When it comes to economic policy, decision-makers rarely face a choice between good and bad. More often, it’s a matter of deciding what’s better or worse.
For example, I argued recently that the Fed tightening of the money supply was too little, too late. A reader wrote in, asking my opinion on what short-term interest rates should be. I responded that if we looked at historical patterns, money-supply growth, and price-index trends, then short-term rates should probably be between 5 and 6 percent, rather than around 3 percent. John Taylor, the former senior Treasury official, developed criteria that would lead to a similar conclusion.
“Six percent interest rates would just kill the U.S. economy,” was the quick reply. I resisted the temptation to note that there has been a U.S. economy for a couple of centuries now and that it has never died yet. I did respond that the question was not simply whether tighter monetary policy would slow the economy, but rather what would happen to the economy if the Fed did not tighten.
President Bush recently argued that taxes should not be raised to pay for Hurricane Katrina-related spending because “higher taxes would hurt the economy.” That may be true, but one also has to ask whether adding another $200 billion to the national debt will hurt it any less.
Between his election and his inauguration, President Bill Clinton told his economic advisers that he would not change farm subsidy programs because it “would hurt farm families.” What he needed to ask was whether continuing such programs might not also harm rural society, as much research over the past 30 years has shown they do.
At the time of the Rio de Janeiro conference on the environment that eventually led to the Kyoto agreement on global warming, former President George H.W. Bush said his administration supported measures to reduce global warming as long as they “do not hurt the U.S. economy.” He failed to recognize that not reducing global warming might also cause substantial economic harm.
The administration of his son hews to the same line: We won’t ratify Kyoto because it would hurt the U.S. economy. Meanwhile, supporters of the Kyoto Protocol back its ratification simply because it will somewhat reduce greenhouse-gas emissions. Such black-white attitudes are naive.
At the very least one needs to ask: What are the likely benefits of ratifying Kyoto versus the likely costs? Is there an alternative to Kyoto that would achieve greater emissions reductions at the same cost or the same reductions at lower cost? What if the eventual effects of global warming turn out to be much better or much worse than our best estimates now? What if our efforts to reduce global warming yield different results than we can now foresee? What then?
Important questions always involve careful weighing of pluses and minuses for all possible answers. They rarely are simple matters of good versus bad. Citizens need to remember that when they step into voting booths.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.