What Political Compromises Could Create Jobs? (Cont'd) : Planet Money A guest post from University of Chicago economist John Cochrane.
NPR logo What Political Compromises Could Create Jobs? (Cont'd)

What Political Compromises Could Create Jobs? (Cont'd)

In his first New York Times Magazine column, Adam Davidson looked at the challenge of creating jobs with a divided government. To continue the discussion, we asked two economists on different sides of the debate — Dean Baker of the Center for Economic and Policy Research, and John Cochrane of the University of Chicago Booth School of Business — to answer the following question.

With power split between the parties in Washington, no one is likely to get exactly what they want. Are there realistic political compromises that could help create jobs?

John Cochrane's answer is below; To read Dean Baker's answer, click here.

Well, that depends on how you interpret "what they want" and "realistic." (It's fun being an economist, I always get to start with "that depends," and end with "on the other hand!") If "what they want" is to help the economy start to grow strongly, which we all admit is the only real hope for reducing our terrible unemployment rate, within the intersection of their broad ideological frameworks, well sure, there is a lot they could do.

Start with the things everyone agrees on. The tax code is a mess. They could easily agree on a revenue-neutral basic structural reform: lower rates, broaden the base, and eliminate deductions, exclusions, loopholes, and tax expenditures (subsidies granted by special tax deductions). Corporate and estate taxes are a particular sham, employing an army of pointless lobbyists and accountants.

To agree on that, Democrats would have to postpone "taxing the rich" or substantially raising revenue according to static calculations. They can agree first to fix the structure of the tax code, and argue about the rates later. Both sides, but particularly Republicans, have to stop the deliberate obfuscation between tax revenue and tax rates. Our objective is more, or at least the same, revenue, at lower and less economically damaging rates. A vague pledge not to "raise taxes" ties us to a pointless status quo.

Move on to issues where ideologies agree, though powerful interests supporting both sides do not. Corporate welfare is as much anathema to the tea party as to occupy Wall Street. Ethanol subsidies, agricultural subsidies, the import-export bank, Amtrak, rural broadband, and so on just tax the middle class and send money to rich people. Perhaps the Republicans can give up subsidies for oil and nuclear power if the Democrats give up subsidies for rail, electric cars and the likes of Solyndra. Perhaps we can even get rid of Fannie and Freddie at last.

Look under the radar screen. We make a mistake in focusing on the big propaganda issues of the moment, like "jobs programs" and "tax the rich" or "no more taxes." Push for free trade, especially in services. Fix bankruptcy law for financial institutions, which is still a mess as the demise of MF Global showed last week. (You don't have to touch Dodd-Frank for that.) Take the Administration's effort to reduce some regulations seriously.

This country recovered from many past recessions without settling the grand issue: Do we expand the activist, social-welfare state, or do we trust deregulation, freedom and private initiative? It could do so again.

So why is none of this happening? It's pretty clear that's not "what they want." The Republicans turned down the democratic infrastructure bill because it included higher taxes, a deliberate poison pill. The Democrats turned down the Republican infrastructure bill, presumably for similar reasons. Both sides seem determined to have nothing happen and blame the other side. The campaign is on.

Maybe that isn't so bad. When you look at the headline ideas out of Washington, there is no chance that anything under discussion would substantially reduce unemployment in the next year, even if it did get enacted. The economy may heal itself, but no thanks to anything in policy.

Why? No major proposals by Democratic or Republican leadership has anything even vaguely to do with the causes of slow growth and high unemployment. The patient is having a heart attack, and at best we are discussing whether a double-shot of espresso might perk him up or whether a nip of brandy would do better. (There are lots of truly radical ideas that I think would work; and those on the far left might approve of Greek-style borrowing and spending as the solution. But all this is off the major agenda this year. )

The "jobs" bills may create roads, but there is no chance they will raise economic growth or seriously attack unemployment in the next year. Not just because there is snow on the roads, and children in the schools, and because an unemployed non-union sheet-rock crew in Nevada has no idea how to operate a road-paving machine in Ohio. Because it's not the cause. Nine percent unemployment did not come from firing road workers.

We also do not have slow growth and 9 percent unemployment because of an inadequate capital gains tax rate. I don't think anyone believes that raising this tax will create jobs.

The Fed is still stimulating. But we do not have 9 percent unemployment because 3 percent interest rates are too high.

If these are the best ideas on the feasible policy agenda, perhaps starting the campaign now isn't so awful. Let us debate, within the parties, and between the parties, just what kind of country we want to become. Let us focus on the long-term rules of the game. Settling the grand issue is likely to be far more important for growth than any of this agenda.

Let us just hope that the financial markets give us a quiet year for this conversation.