underperforming economy where the prospect of high demand never surfaces. Once a hint of inflation becomes evident in the data, the Federal Reserve raised interest rates, and business expansion is dialed back. Unfortunately for many, the cure is as bad as the disease.

Inducing unemployment lacks understanding. Accelerating inflation results from too much demand chasing too few goods. Limiting the capacity of business to produce goods and services when it already is underproducing is counterproductive. Instead of raising interest rates to slow economic growth, interest rates must be maintained or lowered to allow business to meet higher demand by way of expanding operations. When the prospect of inflation appears in the data, business should continue to enjoy attractive interest rates and, depending on the severity of the economic indicators, be granted lower rates of taxation.

Consumer spending must be targeted to fight inflation and not interest rates. Reducing consumer spending will allow supply and demand to become closer in alignment. When aggregate supply and aggregate demand are in close alignment, inflationary pressures are minimized.

This reduction in spending must be accomplished by way of higher levels of taxation for the individual. When the prospect of inflation appears in the data, an across the board tax increase is necessary for individual taxpayers. Once business is again able to produce at levels commensurate with demand, the increase to individual tax rates can and must be rescinded to previous levels. This will help to spur business into further action. While the consumer is asked to shoulder most of the burden in this fight against inflation, this strategy is preferred because unemployment levels will remain low as business continues in its attempt to expand.

                                                          The Challenge

Timely adjustments to income tax rates will be critical in this future fight against accelerating inflation. There will be no time for deliberation. Data that is currently used by the Federal Reserve to project inflationary trends must be used to trigger a rise in the tax rates of individual taxpayers when conditions warrant. These adjustments must be codified into law such that human intervention is not necessary. Fashioning automatic triggers will be challenging given the dynamics of partisan politics. Without these automatic triggers, however, the prospects of gridlock are great. We must guard against this.

Developing automatic triggers to raise or lower income taxes is not a far-flung idea. No one benefits from inflation. In the not-too-distant future we are destined to trust our very lives to self-driving cars. Given the availability of current and historical data, we should be able to codify into law an autonomous economic policy to combat inflation and remove the prospects of accelerating inflation from the political.

                                                     Conclusion

We do not need to engineer a permanently underperforming economy to address inflation. With the proper tools, high levels of employment can be maintained within a growing economy. We must codify into law procedures necessary to combat inflation prior to its arrival.

It is beholden on us all to not only correctly define the nature of an economy and to properly train future generations of economists. We must allow the economy to work for all. If good economic policy can be removed from the political sphere, a significant shortcoming of the discipline of economics will cease to exist and, in the process, perhaps, put an end to the label of ‘the dismal science.’

                                                           References

     Polanyi, K., 1944, The Great Transformation: The Political and Economic Origins of Our 
     Time, Beacon Press, Boston

     Saez, A. & Zucman G., 2019, The Triumph of Inequality, W. W. Norton & Company, 
     New York

     Schleifer, T., 2019, “Silicon Valley billionaires keep getting richer no matter how much 
     money they give away”, Vox, https://www.vox.com/