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February 27, 2015

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Following ideology off a cliff

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We have gone over the “fiscal cliff.” The politicians jury-rigged a last-minute, temporary deal, but let’s face it — we went over.

The chattering classes are discussing the next big fiscal deadline in February, which is when the government hits the debt ceiling and the politicians again walk us up to the edge of a cliff — and maybe over it into a government shutdown or default.

But before focusing on the next act of this needlessly costly exercise, we should figure out how we got into this mess.

Democrats and Republicans will blame each other, but the answer is more subtle than the usual partisan sniping. The answer is ideology. Specifically, the anti-tax ideology promoted by Grover Norquist and his Americans for Tax Reform, which unfortunately has been swallowed by today’s Republican Party.

Let’s be clear. Economics does not prescribe an optimal tax structure, nor does it posit a perfect set of tax rates.

Sure, there are economists who believe that taxes ought to be lower — and the government correspondingly smaller — while others would be content with higher taxes and a larger government. But there is no economic theory or empirical result that says that the top tax rate of 35 percent established under George W. Bush is inherently better for the economy than the 39.6 percent top rate under Bill Clinton.

With no compelling economic evidence for leaving the top marginal rate at 35 percent, why did the Republicans invest so much energy in fighting tax increases for those making over $250,000? Or over $400,000? Or over $1 million? And why did 236 out of 242 Republican House members and 40 out of 47 Republican senators in the just completed 112th Congress sign Norquist’s no new taxes pledge?

This ideologically driven intransigence makes no sense.

Sadly, the Republican abdication of sound economic reasoning in favor of ideology is not an aberration. Ideologically based policy was at the heart of many economic policy blunders during the past two centuries.

The Irish famine in the 19th century left a million people dead and led even more to emigrate. The British government under Prime Minister Sir Robert Peel sent food and made substantial attempts to alleviate the famine. When the Liberal Party’s Lord John Russell replaced Peel, however, the government retreated from the activist relief policy.

Why was this policy mistake made?

Because the Liberals believed above all else that the government should not interfere in the markets, including those for food. The commitment to a free market ideology should have been trumped by the need to save lives.

After World War I, as Europe returned to normalcy, Britain was one of the first European countries to re-establish the gold standard. The British made this policy move despite structural changes that rendered the gold standard inappropriate in the postwar world and warnings from the two most respected economists of the day that the return would be a disaster.

Why was this policy mistake made?

The gold standard was a matter of deep British pride, conjuring up memories of an empire that controlled about a quarter of the world’s land and population. That decision helped usher in the Great Depression, the worst economic crisis the modern world has known. Economic reasoning should have trumped nostalgia for the empire.

At the end of the 1990s, the Europeans launched the euro. The currency emerged out of a post-World War II movement toward greater economic cooperation and integration, in hopes that the two world wars fought during the 20th century would never be repeated. Despite these high-minded — even laudable — ideals, the European economies were far too dissimilar to support a single currency and the euro now teeters on the edge of its own cliff.

Why was this policy mistake made?

Because the dream of a united Europe was allowed to trump the cold, hard fact that Germany and Greece require very different monetary policies.

Solving our fiscal problem requires politicians who are more committed to finding practical, workable solutions than to ideology. And there are plenty of Republicans and Democrats who fit this description.

As voters, we should reward politicians of all stripes who are more loyal to us than to any ideology.

Richard S. Grossman is a professor of economics at Wesleyan University and a visiting scholar at the Institute for Quantitative Social Science, Harvard University. He wrote this for The Hartford Courant.

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  1. Good article Professor. It should be mandatory reading for the gang of 535. And the President and all his Department heads, staff and advisors. Although I doubt that the majority of them, President Obama included, would comprehend and if they did would choose to act on it.