Economists and policymakers often treat a long-running policy direction as if it can continue eternally. If a tax cut, benefit increase, or fiscal or monetary stimulus once seemed worthwhile, a further step, and then another, somehow also becomes justified.
But conditions change. For decades, US tax and spending policy has been dominated by devoting larger shares of national income to capital income tax cuts and to increases in retirement and health care spending. Arguments for those policies have changed little, even as social and economic conditions have evolved significantly. Meanwhile, other needs and opportunities have grown, and many have been crowded out by doing the same things over and over.
Research by the recently deceased Nobel Prize-winning economist Edmund Phelps on the Phillips curve should give us pause. Phelps (and a bit later, Milton Friedman) showed that using higher inflation to boost employment, as some of the nation’s leading economists then promoted, could not work in the long run. Yes, workers might be tricked into accepting lower real wages brought by unexpected inflation, and that might temporarily encourage employers to hire more. But once workers began to adjust their expectations, new bouts of inflation could no longer be relied on to reduce unemployment.
The lesson extends well beyond monetary policy. Policymakers and economists often act as if what worked once will work again. If a tax cut was good in 1964 or 1981, that doesn’t tell us whether it was good in 2001 or 2026. If benefit increases for retirees were justified in the 1970s, that doesn’t mean automatic increases should continue indefinitely.
In many cases, Herb Stein’s Law proves useful: “If something can’t go on forever, it will stop.”
Here are five candidates for policy or policy advocacy positions that can’t continue forever.
Debt growing faster than the nation’s income. This has been true with few exceptions since 1974, when the nation’s debt-to-GDP (gross domestic product) ratio reached its post-World War II low.
Social Security benefits scheduled to grow faster than workers' after-tax income indefinitely. This growth has been built into the law to occur automatically since about 1972, following earlier legislative benefit increases in the 1950s and 1960s.
Healthcare spending growing faster than our national income. Almost every federal health program has been on this track at least since 1965, with very high built-in growth even before being reinforced by legislated increases. Essentially, programs such as Medicare, Medicaid, and tax subsidies for employer-sponsored health insurance face weaker budget constraints than most other federal programs. Compare this, for instance, to housing programs, where Congress usually sets a specific budget amount to be spent, no matter how much consumers want or providers can supply. In health care, Congress grants budget authority to us as individuals when we demand more care, and to providers when they develop new drugs and procedures.
Asymmetric tax policy pledges. The Grover Norquist-led “no new tax” pledge, influential among Republicans for about four decades, advocates a one-way ratchet: tax cuts are allowed, but tax increases are not, regardless of economic conditions. But this pledge effectively increases the size of government, since deficit-financed tax cuts and spending increases that can’t be offset by tax increases raise interest costs on the resulting higher debt. In addition, resistance to tax increases creates pressure for more tax expenditures, or spending disguised as tax cuts.
Growing government bureaucracy. As with the growth in Social Security and healthcare spending, much of the growth of government reflects efforts to address real concerns. Phillip K. Howard has long argued that excessive rules and procedures can disempower citizens, public workers, and beneficiaries alike. In truth, much of the resulting growth in bureaucracy stems from another asymmetry: Legislatures and agencies keep adding new rules but rarely get rid of old ones.
In recent decades, the nation has steadily advanced along each of these five policy paths, sometimes because growth is built into the law and sometimes because policymakers have continued in the same direction without reexamining the underlying rationale. But conditions have changed dramatically. Elected officials must return to their core mission of assessing the relative merit of each next dollar spent, each next tax dollar forgone, and each next dollar of debt passed on to tomorrow’s voters.
Good policy requires that hard choices be made continually. Congress has the legislative wherewithal to address the nation's ever-evolving challenges, especially as long as economic growth continues to bring in new revenues and, by its very nature, democracy provides the political means. But it can’t address the new by insisting on doing so much more of the old, no matter the circumstances.
