2018 Predictions: Best if We Don't Count on Them

One of the few predictions for the coming year that’s nearly certain to come true is that the wealth and incomes of Americans will become more unequal than they are now, though we’re already facing the most extreme inequality of modern times. What soaring stock prices and the economy’s still uneven recovery from the Great Recession did to grow the gap between the top 1% and middle income Americans during 2017 will be further reinforced by cuts on income and corporate profit taxes and by expansion of the scope of exemption for estate taxes being ushered in starting in 2018. To aid the pretense that the cuts are meant to help the middle class, they provide a short-term tax reduction of around seven or eight hundred dollars a year to a household earning the median income. However, gains will range from the tens of thousands to the millions of dollars, for those at the top, and much of the price tag will be paid by future generations.* Meanwhile, Americans below the top 20% of income earners may well be hurt more by the declines they’ll see in government benefits, services, and expenditure than they’ll be helped by the extra $15 or so in their weekly paycheck.

To be fair, a substantial fraction of the gains to top earners could be used to create new jobs for working class Americans. The only problem is that there’s not an economics textbook anywhere that predicts this. No economic theory or experience indicates that windfall tax cuts lead to new jobs. On the contrary, jobs are created when there’s demand for goods and services, and the swelling of high end wealth creates little demand other than that for a bit more landscaping and mansion construction. We’re more likely to see Donald Trump become immersed in mindfulness meditation and Mike Pence convert to Islam than we are to see any burst of job creation in the U.S. from these cuts, and we’re least likely to see growth in manufacturing jobs.

Liberals and progressives naturally hope that the tax changes will prove short-lived, or at least that the cut in the corporate profits tax rate—which some think justifiable from the standpoint of global competition—will in the end be paired with higher income taxes for top earners, helping to address the inequality that’s putting the squeeze on living standards for so many. More than a few analysts see a vigorous 2018 political backlash as likely. Even in red states, many college-educated suburban Republicans are said to be sufficiently turned off by the President’s thinly veiled racism and misogyny that they’re prepared to vote for Democrats over hard-right Republican candidates. More white working class voters may begin to recognize their former hero’s “I’m rich enough to stand up for you” political pitch for what it is as reports of the sums his policies net for his family and wealthy backers reach even their ears. More millennials and Americans of color who sat out 2016 due to disenchantment with Hillary Clinton may also come to recognize that you have to cast a vote to be counted.

But strategists hoping for such a turn-around need to keep front-of-mind that the prediction that this will happen can be their worst enemy. Part of the paradox of voting is that the motivation to go to the polls is inversely related to the perceived likelihood of your side winning. As discussed in previous posts, rational choice analysis in economics and political science predicts that people will not incur the cost of voting if they see their likelihood of being a “pivotal voter” who turns the tide towards a favored candidate or position as negligible. To win in 2018, anti-Trump forces will need to cultivate a “can’t do it without you” atmosphere that constantly reminds voters of how wrong the polls were in 2016.

There’s an interesting connection of this problem of false confidence, in elections, and the “overconfidence” theme on which I wrote in a previous post. In “The political gender gap: do women care more about fairness?” I reported on research in several countries (including the U.S.) that strongly suggests that women favor social insurance mechanisms including progressive taxes and social spending more than men do, and that the reason is that men are demonstrably more over-confident than women are regarding their future economic prospects. Men are also measurably more willing to take risks. In our lab experiment data, we show that men routinely short-change themselves when judging economic policies, because they tend to have unrealistic expectations of imperviousness to the economy’s uncertainties. Related political science research shows that people in the middle of the income scale routinely underestimate the size of the gap between themselves and top earners, likewise underestimate the scale of income inequality in their countries, and that their opinions about policies favoring lower earners like themselves predictably change when interviewers give them more accurate information.

Failure to recognize self-interest due to misperception and overconfidence, including failure to vote in one’s self-interest or even to vote at all, taking political democracy as a given rather than as an extraordinary historical novelty to be defended and improved upon, is a major reason why democracy hasn’t been more effectively harnessed by citizens to give themselves a fairer shake in the American economy, especially in recent decades. Now, years of success at portraying government as the enemy rather than the servant of the people, and making government more hapless by defunding needed programs, has emboldened the new inequality’s biggest winners to think they can sell an unfettered version of capitalism to enough voters to undo the mixed economy altogether. Given the unpredictable twists and turns of the past two years, it’s anyone’s guess whether either capitalism or democracy will survive. It’s your guess, too. Just don’t get too confident.