Tax Analysts Blog

Recovery Through Reform? Wouldn't It Be Nice

Posted on Jul 2, 2009

Sometimes, politics can make for incoherent policy. Economist Tyler Cowen makes that point while mulling the healthcare debate:

    First, the idea of an employer mandate for healthcare is a tax on hiring labor in a time when, if anything, the hiring of labor should be subsidized.  On top of that is the proposal to tax health insurance benefits.  Keynesians especially should be upset about these developments, although I haven't heard many peeps.  Even if they favor this policy in the abstract, surely they are accustomed to the idea that the short run is very important, most of all for labor markets and aggregate demand.

There is much to be said for this observation, especially in light of today's unemployment report. Whatever the long-term economic benefits of health reform -- and I'm persuaded they're substantial -- it's unlikely to help the economy in the short run.

President Obama has been arguing otherwise:
    . . . if we don't act, if we let this moment pass, we could see this economy just sputter along for decades -- a slow, steady decline in which the chances for our children and our grandchildren are fewer than the opportunities that were given to us. 

The president may be right: maybe a dose of health reform is just what the economy needs. But I suspect he's whistling in the dark: reform seems more likely to delay recovery than speed it.

Even so, it may be worth the price. I, for one, would be willing to roll the dice, given the enormous importance of fixing a badly broken health system. Nevertheless, it's important to be candid about the cost. More often than not, recovery and reform are stubbornly inconsistent. Even when we might wish otherwise.

In this debate -- as in so many others -- Obama seems to be channeling Franklin Delano Roosevelt. Many New Deal recovery programs were designed to boost aggregate demand, which economists (then and now) believed crucial to recovery. But FDR's policy agenda also included a variety of tax hikes that economists (then and now) thought likely to reduce demand. Sure, a few New Deal loyalists advanced novel arguments suggesting that some tax hikes could actually boost demand. But for the most part, experts recognized that soak-the-rich taxes -- even when justified by social concerns or long-term economic goals -- were more likely to slow recovery than boost it.

FDR probably understood this fact. But he pursued tax reform anyway, both for political and moral reasons. Politically, he was just about done with business and rich Americans by 1935, when he pushed through the first of several major tax hikes. After a short honeymoon, both groups had turned on the New Deal and Roosevelt was furious.

More important, FDR believed that progressive tax reform was simply too important to put off. He believed (as did many economists) that rich Americans could afford to shoulder more of the nation's tax bill. And he was convinced that the redistribution of wealth (through both taxation and spending) was vital to the nation's long-term economic, political, and moral health.

For FDR -- as I suspect for Obama -- reform might be costly in the short run. But it was worth it.

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