By John Stang
When trying to cut the deficit in some way, that obviously requires trying to change some form of entrenched social policy for which a constituency exists. In Europe and the U.S., this is the case. Matt Yglesias writes about Europe:
Whether you agree with Kierkegaard about that or not, this once again highlights thecentral dilmma of the “independent” central bank. Kierkegaard is a writer and a policy analyst. He pushes for labor market reforms by trying to convince people that they’re a good idea. Thorning-Schmidt is a politician, she pushes for labor market reforms (or not) by campaigning and winning elections and securing votes in parliament. But Draghi is a central banker. His job is supposed to be to provide macroeconomic stability—low unemployment and non-accelerating inflation. But he’s got views on these matters every bit as much as Thorning-Schmidt or Kierkegaard or myself. But he actually has the power to make Kierkegaard’s version of the old saw about the Chinese characters for danger and opportunity into a reality. By tweaking the speed and alacrity with which he responds to short-term demand-side growth issues, he can mightily influence the course of long-term structural policymaking. Elected officials in Italy and Spain don’t have the tools to stabilize the Spanish and Italian macroeconomies over the short term. But they do have the tools to implement long-term structural reforms that Draghi either likes or dislikes, and Draghi has the power to dispense short-term stabilization in accordance with his estimation of the merit of Spanish and Italian long-term policies. In effect, he and his colleagues are running the whole show while simultaneously being accountable to almost nobody.
To put it simply, whether on a central banking or political level, someone will make a decision that impacts a social situation of someone else, which is how economic policy operates. Except, central bankers can have an impact on interest rates while politicians can control social policy, such as labor reforms. Both are critical, but the latter takes more staying power than the other because the latter is accountable to a voting public. On the American side, David Brooks discusses the tax code and its implications for social policy:
The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks. For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing. European governments offer public childcare. In the U.S., we have child tax credits. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everybody from ethanol producers to Nascar track owners.
By trying to change the tax code, or simplifying it, by eliminating loopcauses and carve-outs, that offsets specific incentives for people to have children, buy a house, or even purchase economic necessities for the good of the country, like green technology. Not to say trading it for a welfare state wouldn’t be a bad thing, but the perception of eliminating some sort of tax credit does have a small psychological affect.
The point is that economic policy, an obvious point, is complicated because every choice not only has an economic consequence, but also changes a human behavior and sways public opinion. Think of it as one “ecosocpolitical” sphere. That’s why the tax code can’t be simplified so easily or we are not on our way to a single payer health care system.