Must-Read: Mark Thoma: My Voter’s Guide to Economic Policy

Must-Read: A very nice framework document for the economic policy dialogue:

Mark Thoma: My Voter’s Guide to Economic Policy: “Now we can finally come together as a nation and begin to make progress on important economic, social, and political issues (I can dream, can’t I?)…

…The Capitalist System: Let’s begin with an overview of how the two parties view the capitalist system. Both Democrats and Republicans believe the market system is the best way to satisfy our economic needs. Where they differ is the degree to which government should use social insurance to protect individuals and their families when the economy goes into a recession, when technological change destroys jobs, when jobs are moved to other countries, and so on. Democrats believe these risks should by widely shared…. That is, they believe in a system known as “social democracy.” Republicans have a different view. Social insurance, in their view (not mine from the evidence I’ve seen), creates dependency on government programs and blunts the incentive to work…. 

Market Failure: As just noted, both parties believe that when markets work they are the best way to meet our economic needs. But markets can fail for many reasons such as a high degree of monopoly power, differences in information about a product between the buyer and seller (e.g. patients who are unable to evaluate medical procedures, or a car owner knowing more about the quality of the car than the buyer), and the presence of externalities (e.g. firms that pollute the water or air without incurring the costs of doing so) – the full list is fairly long. And there are some goods, economist call them public goods, which the private sector will not produce at all (national defense is the classic example). Democrats believe the government ought to intervene when there are market failures…. Republicans became leery of government intervention during market failures…. 

Response to Recessions: Consistent with their views that government should intervene when the economy experiences problems, Democrats favor the use of monetary policy to combat mild recessions. In severe recessions, when monetary policy alone is not enough, they also favor the use of fiscal policy, particularly government spending…. Most Republicans agree that monetary policy should be used to smooth fluctuations in output and employment, but they would constrain the Fed’s behavior more than Democrats…. As for fiscal policy, they do not favor the use of government spending in severe recessions, even on things such as infrastructure. They do, however, favor another type of fiscal policy, tax cuts for businesses and the wealthy…. Some Republicans go even further and argue that the government should not intervene at all when the economy goes into a recession….

Inequality: Some degree of inequality is needed to create the correct incentives in a market system, but the two parties differ on whether excessive inequality reduces economic growth, the degree to which the income of those at the top is earned and hence deserved, and the need for government to address the inequality problem. Republicans argue that… people deserve what they get. Any attempt by government to redistribute income would blunt the incentive of those at the top to pursue innovative, entrepreneurial activity and reduce our rate of economic growth. Democrats… believe much of the income of those at the top is… due… unfair bargaining between workers and firms that redirects income upward, market failures, political power that has undermined unions and protected wealthy interests, cronyism on corporate boards, and so on….

Perhaps the difference between the two parties on economic policy can be summarized by the Republican’s faith in markets and their belief that when government tries to help it tends to make things worse rather than better versus the belief among Democrats that capitalist economies need government to keep them on track, to fix market imperfections, to promote equity and equal opportunity, and to ensure that the costs associated with economic shocks are broadly shared through social insurance. My support for Democrats comes, in part, from the belief that they have the stronger hand by far when it comes to economic policy, but whatever your views happen to be, please vote!