Monday, June 4, 2012

Let's have a little chat about Republicans

Once upon a time, Republicans were conservatives, and followed to a significant extent the primary dictate of conservatism:
conservatism - a political or theological orientation advocating the preservation of the best in society and opposing radical changes.
It seems clear that with Republicans routinely promoting the elimination or dramatic restructuring of things like Medicare, Medicaid, and Social Security, that fundamental position has been abandoned.  But, I don't think it is right to say that modern Republicans are entirely unprincipled, or that they are merely advocating the interests of their wealthy donors (though they are certainly pursuing policies that primarily favor the wealthy).  Rather, I think the best way to view Republican ideology is through the lens of psychology.

Republicans understand the direction of human psychology, and the sorts of motivations that impact people's behavior.  It's true that higher marginal tax rates make people less excited about making more money; I've experienced that first hand.  Likewise, it's true that the leap from something for nothing to a-little-more-something for a-lot-more-work is significant.  If you stop your thinking there, then it is obvious that things like unemployment benefits and high marginal tax rates are ridiculous, silly, and probably counterproductive.

The trouble, of course, is that you can't stop there: you have to measure the size of the effect.  Basically everyone in Republican-land is assuming very-large, even dominating, effects from these psychological factors.  Thus things like "the confidence fairy", "regulatory uncertainty","bond market vigilantes", a preoccupation with "moral hazard" and the like.  Sadly, in most cases the empirical evidence seems to indicate that these psychological effects, though often real, are quite small.  The far side of the Laffer Curve--the hypothetical curve depicting the point at which increases in tax rate actually reduce tax revenues through disincentive effects--is estimated to be around a 70% tax rate.  Likewise, unemployment benefits increase unemployment rates much less than one might naively expect, especially in severe recessions like the one we are in.  As for the confidence fairy, bond market vigilantes, and regulatory uncertainty--they just don't seem to apply to our current situation.

Basically, Republicans show an interest in and a sense of human psychology which is intuitive, substantially correct, and praiseworthy.  Liberals are all too often guilty of ignoring the human, social, and psychological aspects of situations.  However, when it comes to accurately describing the way the world works, you'd be much better off dropping the psychological variables from your equations than the mechanical ones.  Or, best of all, keeping them all in and looking at what the econometrics data is actually telling you.  Doing that tends to show that optimal economic policy is much more closely aligned to Keynesian policies than Austrian ones.  Just goes to show that even if your intuitions are broadly right, it is still important to look at the data.

A little post-script:
It does seem that Republicans tend to forget their psychology when it comes to looking at regulating business.  Much, if not all, of the recent bank legislation is about avoiding the "moral hazard" created by federal guarantees on bank deposits, and for some reason that isn't subject to the same psychological rational as unemployment benefits.  Hard to see why, really, except for a sort of team "give the rich what they want" mentality.  That's a bit annoying.

Also, it's worth pointing out that a lot of people think that the financial collapse was brought on by Republican banking deregulation, and the conservatism as defined earlier would have been the exact impulse--that the rules of the past were laid down with wisdom and shouldn't be so easily cast aside--that protected us from that silliness.  In a proper conservative-liberal dichotomy, the liberals should have been pushing for the deregulation, and the conservatives should have been saying "hey man, we made those rules for a reason".

In my mind, both of these failures of Republicans to follow either their "human nature" or "conservative" ideologies is strong evidence of regulatory capture; the business interests have at least partially conquered the Republican party and put them to use on the behalf of banking against the best interests of society.

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