Economy and Government

ECONOMIC ANALYSIS: Politics sometimes fuels destructive public policy

August 14, 2006

If you called someone a royalist these days, you'd probably just get a blank stare.

But 200 years ago, you would have started a heated discussion and perhaps even a deadly duel. The accusation was often leveled toward those who managed the economy in those days, perhaps for good reason. Then, as now, bankers, financiers and the other moguls trusted with responsibility for national money matters were not always a democratic lot.

While politically incorrect then as well as now, those money men's distaste for allowing democratic institutions access to the levers of financial power was not totally misplaced, judging from the historical record. In fact, the notion that matters of national finance are too important to be trusted to the whims of popular representatives is enshrined in the structure of institutions like the Federal Reserve, and even in the pre-eminent role of finance and ways and means committees in legislative bodies.

Now we have another example of the pitfalls of settling matters of finance by popular vote in the form of the recent suggestion by Indiana House Minority Leader Patrick Bauer that Gov. Mitch Daniels declare an energy emergency in the state and temporarily suspend the sales tax on retail gasoline. As economic policy, it is hypocritical almost to the point of dishonesty, and creates much bigger problems than the one it purports to solve.

Yet as politics it is brilliant, just as it was when the late Gov. Frank O'Bannon pulled the same ploy in an election year and sent once-promising Republican challenger David McIntosh into what appears to be permanent retirement from elected office. Accurately or not, Bauer has connected the governor with a tangible pain that all of us feel-paying more at the pump for gas. And in return for that pain, the best we are offered is a balanced budget?

But there have been too many brilliant political ideas from our elected representatives over the last few years, particularly at the federal level where the balanced budget mandate is absent. Their narrow purpose as means of capturing votes aside, those ideas have turned our tax code into a 10,000-page opus, while at the same time extending promises and entitlements to millions of well-off people that future generations have to figure out how to pay for.

The logic of the Bauer proposal is paper thin. There is no energy emergency. Stations and vehicles have fuel, and highways are busy. If the current price constitutes an emergency, then anything that encourages more consumption-like a rollback in taxes-will increase demand and make the situation worse. The idea of exempting necessities from the sales tax is political gold but fiscal folly. If the only things you tax are the things people don't have to buy, how do you expect to support the expenditures of government?

It's enough to turn you into a royalist at times. We've had the closest thing to that at various times in our history, in the form of long-tenured Ways and Means chairs who viewed the tax code as their own playground. Since both the Indiana and U.S. constitutions require tax bills to originate in the House, their power to make or break change was far-reaching, and with only a House district full of voters to keep happy, their political position was often unassailable.

And from an economic perspective, those power barons have often served as useful filters for weeding out politically popular but fiscally irresponsible ideas. But just as many, perhaps, have abused their power and stymied coalitions trying to implement change.

Perhaps it comes down to whom you trust more on matters of tax policy, the voters or the power brokers. Our rhetoric places great faith in the will of the people, but the results of recent years have shaken mine.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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