Wednesday, May 16, 2007

Foresight: A Tool, Not A Trick

*** NOTE: After finishing my finals today, I'll be sure to keep the posts coming on a more regular basis. ***

There is one fundamental difference in how liberals and conservatives handle economic issues. Conservatives value foresight as tool while liberals view everything through its short-run effects. While studying for my history final, I read a section on the Reagan tax cuts in 1981 which seemingly caused an economic downturn, according to the book's author. There is an economic tool that conservative supply-siders use to discourage this notion.

Economic policies tend to have a lag effect. For example, a tax cut will cause consumers to act as though they have more money when in reality they won't until at least the following year. Increased consumption and demand in domestic markets leads to price inflation. So immediately following a tax cut, the short-run effect is inflation. In the long-run, however, tax cuts increase output and bring prices down. Several years following Reagan's tax cuts, inflation and unemployment dropped drastically, but nobody understood exactly why. That, ladies and gentlemen, is the lag effect.

The lag effect is a prime example of the benefits inherent in foresight. A good economist knows both short-run and long-run policy implications. Short-run thinking leads to reactionary policies that keep the economy on a see-saw pattern of expansion and recession. Long-run thinking smooths the crests and valleys caused by the business cycle. Liberals often make the mistake of seeing benefits in the immediate future while overlooking the obvious long-run implications. For example, medicare and social security are headed for insolvency in the very near future. They see any solution as having a negative effect on current recipients but they choose to ignore the long-run implications of doing nothing.

Short-run thinking often wins elections, which is exactly why it is so alluring. If a politician can pursue a policy that has very visible positive effects in a short period during election season, they can trumpet their success during the campaign. Nobody notices the implications five years down the road when the same politician is championing a solution to the problem they caused. This is one of the biggest reasons that we need term limits in Congress. A politician with no option for re-election will find it much easier to adopt a long-run philosophy.

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