Sunday, June 15, 2008

How to lie with statistics

In this post, Andrew Sullivan appears to be blaming modern conservatism for the entire post-Vietnam era rise in the national debt held by the public. The chart that he uses to illustrate his point is available here. Sullivan's brief analysis obscures a number of important points.

  • First, one major reason for the rise in spending is the federal government paying for the growth of the welfare state. Let's look at things from the historical perspective. Crudely speaking, the Democrats dominated the presidency from 1932 to 1968 and used that power to contruct a massive revenue bomb: the welfare state. After 1968, the Democrats mostly abandoned the presidency to the Republicans at about the same time as the welfare state began to explode.

    Let me rephrase my point. The welfare state was created in the post-1932 golden age of liberalism! Modern conservatism didn't have any political power during those years. Modern conservatism was considered a neurotic mental disease durning those years. Now the moment the welfare state starts going totally apes**t, it all becomes modern conservatism's fault?

  • Notice the big trillion dollar drop in the publically held portion of the national debt in the years between 1996 and 2000. In these years, President Clinton was forced to divert tax revenues from new spending to deficit reduction in order to politically protect the government's ability to increase spending in the future. This singular achievement was accomplished by modern conservatism: Newt Gingrich and the Republican revolution of 1994.

  • Let's think about the graph more abstractly in the light of some simplifying assumptions. Assume that government spending would remain fixed (in the sense that the hypothetical changes to funding regimes aren't changing the historical year-by-year outlays) from 1968 onwards, so that the only political question becomes how to pay for the spending. Also make the (perhaps too simplifying) assumption that only the rich pay taxes or hold the public portion of the national debt.

    In the light of these assumptions, the graph tells a different story. The rich as a class are still paying for the modern welfare state, but the terms of the payment could have changed. Under the Democrats, we can assume that borrowing from the rich would have much less after 1980, but that taxes on the rich would have been much higher. Under the Republicans, taxes rates are a lot lower than the Democrats wanted them to be, but borrowing at interest is much higher than the Democrats could tolerate. In other words, the Republicans paid for the welfare state by capitalizing it instead of confiscating wealth for it.

    You could think of the federal borrowing regime as a reverse "cap and trade" market for the financial burden of the welfare state. The interest payments on the federal debt represent, under the simplifying assumptions here, money being paid by rich people to other rich people. The interest payments are, in effect, rich people with a low tolerance for holding debt giving "welfare state offsets" to rich people with a higher debt tolerance.

    The reason why government would do something like that is simple. The net effect would be to encourage class harmony by reconciling the rich with the welfare state.


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