Pop Economics

I was looking for something to disagree passionately with for my final blog post when I came across this little beauty of an opinion piece from the National Review, an eminent conservative journal. It was well-written and sobering, but it was another example of the kind of thinking that's been upsetting me for some time now: the use of simplistic Econ 1 concepts to explain the real world.

Everyone knows you can't directly apply Econ 1 concepts to actual situations. The real world is just much too complex. For example, in today's global economy, there is no such thing as an "exogenous" upward shift in demand (a shift in demand that comes from outside the system) because there is NO "outside the system." Rising demand for staple crops is linked to rising energy demand through ethanol. Free trade agreements and commodity deals have effects that reverberate differently depending on the institutions of the countries in question. To quote a speech in the fantastic 1975 movie Network, the world is a "holistic system of systems, one vast and immane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, reichmarks, rins, rubles, pounds, and shekels." Economics is complex, and policy analysis is hard.

So when Michael Novak simplifies and caricatures the Democrats' economic policies using exactly the kind of univariate, static-world thinking I disparaged above, my hackles go up a little bit. Novak argues that raising income taxes on the wealthiest 2% to their 1990s levels "will give them enormous incentives to alter their behavior, so as to show lower income." He forecasts "dramatically lower" revenues, a financially hamstrung and chronically deficit-plagued federal government, and the end of civilization as we know it. Obama, he says, "will learn the hard way" about the disastrous results of his tax-hiking policy.

No one's denying the existence of incentive effects, but substantial questions exist as to their magnitude. While "enormous" reads well, it may be an overstatement--I don't remember tax receipts being dramatically lower before the 2001 and 2003 tax cuts. In fact, they were higher. And guess what? We still had economic growth. In fact, we look back on the 1990s as a period of enormous productivity growth! Despite the fact that marginal tax rates for the top 2% were higher in the 1990s, the economy prospered and America, somehow, endured. But there is no mention of that fact in Novak's piece, because Novak is no economist--just a guy using the words "incentive effects" and praying no one remembers the counterexample of a decade ago.

If Obama is elected, there is reason to believe that Novak will have to learn the hard way that you can't forecast the future of the federal budget, the economy, or the country solely from a simplistic univariate analysis.