Remember the debt ceiling debate? It seems that this horrifying event, so prominent in media coverage just a few months ago, has abruptly passed from public consciousness. It makes some sense that it has, since the economic downturn that started during the crisis and continued afterwards was attributed to problems in Europe, rather than domestic ones inherent in our national system. The whole debt debate was more of a catalyst for the downturn rather than an underlying cause. In fact, demand for treasuries actually increased, so no one seemed too worried about the U.S. government defaulting anytime soon.
If you think about it, the connection between the debt ceiling debate and out-of-control deficit spending is more psychological than it is factual. To see what I mean, suppose Congress needs to pass a bill, without which a nuclear war will start. Obviously, the U.S. government should pass the bill. But suppose the opposing party wants to cut taxes and decides that this bill should not be passed while government spending is out of control. What is the opposing party to do? Obviously, they should compromise and concede on a bill that saves human existence. It would be fairly offensive if a party used a completely unrelated, must-pass piece of legislation as a choking point or an opportunity to criticize federal spending.
Though this is an extreme example, my point is that the only difference between the above debate and the debt debate is that when we hear “debt ceiling,” we are cued to think “government spending.” Thus, we don’t think it’s strange when policymakers take the opportunity to talk about out-of-control government spending, or when they use this as leverage over the other party. But, if we heard “nuclear war bill,” we wouldn’t necessarily think “government spending,” and we would probably be upset with our politicians for making this dubious and irrelevant connection.
But, when the debt ceiling needed to be raised, the debate about whether to spend money had already occurred. Raising the debt ceiling was a necessary technicality, lest the financial markets be led to ruin. The question of whether we should default on our debt was not at all related to the question of whether the government is spending too much money. And, though perhaps the analogy between a nuclear war and government default is fairly extreme, let’s just say that, in the finance literature, treasury bonds are referred to as “risk-free” because it is assumed there is zero chance of default. Say what you want about the ramifications, but as a general principle, models don’t do very well when confronted with the occurrence of a zero-probability event. Since the debt ceiling needed to be raised, it was used as a choke point in order to obtain a political outcome.
Admittedly, this is old news. But I hope that we do not forget this debate in the upcoming campaign season, because it was the clearest indication of a definite trend: Economic policy is driven more by political ideology and less by testable ideas. Economists analyze data, and disagreements are resolved by comparisons of models. But though data used to be important, politicians no longer seem to care. Even Ronald Reagan listened to people who looked at data, but it’s not clear whom today’s politicians are listening to. Branding determines the legitimacy and relevance of a position, and even an absurd economic position will be taken seriously if branded effectively.
I was reminded of this point recently when hearing about Herman Cain’s “9-9-9” plan, which posits that there should be a flat nine percent sales tax, nine percent income tax, and nine percent corporate tax. I challenge any reader to find me any piece of economic analysis, in any area of economics or political science, which states the optimal value for three different quantities as equal positive integer values. These numbers were chosen because, first, they sound plausible—sales tax in Chicago is around 10 percent—and second, because it is marketable. But trying to find economics in Cain’s plan is like trying to read horoscopes to figure out your future; any time it matches up with the facts is probably a coincidence.
Of course, politics always relies upon branding, but rarely has political ideology created conflict where none had previously existed. The debt ceiling was one example of this, but there are others that are slightly less visible. For example, in a Wall Street Journal editorial, economists Alan Blinder and Glenn Hubbard, who would traditionally be viewed as holding opposite political beliefs, outlined several areas of common ground for both Democrats and Republicans relating to spending and tax measures. A depressing thought is that the article’s recommendations probably won’t enter the mainstream because it doesn’t have a catchy slogan and no one is paying any money to advertise it. Instead, mainstream debates will focus on ideas that can be sold quickly and effectively, ideas without evidence to support them, and ideas that, despite their memorable branding and good timing, will ultimately fail.
Jonathan Libgober is a fourth-year in the College majoring in economics and math.