How to Talk about Public Policy and Why It Matters December 29, 2018 by Dan Mitchell

I periodically try to remind people that you can’t explain or understand economic performance by looking at just one policy.

I’ve argued, for instance, good tax policy isn’t a panacea if there are many other policies that expand the burden of government. Likewise, bad fiscal policy isn’t a death knell if there’s a pro-market approach on issues such as trade, regulation, and monetary policy.

Which was the point I made, in this short excerpt from a recent interview, when asked about the Trump tax cut.

This obviously has implications for Trump. He wants the economy to grow faster, but he is sabotaging his good tax reform with bad protectionism.

Which is why I’ve also explained that Trump’s overall “grade point average” for economic policy isn’t very good.

And here are two other examples, but showing that tax policy – by itself – does not drive the economy.

• The economy enjoyed good performance during the Clinton years because his one bad policy (the 1993 tax hike) was more than offset by many good policies.
• Similarly, the economy didn’t get strong growth during the Bush years because his one good policy (the 2003 tax cut) was more than offset by many bad policies.

The same is true for policy in other nations. That’s why I always check the Fraser Institute’s Economic Freedom of the World before writing about another country. I want a dispassionate source of data that covers all the major types of public policy.

And that generates counter-intuitive results, at least for people who focus on fiscal policy.

• I’ve crunched the data to show that nations such as Denmark and the Netherlands remain relatively rich because they have pro-market policies that offset onerous fiscal burdens.
• Likewise, some nations in Eastern Europe continue to lag economically because the pro-growth effect of their flat taxes are offset by weak scores in other areas, especially quality of governance.

There are a couple of takeaways from this type of nuanced analysis.

First, don’t pay excessive attention to partisan affiliations. Yes, sometimes a Republican such as Reagan reduces the burden of government, but plenty of GOPers (Hoover, the first Bush, Nixon) impose lots of statism.

The same is true in other nations. Many of the pro-market reforms in Australiaand New Zealand were initiated by Labour governments.

Second, let’s close by explaining why this matters. When people fixate on partisan labels rather than policy changes, it can lead them to very erroneous conclusions.

• For instance, even though the Great Depression was mostly the result of government intervention, many people think it was caused by capitalism simply because a Republican president was in office when it started.
• Similarly, even though the recent financial crisis was caused by government intervention, many people want to blame free markets merely because a Republican president was in office when it started.

P.S. In the interview, I said monetary policy might deserve some of the blame if the economy turns south. I want to stress, however, that I’m not blaming the Fed for trying to “normalize” today. Instead, the problem is all the easy-money policyearlier this decade.

As scholars from the Austrian School have explained, artificially low interest rates and other types of Keynesian monetary policy create the conditions for subsequent suffering.