The recent failure in the Senate to repeal the estate tax stands as a rare victory for sane fiscal policy. The NYT editorialized about the event under the heading “What Passes for Good News.”
In fact, the Senate vote came alarming close to ending a tax on inheritances of the richest half-a-percent of households, with a majority of Senators (57–but they needed 60 for a repeal) supporting a measure which would have cost the treasury $800 billion over 10 years at a time of ballooning budget deficits and war.
Of course, the politics of the repeal were the focus of most analyses–would the White House be adhered to or get rebuffed on an issue dear to them–but the economics of the tax cut are deeply revealing of the fundamental flaw of economic policy today.
And that flaw is this: we have, over the past three decades, shifted from we’re-in-this-together (WITT) economics to you’re-on-your-own (YOYO) economics.
For decades after the Great Depression, economics had two main policy goals: (1) ensuring that we as a society tap our collective potential and fully employ our economic resources, especially people, and (2) providing individuals with ample protections and publicly provided insurance against undesirable market outcomes–weak job creation, high unemployment, rising poverty rates, and falling real incomes — and other challenges like aging out of the workforce or becoming disabled.
This approach ran into trouble in the latter 1970s, when two villains who are not supposed to appear on the same stage–high unemployment and inflation–combined with another potent force to knock the dominant regime out of the box. That other force was the rise of “neo-classical” economics.
This approach to economics also has two goals: (1) getting rid of the policy set associated with the old economics and (2) making sure that individuals are offered the optimal incentives, the ones that should lead them to behave in ways that, according to the mathematical models, bring about the most efficient results.
In other words, the target of economic policy has shifted from maximizing society’s potential through promoting full employment and insurance against market failures, to incentivizing the individual’s interactions with the market.
Thus, YOYO economics was born. Today, we’re seeing the outcomes: greater inequality, a fiscally bankrupt government, the shifting of risk from the government and the firm to the individual, and the loss of the systems and institutions–like pension coverage, minimum wages, overtime rules, and a durable safety net–that smoothed some of the rough edges of capitalism, without diminishing the economy’s growth potential.
The policy implications reduce to this: “You’re on your own. Here’s a tax cut. Now go out there and optimize.”
In our money-laden system, that type of message leads directly to endless arguments for cutting taxes, especially for wealthy investors, since they’re the ones who, according to YOYO lore, will unleash all kinds of wonderful fairy dust once their hands are no longer tied by the fact that they have to pay taxes on inherited income from estates worth millions.
The irony of all this is that the majority of individuals do much better under the WITT regime than the YOYO one. Part of this is distributional: the typical, or median family’s income grew with productivity over the period where WITT was in ascendancy, but has lagged ever since.
And part stems from the fact that we simply all do much better when we work together to confront the economic challenges we face. The new, globalized economy has many wonderful attributes and opportunities, but too many of us feel like we’re walking a tight rope without a net.
From this point forward, we should view every proposed initiative through this lens: does the policy rebuild that connection between growth and broadly shared economic security? If not, as with the estate tax repeal, it should be rejected. If so, bring it on.